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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, RXXgBWkKg8IX8+vtCdMMjss79mqEORzntYYJaodWeUaWF3emHb9OMsFykB+yaYQG nYtdsAHpQ5L3evIDHP7LGQ== 0000950124-05-001425.txt : 20050310 0000950124-05-001425.hdr.sgml : 20050310 20050310160804 ACCESSION NUMBER: 0000950124-05-001425 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 31 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050310 DATE AS OF CHANGE: 20050310 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: 05672554 BUSINESS ADDRESS: STREET 1: ONE ENERGY PLAZA CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 5177881031 MAIL ADDRESS: STREET 1: ONE ENERGY PLAZA CITY: JACKSON STATE: MI ZIP: 49201 FORMER COMPANY: FORMER CONFORMED NAME: CONSUMERS POWER CO DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CMS ENERGY CORP CENTRAL INDEX KEY: 0000811156 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 382726431 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09513 FILM NUMBER: 05672555 BUSINESS ADDRESS: STREET 1: ONE ENERGY PLAZA CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 5177881031 MAIL ADDRESS: STREET 1: ONE ENERGY PLAZA CITY: JACKSON STATE: MI ZIP: 49201 10-K 1 k91832e10vk.txt ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2004 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, 2004 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 $1.472 billion for the 161,261,572 CMS Energy Common Stock shares outstanding on June 30, 2004 based on the closing sale price of $9.13 for CMS Energy Common Stock, as reported by the New York Stock Exchange on such date. There were 195,466,087 shares of CMS Energy Common Stock outstanding on March 7, 2005. On March 7, 2005, 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 2005 annual meeting of shareholders to be held May 20, 2005, is incorporated by reference in Parts II and III, except for the compensation and human resources 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, 2004 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 Alstom.................................... Alstom Power Company 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 Bluewater Pipeline........................ Bluewater Pipeline, a 24.9-mile pipeline that extends from Marysville, Michigan to Armada, Michigan Board of Directors........................ Board of Directors of CMS Energy Brownfield site........................... 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 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 wholly owned subsidiary of Enterprises CMS Generation............................ CMS Generation Co., a wholly owned 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 Corporation, 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 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 Energy DOE....................................... U.S. Department of Energy DOJ....................................... U.S. Department of Justice Dow....................................... The Dow Chemical Company, a non-affiliated company DSM....................................... Demand-side management EBITDA.................................... Earnings before income taxes, depreciation, and amortization 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 FASB Staff Position, No. 106-2............ Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (May 19, 2004) FERC...................................... Federal Energy Regulatory Commission First Mortgage Bond Indenture............. The indenture dated as of September 1, 1945 between Consumers and JPMorgan Chase Bank, N.A. (ultimate successor to City Bank Farmers Trust Company), as Trustee, and as amended and supplemented FMB....................................... First Mortgage Bonds

4 FMLP...................................... First Midland Limited Partnership, a partnership that holds a lessor interest in the MCV facility Ford...................................... Ford Motor Company FSP....................................... FASB Staff Position GAAP...................................... Generally Accepted Accounting Principles GasAtacama................................ An integrated natural gas pipeline and electric generation project located in Argentina and Chile, which includes 702 miles of natural gas pipeline and a 720 MW gross capacity power plant GCR....................................... Gas cost recovery Goldfields................................ A pipeline business located in Australia, in which CMS Energy formerly held a 39.7 percent ownership interest Guardian.................................. Guardian Pipeline, L.L.C., in which CMS Gas Transmission owned a one-third interest GVK....................................... GVK Facility, a 250 MW gas fired power plant located in South Central India, in which CMS Generation holds a 33 percent interest Health Care Plan.......................... The medical, dental, and prescription drug programs offered to eligible employees of Consumers and CMS Energy IPP....................................... Independent Power Production ITC....................................... Investment tax credit Jorf Lasfar............................... The 1,356 MW coal-fueled power plant in Morocco, jointly owned by CMS Generation and ABB Energy Ventures, Inc. Karn...................................... D.E Karn/J.C. Weadock Generating Complex, which is owned by Consumers 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 formerly held a 50 percent ownership interest LNG....................................... Liquefied natural gas Ludington................................. Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison Marysville................................ CMS Marysville Gas Liquids Company, a Michigan corporation and a former 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 and in which Consumers' holds a 35 percent lessor interest 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 MDEQ...................................... Michigan Department of Environmental Quality METC, LLC................................. Michigan Electric Transmission Company, formerly a subsidiary of Consumers Energy and now an indirect subsidiary of Trans-Elect Michigan Power............................ CMS Generation Michigan Power L.L.C., owner of the Kalamazoo River Generating Station and the Livingston Generating Station

5 Midwest Energy Market..................... An energy market developed by the MISO to provide day-ahead and real-time market information and centralized dispatch for market participants, scheduled to begin April l, 2005 MISO...................................... Midwest Independent System Operator 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 NERC...................................... North American Electric Reliability Council NRC....................................... Nuclear Regulatory Commission NYMEX..................................... New York Mercantile Exchange 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 former subsidiary of CMS Gas Transmission PCB....................................... Polychlorinated biphenyl Pension Plan.............................. The trusteed, non-contributory, defined benefit pension plan of Panhandle, Consumers and CMS Energy PJM RTO................................... Pennsylvania-Jersey-Maryland Regional Transmission Organization Powder River.............................. CMS Oil and 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 RCP....................................... Resource Conservation Plan ROA....................................... Retail Open Access RTO....................................... Regional Transmission Organization SCP....................................... Southern Cross Pipeline in Australia, in which CMS Gas Transmission formerly held a 45 percent ownership interest SEC....................................... U.S. Securities and Exchange Commission

6 Section 10d(4) Regulatory Asset........... Regulatory asset as described in Section 10d(4) of the Customer Choice Act, as amended 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" SFAS No. 88............................... SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" SFAS No. 98............................... SFAS No. 98, "Accounting for Leases" 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" Shuweihat................................. A power and desalination plant of Emirates CMS Power Company, in which CMS Generation holds a 20 percent interest SLAP...................................... Scudder Latin American Power Fund 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

7 Taweelah.................................. Al Taweelah A2, a power and desalination plant of Emirates CMS Power Company, in which CMS Generation holds a forty percent interest Toledo Power.............................. Toledo Power Company, the 135 MW coal and fuel oil power plant located on Cebu Island, Philippines, in which CMS Generation held a 47.5 percent interest. Trunkline................................. CMS Trunkline Gas Company, LLC, formerly a subsidiary of CMS Panhandle Holdings, LLC Trunkline LNG............................. CMS 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 employees' beneficiary association trusts accounts established to specifically set aside employer contributed assets to pay for future expenses of the OPEB plan X-TRAS.................................... Extendible tenor rate adjusted securities

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 6.5 million of Michigan's 10 million residents and serves customers in all 68 of the state's Lower Peninsula counties. Enterprises, through various subsidiaries and affiliates, is engaged in diversified energy businesses in the United States and in selected international markets. CMS Energy's consolidated operating revenue was approximately $5.472 billion in 2004, $5.513 billion in 2003, and $8.673 billion in 2002. CMS Energy operates in three business segments -- electric utility, gas utility, and Enterprises. 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. Consumers' service areas include companies operating in the automotive, metal, chemical and food products industries as well as a diversified group of other industries. In 2004, Consumers served 1.77 million electric customers and 1.69 million gas customers. 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. Consumers' consolidated operating revenue was $4.711 billion in 2004, $4.435 billion in 2003, and $4.169 billion in 2002. 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 owns its principal properties in fee, except that most electric lines and gas mains are located in public roads or on land owned by others and are accessed by Consumers 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 further 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 AND CMS ENERGY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. CONSUMERS FINANCIAL INFORMATION For further information with respect to operating revenue, net operating income, identifiable assets and liabilities attributable to Consumers' electric and gas utility operations, see ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- SELECTED FINANCIAL INFORMATION AND CONSUMERS' CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 9 CONSUMERS ELECTRIC UTILITY OPERATIONS ELECTRIC UTILITY OPERATIONS Consumers' electric utility operating revenue was $2.586 billion in 2004, $2.590 billion in 2003, and $2.648 billion in 2002. Consumers' electric utility operations include the generation, purchase, distribution and sale of electricity. At year-end 2004, it was authorized to provide service in 60 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 2004, Consumers' electric sales were 36 billion kWh and retail open access deliveries were 4 billion kWh, for total electric deliveries of 40 billion kWh. 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. Consumers' 2004 summer peak demand was 6,958 MW excluding retail open access loads and 7,643 MW including retail open access loads. For the 2003-04 winter period, Consumers' peak demand was 5,636 MW excluding retail open access loads and 6,076 MW including retail open access loads. In December 2004, Consumers experienced peak demand of 5,750 MW excluding retail open access loads and 6,385 MW including retail open access loads. Based on its summer 2004 forecast, Consumers carried an 11 percent reserve margin target. However, as a result of lower than forecasted peak loads and additional purchases in response to the uncertainty surrounding the Karn 4 exciter failure and eventual replacement, Consumers' ultimate reserve margin was 29.6 percent compared to 14.7 percent in 2003. Currently, Consumers has a reserve margin of approximately 5.4 percent, or supply resources equal to 105.4 percent of projected summer peak load for summer 2005 and is in the process of securing the additional capacity needed to meet its summer 2005 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, 2004, Consumers' electric generating system consisted of the following:
2004 NET 2004 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 4,052 J H Campbell 3 -- West Olive................ 1 Unit, 1980 765(a) 4,895 D E Karn -- Essexville...................... 2 Units, 1959-1961 515 3,373 B C Cobb -- Muskegon........................ 2 Units, 1956-1957 312 2,092 J R Whiting -- Erie......................... 3 Units, 1952-1953 328 2,458 J C Weadock -- Essexville................... 2 Units, 1955-1958 302 1,940 ----- ------ Total coal generation......................... 2,837 18,810 ----- ------
10
2004 NET 2004 SUMMER NET GENERATION SIZE AND YEAR DEMONSTRATED (MILLIONS NAME AND LOCATION (MICHIGAN) ENTERING SERVICE CAPABILITY (MWS) OF KWHS) - ---------------------------- ---------------- ---------------- ---------- OIL/GAS GENERATION B C Cobb -- Muskegon........................ 3 Units, 1999-2000(b) 183 0 D E Karn -- Essexville...................... 2 Units, 1975-1977 1,276 223 ----- ------ Total oil/gas generation...................... 1,459 223 ----- ------ HYDROELECTRIC Conventional Hydro Generation............... 13 Plants, 1906-1949 74 445 Ludington Pumped Storage.................... 6 Units, 1973 955(c) (538)(d) ----- ------ Total Hydroelectric........................... 1,029 (93) ----- ------ NUCLEAR GENERATION Palisades -- South Haven.................... 1 Unit, 1971 767 5,336 ----- ------ GAS/OIL COMBUSTION TURBINE Generation.................................. 7 Plants, 1966-1971 345 8 ----- ------ Total owned generation........................ 6,437 24,284 PURCHASED AND INTERCHANGE POWER Capacity.................................... 2,478(e) ----- Total......................................... 8,915 =====
- ------------------------- (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 2004, through long-term purchase contracts, options, spot market and other seasonal purchases, Consumers purchased up to 2,542 MW of net capacity from other power producers (the largest of which was the MCV Partnership), which amounted to 36.6 percent of Consumers' total system requirements. DISTRIBUTION: Consumers' distribution system includes: - 356 miles of high-voltage distribution radial lines operating at 120 kilovolts and above; - 4,178 miles of high-voltage distribution overhead lines operating at 23 kilovolts and 46 kilovolts; - 17 subsurface miles of high-voltage distribution underground lines operating at 23 kilovolts and 46 kilovolts; - 55,157 miles of electric distribution overhead lines; - 8,896 subsurface miles of underground distribution lines; and - substations having an aggregate transformer capacity of 20,787,500 kilovoltamperes. Consumers is interconnected to METC, LLC, a member of MISO. METC, LLC is interconnected with neighboring utilities as well as out-state transmission systems. FUEL SUPPLY: Consumers has four generating plant sites that burn coal. These plants constitute 77.5 percent of Consumers' baseload supply, the capacity used to serve a constant level of customer demand. In 2004, these 11 plants produced a combined total of 18,810 million kWhs of electricity and burned 9.7 million tons of coal. On December 31, 2004, Consumers had on hand a 31-day supply of coal. Consumers enters into a number of 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 its business and to minimize exposure to market price fluctuations. Consumers believes that these future costs are prudent and reasonably assured of recovery in future rates. Consumers has entered into coal supply contracts with various suppliers and associated rail transportation contracts for its coal-fired generating stations. Under the terms of these agreements, Consumers is obligated to take physical delivery of the coal and make payment based upon the contract terms. Consumers' coal supply contracts expire through 2010, and total an estimated $376 million. Its coal transportation contracts expire through 2009, and total an estimated $205 million. Long-term coal supply contracts have accounted for approximately 60 to 90 percent of Consumers' annual coal requirements over the last 10 years. Although future contract coverage is not finalized at this time, Consumers believes that it will be within the historic 60 to 90 percent range. As of December 31, 2004, Consumers had future unrecognized commitments to purchase power transmission services under fixed price forward contracts for 2005 totaling $4 million. Consumers also had commitments to purchase capacity and energy under long-term power purchase agreements with various generating plants. These contracts require monthly capacity payments based on the plants' availability or deliverability. These payments for 2005 through 2030 total an estimated $4.503 billion, undiscounted. This amount may vary depending upon plant availability and fuel costs. If a plant were not available to deliver electricity to Consumers, then Consumers would not be obligated to make the capacity payment until the plant could deliver. 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 NMC. During 2004, Palisades' net generation was 5,336 million kWhs, constituting 22 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 in place to supply 93 percent of the uranium concentrates and conversion services and 100 percent of the enrichment services requirements for the 2006 reload. A contract for conversion services is in place to supply approximately 26 percent of the 2007 reload requirements and a contract for enrichment services is in place to supply approximately 100 percent of the 2007 reload requirements. A mix of spot, medium and long-term contracts are being negotiated with producers and service suppliers who participate in the world nuclear fuel marketplace to provide for the remaining open requirements for the 2007 reload. Consumers has a contract for nuclear fuel fabrication services in place for the 2006 reload. Contract negotiations are currently ongoing with the current nuclear fuel fabrication vendor to enter into a new contract to cover reloads in 2006 through 2013. 12 As shown below, Consumers generates electricity principally from coal and nuclear fuel.
MILLIONS OF KWHS ------------------------------------------------ POWER GENERATED 2004 2003 2002 2001 2000 - --------------- ---- ---- ---- ---- ---- Coal.............................................. 18,810 20,091 19,361 19,203 17,926 Nuclear........................................... 5,336 6,151 6,358 2,326(a) 5,724 Oil............................................... 193 242 347 331 645 Gas............................................... 38 129 354 670 400 Hydro............................................. 445 335 387 423 351 Net pumped storage................................ (538) (517) (486) (553) (541) ------ ------ ------ ------ ------ Total net generation.............................. 24,284 26,431 26,321 22,400 24,505 ====== ====== ====== ====== ======
- ------------------------- (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. The cost of all fuels consumed, shown below, fluctuates with the mix of fuel burned.
COST PER MILLION BTU ----------------------------------------- FUEL CONSUMED 2004 2003 2002 2001 2000 - ------------- ---- ---- ---- ---- ---- Coal..................................................... $1.43 $1.33 $1.34 $1.38 $1.34 Oil...................................................... 4.68 3.92 3.49 4.02 3.30 Gas...................................................... 10.07 7.62 3.98 4.05 4.80 Nuclear.................................................. 0.33 0.34 0.35 0.39 0.45 All Fuels(a)............................................. 1.26 1.16 1.19 1.44 1.27
- ------------------------- (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 2005. 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 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- OTHER ELECTRIC UTILITY BUSINESS UNCERTAINTIES -- NUCLEAR MATTERS AND ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 3 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) -- OTHER CONSUMERS' ELECTRIC UTILITY CONTINGENCIES -- NUCLEAR MATTERS and ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- OTHER ELECTRIC BUSINESS UNCERTAINTIES -- NUCLEAR MATTERS AND ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) -- OTHER ELECTRIC CONTINGENCIES -- NUCLEAR MATTERS. CONSUMERS GAS UTILITY GAS UTILITY OPERATIONS Consumers' gas utility operating revenue was $2.081 billion in 2004, $1.845 billion in 2003, and $1.519 billion in 2002. Consumers' gas utility operations purchase, transport, store, distribute and sell natural gas. As of December 31, 2004, it was authorized to provide service in 47 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 Consumers' 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. 13 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 2004, 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 389.47 bcf. GAS UTILITY PROPERTIES: Consumers' gas distribution and transmission system consists of: - 25,756 miles of distribution mains throughout Michigan's Lower Peninsula; - 1,642 miles of transmission lines throughout Michigan's Lower Peninsula; - 7 compressor stations with a total of 162,000 installed horsepower; and - 15 gas storage fields located across Michigan with an aggregate storage capacity of 308 bcf and a working storage capacity of 142.8 bcf. GAS SUPPLY: In 2004, Consumers purchased 1 percent of the gas it delivered from Michigan producers, 70 percent from United States producers outside Michigan and 22 percent from Canadian producers. Authorized suppliers in the gas customer choice program supplied the remaining 7 percent of gas that Consumers delivered. Consumers' firm gas transportation agreements are with ANR Pipeline Company, Great Lakes Gas Transmission, L.P., Trunkline Gas Co., Panhandle Eastern Pipe Line Company, and Vector Pipeline. 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 90 percent of Consumers' total gas supply requirements. As of December 31, 2004, Consumers' portfolio of firm transportation from pipelines to Michigan is as follows:
VOLUME (DEKATHERMS/DAY) EXPIRATION ---------------- ---------- ANR Pipeline Company........................................ 50,000 March 2006 Great Lakes Gas Transmission, L.P. ......................... 50,000 March 2007 Great Lakes Gas Transmission, L.P. ......................... 100,000 March 2007 Trunkline Gas Co. .......................................... 336,375 October 2005 Trunkline Gas Co. (starting 11/01/05)....................... 290,000 October 2008 Panhandle Eastern Pipe Line Company (starting 04/01/05)..... 50,000 October 2005 Panhandle Eastern Pipe Line Company (starting 04/01/06)..... 50,000 October 2006 Panhandle Eastern Pipe Line Company (starting 04/01/07)..... 50,000 October 2007 Panhandle Eastern Pipe Line Company (starting 04/01/08)..... 50,000 October 2008 Panhandle Eastern Pipe Line Company (starting 11/01/05)..... 50,000 October 2008 Vector Pipeline............................................. 50,000 March 2007
Consumers purchases the balance of its required gas supply under incremental firm transportation contracts, firm city gate contracts, and as needed, interruptible transportation 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. ENTERPRISES Enterprises, through various subsidiaries, affiliates, and equity investments, is engaged in domestic and international diversified energy businesses including independent power production, natural gas transmission, storage and processing, and energy services. Enterprises' operating revenue was $808 million in 2004, $1.085 billion in 2003, and $4.508 billion in 2002. 14 NATURAL GAS TRANSMISSION CMS Gas Transmission was formed in 1988 and owns, develops and manages domestic and international natural gas facilities. In 2004, CMS Gas Transmission's operating revenue was $22 million. 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 3.15 million shares of Southern Union common stock. Southern Union Panhandle Corp. also assumed approximately $1.166 billion in debt. 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. In August 2004, CMS Gas Transmission sold its interest in Goldfields and its Parmelia business, a discontinued operation, to APT for A$204 million (approximately $147 million in U.S. dollars). A $45 million ($29 million after-tax) gain on the sale of Goldfields includes a $9 million ($6 million after-tax) foreign currency translation gain. A $10 million ($6 million after-tax) gain on the sale of Parmelia includes a $3 million ($2 million after-tax) foreign currency translation loss. NATURAL GAS TRANSMISSION PROPERTIES: CMS Gas Transmission has a total of 265 miles of gathering and transmission pipelines located in the state of Michigan, with a daily capacity of 0.75 bcf. At December 31, 2004, CMS Gas Transmission had nominal processing capabilities of approximately 0.33 bcf per day of natural gas in Michigan. At December 31, 2004, CMS Gas Transmission had ownership interests in the following international pipelines:
LOCATION OWNERSHIP INTEREST (%) MILES OF PIPELINES - -------- ---------------------- ------------------ Argentina................................................. 29.42 3,362 Argentina to Brazil....................................... 20 262 Argentina to Chile........................................ 50 707
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 2004, the independent power production business segment's operating revenue was $258 million, which includes revenues from CMS Generation, CMS Operating, S.R.L., the MCV Facility and the MCV Partnership. INDEPENDENT POWER PRODUCTION PROPERTIES: As of December 31, 2004, CMS Generation had ownership interests in operating power plants totaling 8,219 gross MW (3,455 net MW). At December 31, 2004, additional plants totaling approximately 322 gross MW (69 net MW) were under construction or in advanced stages of development. These plants include the Saudi Petrochemical Company power plant, which is under construction in the Kingdom of Saudi Arabia. In 2005, CMS Generation plans to complete the restructuring of its operations by narrowing the scope of its existing operations and commitments to three regions: the U.S., South America, 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 2004 (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 80 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 6.25 124 100 ----- DOMESTIC TOTAL..................... 1,337 Argentina.......................... Hydro 17.2 1,320 20(a) Chile.............................. Natural gas 50 720 100 Ghana.............................. Crude oil 90 224 100 India.............................. Coal 50 250 100 India.............................. Natural gas 33.2 235 100(b) Jamaica............................ Diesel 42.3 63 100 Latin America...................... Various Various 437 66 Morocco............................ Coal 50 1,356 100(c) United Arab Emirates............... Natural gas 40 777 100 United Arab Emirates............... Natural gas 20 1,500 100 ----- INTERNATIONAL TOTAL................ 6,882 TOTAL DOMESTIC AND INTERNATIONAL... 8,219 ===== PROJECTS UNDER CONSTRUCTION/ ADVANCED DEVELOPMENT............. 322
- ------------------------- (a) El Chocon is primarily on a spot market basis, however, it has a high dispatch rate due to low cost. The El Chocon facility is held pursuant to a 30-year possession agreement. (b) CMS Generation sold its interest in GVK in the first quarter of 2005. (c) The Jorf Lasfar facility is held pursuant to a right of possession agreement with the Moroccan state-owned Office National de l'Electricite. 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 597 MW natural gas power plant, each in Argentina. Through CMS Electric and Gas, CMS Enterprises has an 87 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. The MCV Partnership contracted to sell electricity to Consumers for a 35-year period beginning in 1990, and to supply electricity and steam to Dow. 16 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 4 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 closed its Houston, Texas office and in 2004, CMS ERM changed its name from CMS Marketing, Services and Trading Company to CMS Energy Resource Management Company. CMS ERM concentrates on the purchase and sale of energy commodities in support of CMS Energy's generating facilities. In March 2004, CMS ERM discontinued its natural gas retail program as customer contracts expired. In 2004, CMS ERM marketed approximately 53.1 bcf of natural gas and 1,243.5 GWh of electricity. Its operating revenue was $381 million in 2004, $711 million in 2003, and $4.137 billion in 2002. INTERNATIONAL ENERGY DISTRIBUTION In October 2001, CMS Energy discontinued the operations of its international energy distribution business. In 2002, CMS Energy discontinued new development outside North America, which included closing all non-U.S. development offices. In 2003, due to the uncertainty of executing an asset sale on acceptable terms and conditions, 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, and restated the prior year's earnings for these businesses. 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, most significant MPSC orders affecting Consumers have 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. 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 17 ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- ELECTRIC UTILITY BUSINESS UNCERTAINTIES -- COMPETITION AND REGULATORY RESTRUCTURING and ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- ELECTRIC BUSINESS UNCERTAINTIES -- COMPETITION AND REGULATORY RESTRUCTURING. 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 were 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 3 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) -- CONSUMERS' GAS UTILITY RATE MATTERS and ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 OF CONSUMERS' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINGENCIES) -- 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 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- OTHER ELECTRIC UTILITY BUSINESS UNCERTAINTIES -- NUCLEAR MATTERS AND ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 3 (CONTINGENCIES) OF CMS ENERGY'S CONSOLIDATED FINANCIAL STATEMENTS -- NUCLEAR PLANT DECOMMISSIONING and ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- OTHER ELECTRIC BUSINESS UNCERTAINTIES -- NUCLEAR MATTERS AND ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- NOTE 2 (CONTINGENCIES) OF CONSUMERS' CONSOLIDATED FINANCIAL STATEMENTS -- NUCLEAR PLANT DECOMMISSIONING. 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. 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. 18 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. Consumers' electric generating plants must comply with rules that significantly reduce the number of fish killed by plant cooling water intake systems. Consumers is studying options to determine the most cost-effective solutions for compliance. 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 or environmental damages, such as claims for air pollution, damage to sites owned by CMS Energy or Consumers, and for 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 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- ELECTRIC UTILITY BUSINESS UNCERTAINTIES -- ELECTRIC ENVIRONMENTAL ESTIMATES and ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS -- OUTLOOK -- ELECTRIC BUSINESS UNCERTAINTIES -- ELECTRIC ENVIRONMENTAL ESTIMATES. 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' 2004 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 2005, alternative electric suppliers are providing 900 MW of generation supply to retail open access customers. This represents approximately 12 percent of Consumers' total distribution load and an increase of approximately 23 percent in generation supply being purchased from alternative electric suppliers by retail open access customers over March 2004. In June 2004, the MPSC granted Consumers recovery of implementation costs incurred for the Electric Customer Choice program. In November 2004, the MPSC adopted a mechanism pursuant to the Customer Choice Act to provide for recovery of stranded costs that occur when customers leave Consumers' system to purchase electricity from alternative electric suppliers. Consumers cannot predict the total amount of electric supply load that may be lost to competitor suppliers. In addition to retail electric customer choice, Consumers also has competition or potential competition from: - customers relocating for economic reasons outside Consumers' service territory; - municipalities owning or operating competing electric delivery systems; - customer self-generation; and - adjacent utilities that extend lines to customers in contiguous service territories. Consumers addresses this competition by monitoring activity in adjacent areas and enforcing compliance with MPSC and FERC rules, providing non-energy services, and providing tariff-based incentives that support economic development. 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, a non-utility electric subsidiary, continues to focus on optimizing 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 other utilities marketing power at 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 other gas suppliers taking advantage of direct access to Consumers' customers and 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 possible that some of the insurance coverage may not be renewed or obtainable on commercially reasonable terms due to restrictive insurance markets. 20 EMPLOYEES CMS ENERGY As of December 31, 2004, CMS Energy and its wholly owned subsidiaries, including Consumers, had 8,660 full-time equivalent employees, of whom 8,603 are full-time employees and 57 are full-time equivalent employees associated with the part-time work force. Included in the total are 3,734 employees who are covered by union contracts. CONSUMERS As of December 31, 2004, Consumers and its subsidiaries had 8,050 full-time equivalent employees, of whom 7,995 are full-time employees and 55 are full-time equivalent employees associated with the part-time work force. Included in the total are 3,407 full-time operating, maintenance and construction employees and 308 full-time and part-time 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. Negotiations to reach a new contract are underway currently. 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, 2005)
NAME AGE POSITION PERIOD - ---- --- -------- ------ David W. Joos........................ 51 President and Chief Executive Officer of CMS Energy 2004-Present Chairman of the Board, Chief Executive Officer of CMS Enterprises 2003-Present President, Chief Operating Officer of CMS Energy 2001-2004 Chief Executive Officer of Consumers 2004-Present President, Chief Operating Officer of Consumers 2001-2004 President, Chief Operating Officer of CMS Enterprises 2001-2003 Director of CMS Energy 2001-Present Director of Consumers 2001-Present Director of CMS 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 Executive Vice President, President and Chief Executive Officer -- Electric of Consumers 2000-2001 1997-2001
21
NAME AGE POSITION PERIOD - ---- --- -------- ------ S. Kinnie Smith, Jr. ................ 74 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 CMS Enterprises 2003-Present Vice Chairman of Trans-Elect, Inc. 2002 Senior Counsel at Skadden, Arps, Slate, Meagher, & Flom LLP 1996-2002 Thomas J. Webb....................... 52 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 CMS 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..................... 56 President, Chief Operating Officer of CMS Enterprises 2003-Present President, Chief Executive Officer of CMS Generation Co. 2002-Present Director of CMS Enterprises 2003-Present Director of CMS Generation Co. 2002-Present Senior Vice President of CMS Enterprises 2002-2003 Senior Vice President of CMS Generation Co. 1998-2001 John G. Russell*..................... 47 President and Chief Operating Officer of Consumers 2004-Present Executive Vice President, President and Chief Executive Officer -- Electric of Consumers 2001-2004 Senior Vice President of Consumers 2000-2001 Vice President of Consumers 1999-2000 David G. Mengebier**................. 47 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 John F. Drake........................ 56 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
22
NAME AGE POSITION PERIOD - ---- --- -------- ------ Glenn P. Barba....................... 39 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 20, 2005). 23 CONSUMERS EXECUTIVE OFFICERS (as of March 1, 2005)
NAME AGE POSITION PERIOD - ---- --- -------- ------ David W. Joos........................ 51 President and Chief Executive Officer of CMS Energy 2004-Present Chairman of the Board, Chief Executive Officer of CMS Enterprises 2003-Present President, Chief Operating Officer of CMS Energy 2001-2004 Chief Executive Officer of Consumers 2004-Present President, Chief Operating Officer of Consumers 2001-2004 President, Chief Operating Officer of CMS Enterprises 2001-2003 Director of CMS Energy 2001-Present Director of Consumers 2001-Present Director of CMS 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 S. Kinnie Smith, Jr. ................ 74 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 CMS Enterprises 2003-Present Vice Chairman of Trans-Elect, Inc. 2002 Senior Counsel at Skadden, Arps, Slate, Meagher, & Flom LLP 1996-2002 Thomas J. Webb....................... 52 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 CMS 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
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NAME AGE POSITION PERIOD - ---- --- -------- ------ John G. Russell*..................... 47 President and Chief Operating Officer of Consumers 2004-Present Executive Vice President, President and Chief Executive Officer -- Electric of Consumers 2001-2004 Senior Vice President of Consumers 2000-2001 Vice President of Consumers 1999-2000 John F. Drake........................ 56 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..................... 57 Senior Vice President of Consumers 1997-Present Vice President of Consumers 1994-1997 Frank Johnson........................ 57 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 David G. Mengebier**................. 47 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 Paul N. Preketes..................... 55 Senior Vice President of Consumers 1999-Present Vice President of Consumers 1994-1999 Glenn P. Barba....................... 39 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 20, 2005). 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 25 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); and - Board Committee Charters (including the Audit Committee and the Governance and Public Responsibility Committee). We will provide this information in print to any shareholder who requests it. 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 SEC REQUEST On August 5, 2004, CMS Energy received a request from the SEC that CMS Energy voluntarily produce all documents and data relating to the SEC's inquiry into payments made to the government and officials of the government of Equatorial Guinea. On August 17, 2004, CMS Energy submitted its response, advising the SEC of the information and documentation it had available. On March 8, 2005, CMS Energy received a request from the SEC that CMS Energy voluntarily produce certain of such documents. From 1991 through January 3, 2002, subsidiaries of CMS Energy held interest in, and beginning in 1995 operated, hydrocarbon production and processing facilities and a methanol plant in Equatorial Guinea. On January 3, 2002, CMS Energy sold all its Equatorial Guinea holdings. The SEC's inquiry follows an investigation and public hearing conducted by the United States Senate Permanent Subcommittee on investigations, which reviewed the U.S. banking transactions of various foreign governments, including that of Equatorial Guinea. The investigation and hearing also reviewed the operations of certain U.S. oil companies in Equatorial Guinea. There 26 were no findings of violations of the U.S. Foreign Corrupt Practices Act by the U.S. oil companies in the report of the Minority Staff of the Subcommittee, the only report issued to date as a result of the hearing. The Subcommittee did find that oil companies operating in Equatorial Guinea may have contributed to corrupt practices in that country. 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 CMS Energy's best interest 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. CMS Energy cannot predict the outcome of this matter. 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. Plaintiffs are seeking to have a class certified and to have the class recover actual damages and costs, including attorneys fees. 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, LLC, which changed the name from CMS Field Services to Cantera Gas Company. CMS Energy is required to indemnify Cantera Natural Gas, LLC 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 in November 2003 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 scheme by engaging in activities to manipulate the price of natural gas in California. The complaint contains counts alleging violations of the federal Sherman Act, the California Cartwright Act, and the California Business and Professions Code relating to unlawful, unfair and deceptive business practices. The complaint seeks both actual and exemplary damages for alleged overcharges, attorneys fees and injunctive relief regulating defendants' future conduct relating to pricing and price reporting. In April 2004, a Nevada multi district court litigation (MDL) panel decided to transfer the Texas-Ohio case to a pending MDL matter in the Nevada federal district court that at the time involved 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 federal Sherman Act claim. In November 2004, those seven complaints, as well as a number of others that were originally filed in various state courts in California and subsequently transferred to the MDL proceeding, were remanded back to California state court. The Texas-Ohio case remains in Nevada federal district court, and defendants, with CMS Energy joining, filed a motion to dismiss, which remains pending. Three federal putative class actions, Fairhaven Power Company v. Encana Corp. et al., Utility Savings & Refund Services LLP v. Reliant Energy Resources Inc. et al., and Abelman Art Glass v. Encana Corp. et al., all of which make allegations similar to those in the Texas-Ohio case regarding price manipulation and seek similar relief, were originally filed in the United States District Court for the Eastern District of California in September 27 2004, November 2004 and December 2004, respectively. The Fairhaven and Abelman Art Glass cases also include claims for unjust enrichment and a constructive trust. The three complaints were filed against CMS Energy and many of the other defendants named in the Texas-Ohio case. In addition, the Utility Savings case names CMS MST and Cantera Resources Inc. (Cantera Resources Inc. is the parent of Cantera Natural Gas, LLC. and CMS Energy is required to indemnify Cantera Natural Gas, LLC and Cantera Resources Inc. with respect to these actions.) Both the Fairhaven and Utility Savings cases have been transferred to the MDL proceeding, where the Texas-Ohio case is pending. Pursuant to stipulation by the parties and court order, defendants are not required to respond to the Fairhaven and Utility Savings complaints until the court rules on defendants' Motion to Dismiss, which is pending in the Texas-Ohio case. Should the court grant defendants' motion without leave to amend, any remaining cases in the MDL proceeding shall be refiled as a consolidated complaint within 20 days of such ruling. If the motion is denied, or granted with leave to amend, the Texas-Ohio case and any others pending in the MDL proceeding shall be refiled as a consolidated complaint within 20 days of the court's ruling. In February 2005, the Abelman Art Glass case was conditionally transferred to the MDL proceeding. Abelman Art Glass has until March 10, 2005 to oppose the conditional transfer order. Commencing in or about February 2004, 15 state law complaints containing allegations similar to those made in the Texas-Ohio case, but generally limited to the California Cartwright Act and unjust enrichment, were filed in various California state courts against many of the same defendants named in the federal price manipulation cases discussed above. In addition to CMS Energy, CMS MST is named in all of the 15 state law complaints. Cantera Gas Company and Cantera Natural Gas, LLC (erroneously sued as Cantera Natural Gas, Inc.) are named in all but the Benscheidt complaint. Two of these cases are styled as class actions, Benscheidt v. AEP Energy Services, Inc., et al. and Older v. Sempra Energy, et al., and include a claim for violation of the California Business and Professions Code relating to unlawful, unfair and deceptive business practices. Two others, City and County of San Francisco and the People of the State of California, ex rel. Dennis J. Herrera, in his official capacity as City Attorney for the City and County of San Francisco v. Sempra Energy, et al. and Owens-Brockway Glass Container Inc. v. Sempra Energy et al., also include such a claim under the California Business and Professions Code and are styled as representative actions. In February 2005, these 15 separate actions, as well as nine other similar actions that were filed in California state court but do not name CMS Energy or any of its former or current subsidiaries, were ordered coordinated with pending coordinated proceedings in the San Diego Superior Court. The pending coordinated proceedings, Natural Gas Antitrust Cases I-IV, involve an alleged 1990's conspiracy by major gas pipeline companies not to build a new pipeline into Southern California, and a conspiracy to limit gas transmission over an existing pipeline. The 24 state court complaints involving price reporting were coordinated as Natural Gas Antitrust Cases V. Plaintiffs in Natural Gas Antitrust Cases V have been ordered to file a consolidated complaint. Samuel D. Leggett, et al v. Duke Energy Corporation, et al, a class action complaint brought on behalf of retail and business purchasers of natural gas in Tennessee, was filed in the Chancery Court of Fayette County, Tennessee in January 2005. The complaint contains claims for violations of the Tennessee Trade Practices Act based upon allegations of false reporting of price information by defendants to publications that compile and publish indices of natural gas prices for various natural gas hubs. The complaint seeks statutory full consideration damages and attorneys fees and injunctive relief regulating defendants' future conduct. The defendants include CMS Energy, CMS MST and CMS Field Services. CMS Energy and the other CMS defendants will defend themselves vigorously against these matters but cannot predict their outcome. ROUND-TRIP TRADING INVESTIGATIONS During the period of May 2000 through January 2002, CMS MST engaged in simultaneous, prearranged commodity trading transactions in which energy commodities were sold and repurchased at the same price. These so called round-trip trades had no impact on previously reported consolidated net income, earnings per share, or 28 cash flows, but had the effect of increasing operating revenues, operating expenses, accounts receivable, accounts payable, and reported trading volumes. CMS Energy is cooperating with an investigation by the DOJ concerning round-trip trading, which the DOJ commenced in May 2002. CMS Energy is unable to predict the outcome of this matter and what effect, if any, this investigation will have on its business. In March 2004, the SEC approved a cease-and-desist order settling an administrative action against CMS Energy related to round-trip trading. The order did not assess a fine and CMS Energy neither admitted to nor denied the order's findings. The settlement resolved the SEC investigation involving CMS Energy and CMS MST. 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 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. The judge issued an opinion and order dated March 31, 2004 in connection with the motions to dismiss filed by CMS Energy, Consumers and the individuals. The judge dismissed certain of the amended counts in the plaintiffs' complaint and denied CMS Energy's motion to dismiss the other claims in the complaint. CMS Energy, Consumers and the individual defendants filed answers to the amended complaint on May 14, 2004. The judge issued an opinion and order dated December 27, 2004, conditionally granting plaintiffs' motion for class certification. A trial date has not been set, but is expected to be no earlier than late in 2005. CMS Energy and Consumers will defend themselves vigorously 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. The judge issued an opinion and order dated March 31, 2004 in connection with various pending motions, including plaintiffs' motion to amend the complaint and the motions to dismiss the complaint filed by CMS Energy, Consumers and other defendants. The judge directed plaintiffs to file an amended complaint under seal and ordered an expedited hearing on the motion to amend, which was held on May 12, 2004. At the hearing, the judge ordered plaintiffs to file a Second Amended Consolidated Class Action complaint deleting Counts III and IV relating to purchasers of CMS PEPS, which the judge ordered dismissed with prejudice. Plaintiffs filed this complaint on May 26, 2004. CMS Energy, Consumers, and the individual defendants filed new motions to dismiss on June 21, 2004. The judge issued an opinion and order dated January 7, 2005, granting the motion to dismiss for Consumers and three of the individual defendants, but denying the motions to dismiss for CMS Energy and the 13 remaining individual defendants. CMS Energy and the individual defendants will defend themselves vigorously but cannot predict the outcome of this litigation. 29 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 2004, CMS Energy did not submit any matters to a vote of security holders. CONSUMERS During the fourth quarter of 2004, Consumers did not submit any matters to a vote of security holders. 30 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 17 OF CMS ENERGY'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION), which is incorporated by reference herein. At March 7, 2005, the number of registered holders of CMS Energy Common Stock totaled 57,787. In January 2003, CMS Energy suspended the payment of dividends on its common stock. Information regarding securities authorized for issuance under equity compensation plans is included in our definitive proxy statement, which is incorporated by reference herein. CONSUMERS Consumers' common stock is privately held by its parent, CMS Energy, and does not trade in the public market. In February, May, August, and November 2004, Consumers paid $77.5 million, $27 million, $81.9 million and $3.6 million in cash dividends, respectively, on its common stock. 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. 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. 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. 31 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. 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Index to Financial Statements:
PAGE ---- CMS ENERGY CORPORATION Selected Financial Information.............................. CMS-2 Management's Discussion and Analysis Executive Overview........................................ CMS-3 Consolidation of Variable Interest Entities............... CMS-4 Forward-Looking Statements and Risk Factors............... CMS-4 Results of Operations..................................... CMS-6 Critical Accounting Policies.............................. CMS-13 Capital Resources and Liquidity........................... CMS-23 Outlook................................................... CMS-27 New Accounting Standards.................................. CMS-38 Management's Report on Internal Control Over Financial Reporting................................................. CMS-39 Report of Independent Registered Public Accounting Firm -- Internal Control.................................. CMS-40 MCV Management's Report on Internal Control Over Financial Reporting................................................. CMS-41 Consolidated Financial Statements Consolidated Statements of Income (Loss).................. CMS-42 Consolidated Statements of Cash Flows..................... CMS-44 Consolidated Balance Sheets............................... CMS-46 Consolidated Statements of Common Stockholders' Equity.... CMS-48 Notes to Consolidated Financial Statements: 1. Corporate Structure and Accounting Policies........... CMS-51 2. Discontinued Operations, Other Asset Sales, Impairments, and Restructuring........................ CMS-57 3. Contingencies......................................... CMS-62 4. Financings and Capitalization......................... CMS-75 5. Earnings Per Share.................................... CMS-82 6. Financial and Derivative Instruments.................. CMS-83 7. Retirement Benefits................................... CMS-88 8. Asset Retirement Obligations.......................... CMS-93 9. Income Taxes.......................................... CMS-95 10. Executive Incentive Compensation...................... CMS-97 11. Leases................................................ CMS-100 12. Equity Method Investments............................. CMS-101 13. Goodwill.............................................. CMS-105 14. Jointly Owned Regulated Utility Facilities............ CMS-105 15. Reportable Segments................................... CMS-106 16. Implementation of New Accounting Standards............ CMS-108 17. Quarterly Financial and Common Stock Information (Unaudited)............................................ CMS-111 Reports of Independent Registered Public Accounting Firms... CMS-113
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PAGE ---- CONSUMERS ENERGY COMPANY Selected Financial Information.............................. CE-2 Management's Discussion and Analysis Executive Overview........................................ CE-3 Consolidation of the MCV Partnership and the FMLP......... CE-4 Forward-Looking Statements and Risk Factors............... CE-4 Results of Operations..................................... CE-6 Critical Accounting Policies.............................. CE-10 Capital Resources and Liquidity........................... CE-18 Outlook................................................... CE-21 New Accounting Standards.................................. CE-31 Management's Report on Internal Controls Over Financial Reporting................................................. CE-32 Report of Independent Registered Public Accounting Firm -- Internal Control.................................. CE-33 MCV Management's Report on Internal Control Over Financial Reporting................................................. CE-34 Consolidated Financial Statements Consolidated Statements of Income......................... CE-35 Consolidated Statements of Cash Flows..................... CE-36 Consolidated Balance Sheets............................... CE-38 Consolidated Statements of Common Stockholder's Equity.... CE-40 Notes to Consolidated Financial Statements: 1. Corporate Structure and Accounting Policies........... CE-43 2. Contingencies......................................... CE-48 3. Financings and Capitalization......................... CE-59 4. Financial and Derivative Instruments.................. CE-63 5. Retirement Benefits................................... CE-67 6. Asset Retirement Obligations.......................... CE-72 7. Income Taxes.......................................... CE-74 8. Executive Incentive Compensation...................... CE-75 9. Leases................................................ CE-77 10. Summarized Financial Information of Significant Related Energy Supplier............................... CE-78 11. Jointly Owned Regulated Utility Facilities............ CE-80 12. Reportable Segments................................... CE-80 13. Implementation of New Accounting Standards............ CE-82 14. Quarterly Financial and Common Stock Information (Unaudited)............................................ CE-84 Reports of Independent Registered Public Accounting Firms... CE-85
34 (CMS ENERGY LOGO) 2004 CONSOLIDATED FINANCIAL STATEMENTS CMS-1 CMS ENERGY CORPORATION SELECTED FINANCIAL INFORMATION
2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Operating revenue (in millions).................... ($) 5,472 5,513 8,673 8,006 6,623 Earnings from equity method investees (in millions)........................................ ($) 115 164 92 172 213 Income (loss) from continuing operations (in millions)........................................ ($) 127 (42) (394) (327) (85) Cumulative effect of change in accounting (in millions)........................................ ($) (2) (24) 18 (4) -- Net income (loss) (in millions).................... ($) 121 (43) (650) (459) 5 Net income (loss) available to common stockholders (in millions).................................... ($) 110 (44) (650) (459) 5 Average common shares outstanding (in thousands)... 168,553 150,434 139,047 130,758 113,128 Net income (loss) from continuing operations per average common share CMS Energy -- Basic............................ ($) 0.68 (0.30) (2.84) (2.50) (0.76) -- Diluted........................ ($) 0.67 (0.30) (2.84) (2.50) (0.76) Cumulative effect of change in accounting per average common share CMS Energy -- Basic............................ ($) (0.01) (0.16) 0.13 (0.03) -- -- Diluted........................ ($) (0.01) (0.16) 0.13 (0.03) -- Income (loss) per average common share CMS Energy -- Basic............................ ($) 0.65 (0.30) (4.68) (3.51) 0.04 -- Diluted........................ ($) 0.64 (0.30) (4.68) (3.51) 0.04 Cash provided by (used in) operations (in millions)........................................ ($) 398 (250) 614 372 600 Capital expenditures, excluding acquisitions, capital lease additions and DSM (in millions).... ($) 525 535 747 1,239 1,032 Total assets (in millions)(a)...................... ($) 15,872 13,838 14,781 17,633 17,801 Long-term debt, excluding current portion (in millions)(a)..................................... ($) 6,444 6,020 5,357 5,842 6,052 Long-term debt-related parties, excluding current portion (in millions)(b)......................... ($) 504 684 -- -- -- Non-current portion of capital leases (in millions)........................................ ($) 315 58 116 71 49 Total preferred stock (in millions)................ ($) 305 305 44 44 44 Total Trust Preferred Securities (in millions)(b)..................................... ($) -- -- 883 1,214 1,088 Cash dividends declared per common share........... ($) -- -- 1.09 1.46 1.46 Market price of common stock at year-end........... ($) 10.45 8.52 9.44 24.03 31.69 Book value per common share at year-end............ ($) 10.62 9.84 7.48 14.98 19.62 Number of employees at year-end (full-time equivalents)..................................... 8,660 8,411 10,477 11,510 11,652 ELECTRIC UTILITY STATISTICS Sales (billions of kWh).......................... 40 39 39 40 41 Customers (in thousands)......................... 1,772 1,754 1,734 1,712 1,691 Average sales rate per kWh....................... ($) 6.88 6.91 6.88 6.65 6.56 GAS UTILITY STATISTICS Sales and transportation deliveries (bcf)........ 385 380 376 367 410 Customers (in thousands)(c)...................... 1,691 1,671 1,652 1,630 1,611 Average sales rate per mcf....................... ($) 8.04 6.72 5.67 5.34 4.39
- ------------------------- (a) Under revised FASB Interpretation No. 46, we are the primary beneficiary of the MCV Partnership and the FMLP. As a result, we have consolidated their assets, liabilities and activities into our financial statements as of and for the year ended December 31, 2004. These partnerships had third party obligations totaling $582 million at December 31, 2004. Property, plant and equipment serving as collateral for these obligations had a carrying value of $1.426 billion at December 31, 2004. (b) Effective December 31, 2003, Trust Preferred Securities are classified on the balance sheet as long-term debt-related parties. (c) Excludes off-system transportation customers. CMS-2 CMS Energy Corporation Management's Discussion and Analysis This MD&A is a consolidated 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 consolidated entity, except where it is 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 various subsidiaries and equity investments, is engaged in domestic and international diversified energy businesses including independent power production and natural gas transmission, storage, and processing. We manage our businesses by the nature of services each provides. We 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. Our businesses are affected primarily by: - weather, especially during the traditional heating and cooling seasons, - economic conditions primarily in Michigan, - regulation and regulatory issues that affect our gas and electric utility operations, - interest rates, - our debt credit rating, and - energy commodity prices. Our business strategy involves improving our balance sheet and maintaining focus on our core strength: superior utility operation and service. Our primary focus with respect to our non-utility businesses has been to optimize cash flow and further reduce our business risk and leverage through the sale of non-strategic assets, and to improve earnings and cash flow from the businesses we plan to retain. Although much of our asset sales program is complete, we still may sell certain remaining businesses that are not strategic to us. Over the next few years, we expect that this strategy will result in reduced parent company debt, improved credit ratings, earnings growth, restoration of a common stock dividend, and a company positioned to make new investments consistent with our strengths. In the near term, our new investments will focus principally on the utility. We face important challenges in the future. We continue to lose industrial and commercial customers to alternative electric suppliers as a result of Michigan's Customer Choice Act. As of March 2005, we have lost 900 MW, or 12 percent, of our electric load to these alternative electric suppliers. Based on current trends, we predict total load loss by the end of 2005 to be in the range of 1,000 MW to 1,200 MW. However, no assurance can be made that the actual load loss will fall within that range. Existing state legislation encourages competition and provides for recovery of Stranded Costs caused by the lost sales. In fact, in November 2004, the MPSC ordered Consumers to recover 2002 and 2003 Stranded Costs in the amount of $63 million. In 2004, several bills were introduced into the Michigan Senate that could change Michigan's Customer Choice Act. Another important challenge relates to the economics of the MCV Partnership. 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 and the price the MCV Partnership can charge us for energy has not, the MCV Partnership's financial performance has been impacted negatively. In January 2005, the MPSC issued an order approving the RCP to change the way the facility is used. The purpose of the RCP is to conserve natural gas CMS-3 through a change in the dispatch of the MCV Facility and thereby improve the financial performance of the MCV Partnership without increased costs to customers. The approved plan will: - allow for dispatching the MCV Facility based on natural gas market prices, which is expected to reduce gas consumption by an estimated 30 to 40 bcf per year, - allocate 50 percent of Consumers' direct savings to customers in 2005 and 70 percent of Consumers' direct savings to customers thereafter, and - fund $5 million annually for renewable energy sources such as wind power projects. Our business plan is targeted at predictable earnings growth and debt reduction. Between 2001 and 2003, we reduced parent debt (ie: excluding Consumers' and other subsidiaries' debt) by 50 percent. We are now in the second year of a five-year plan to reduce further, by about half, the debt of CMS Energy. In 2004, we issued 32.8 million shares of our common stock. We also issued over $1 billion in FMBs and $288 million of convertible senior notes. Proceeds from these transactions were used to retire higher-interest rate long-term debt and to make capital infusions of $250 million into Consumers, providing additional liquidity and flexibility for our utility operations. In January 2005, we continued to retire higher-interest rate debt through the use of proceeds from the issuance of $150 million of CMS Energy senior notes and $250 million of Consumers' FMBs. We also infused an additional $200 million into Consumers in January 2005. These efforts, and others, are designed to lead us to be a strong, reliable energy company that will be poised to take advantage of opportunities for further growth. CONSOLIDATION OF VARIABLE INTEREST ENTITIES Under Revised FASB Interpretation No. 46, we are the primary beneficiary of several entities, most notably the MCV Partnership and the FMLP. As a result, we have consolidated the assets, liabilities, and activities of these entities into our financial statements as of and for the year ended December 31, 2004. These entities are reported as equity method investments in our financial statements for all periods prior to January 1, 2004. For additional details, see Note 16, Implementation of New Accounting Standards. 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 Exchange 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: - capital and financial market conditions, including the price of CMS Energy Common Stock and the effect of such market conditions on the Pension Plan, interest rates, and access to the capital markets as well as 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, - credit 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, - international, national, regional, and local economic, competitive, and regulatory policies, conditions and developments, CMS-4 - adverse regulatory or legal decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with such decisions, - potentially adverse regulatory treatment and/or regulatory lag concerning a number of significant questions presently before the MPSC relating to the Customer Choice Act including: - recovery of future Stranded Costs incurred due to customers choosing alternative energy suppliers, - recovery of Clean Air Act costs and other environmental and safety-related expenditures, - power supply and natural gas supply costs when oil prices and other fuel prices are rapidly increasing, - timely recognition in rates of additional equity investments in Consumers, and - adequate and timely recovery of additional electric and gas rate-based expenditures, - the impact of adverse natural gas prices on the MCV Partnership investment, and regulatory decisions that limit our recovery of capacity and fixed energy payments, - federal regulation of electric sales and transmission of electricity including periodic re-examination by federal regulators of the market-based sales authorizations under which our subsidiaries participate in wholesale power markets without price restrictions, - energy markets, including the timing and extent of changes in commodity prices for oil, coal, natural gas, natural gas liquids, electricity, and certain related products due to lower or higher demand, shortages, transportation problems, or other developments, - potential for the Midwest Energy Market to develop into an active energy market in the state of Michigan, which may lead us to account for electric capacity and energy contracts with the MCV Partnership and other independent power producers as derivatives, - the GAAP requirement that we utilize mark-to-market accounting on certain of our energy commodity contracts and interest rate swaps, which may have, in any given period, a significant positive or negative effect on earnings, which could change dramatically or be eliminated in subsequent periods and could add to earnings volatility, - potential disruption, expropriation or interruption of facilities or operations due to accidents, war, terrorism, or changing political conditions and the ability to obtain or maintain insurance coverage for such events, - nuclear power plant performance, decommissioning, policies, procedures, incidents, and regulation, including the availability of spent nuclear fuel storage, - technological developments in energy production, delivery, and usage, - achievement of capital expenditure and operating expense goals, - changes in financial or regulatory accounting principles or policies, - outcome, cost, and other effects of legal and administrative proceedings, settlements, investigations and claims, including particularly claims, damages, and fines resulting from round-trip trading and inaccurate commodity price reporting, including investigations by the DOJ regarding round-trip trading and price reporting, - limitations on our ability to control the development or operation of projects in which our subsidiaries have a minority interest, - disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance and performance bonds, CMS-5 - the efficient sale of non-strategic or under-performing domestic or international assets and discontinuation of certain operations, - 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 Our business strategy involves improving our balance sheet and maintaining focus on our core strength: superior utility operation and service. Our primary focus with respect to our non-utility businesses has been to optimize cash flow and further reduce our business risk and leverage through the sale of non-strategic assets, and to improve earnings and cash flow from the businesses we plan to retain. The level of inflation in the U.S. and in other countries in which we have businesses or investments has not had a significant effect on our consolidated results of operations. CMS ENERGY CONSOLIDATED RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- IN MILLIONS (EXCEPT FOR PER SHARE AMOUNTS) Net Income (Loss) Available to Common Stockholders.......... $ 110 $ (44) $ (650) Basic Earnings (Loss) Per Share............................. $0.65 $(0.30) $(4.68) Diluted Earnings (Loss) Per Share........................... $0.64 $(0.30) $(4.68)

YEARS ENDED DECEMBER 31 2004 2003 CHANGE 2003 2002 CHANGE - ----------------------- ---- ---- ------ ---- ---- ------ IN MILLIONS Electric Utility............................ $ 223 $ 167 $ 56 $ 167 $ 264 $ (97) Gas Utility................................. 71 38 33 38 46 (8) Enterprises................................. 19 8 11 8 (419) 427 Corporate Interest and Other................ (197) (256) 59 (256) (285) 29 Discontinued Operations..................... (4) 23 (27) 23 (274) 297 Accounting Changes.......................... (2) (24) 22 (24) 18 (42) ----- ----- ---- ----- ----- ----- Net Income (Loss) Available to Common Stockholders.............................. $ 110 $ (44) $154 $ (44) $(650) $ 606 ===== ===== ==== ===== ===== =====
2004 COMPARED TO 2003: For the year ended December 31, 2004, our net income available to common stockholders was $110 million, compared to a net loss available to common stockholders of $44 million for the year ended December 31, 2003. The improvement reflects the increased earnings from our utility due in large part to rulings from the MPSC. The increase also reflects our continued commitment to cost management, the continued reduction of debt at our parent company, lower interest expense from refinanced debt, and benefits from recent tax legislation. This improvement was offset partially by increased impairment charges as we continued to dispose of certain businesses that are not strategic to us. Net income was also reduced by an environmental remediation charge related to our involvement in Bay Harbor. Specific increases to net income available to common stockholders are: - a $56 million increase in net income at our electric utility as favorable treatment of depreciation and interest under the Customer Choice Act and reduced pension and benefit costs more than offset the effects of milder weather, reduced tariff revenues equivalent to the Big Rock nuclear decommissioning surcharge, and customers choosing alternative electric suppliers, - a $56 million net reduction in corporate interest expense, - a $35 million net gain from the 2004 sales of our Parmelia business and our interest in Goldfields; CMS-6 - a $33 million increase in net income at our gas utility resulting from favorable impacts of MPSC rate orders, reduced pension and benefit costs outpacing increased interest costs, and the effects of milder weather, - a $21 million income tax benefit recorded at Enterprises resulting from the American Jobs Creation Act of 2004, - a $20 million net reduction in operating and maintenance expenses at Enterprises resulting from a reduction in expenses at CMS ERM, which sold its non-essential business segments and moved its headquarters from Houston, Texas to Jackson, Michigan in 2003, - a $5 million net reduction in debt retirement charges, - a $22 million reduction in charges related to changes in accounting, and - the absence in 2004 of a $34 million deferred tax asset valuation reserve established in 2003. These increases were offset partially by: - a $36 million increase in net asset impairment charges, - a $29 million net environmental remediation charge associated with our involvement in Bay Harbor, - a $10 million increase in the declaration and payment of CMS Energy preferred dividends; - the absence in 2004 of $30 million of MSBT refunds received in 2003, and - the absence in 2004 of $23 million in gains in Discontinued Operations recorded in 2003. 2003 COMPARED TO 2002: For the year ended December 31, 2003, our net loss available to common stockholders was $44 million, compared to a net loss available to common stockholders of $650 million for the year ended December 31, 2002. The improvement reflects the absence of impairment charges from businesses that were not strategic to us, reduced corporate debt, and increased earnings from equity method investments. These improvements were offset partially by lower earnings at our electric utility, a net settlement and curtailment loss related to our employee benefit plans, and changes in accounting. Specific increases to net income available to common stockholders are: - the absence in 2003 of $379 million of net goodwill impairments associated with discontinued operations recorded in 2002, - a $427 million increase in net income at Enterprises, primarily due to a significant reduction in asset impairment charges and increased earnings from equity investments, - $30 million of MSBT refunds, and - a $25 million net reduction in corporate interest. These increases were offset partially by: - a $97 million reduction in net income from our electric utility due to the impact of milder weather on electric deliveries, higher pension expense, greater depreciation and amortization expense, and customers choosing alternative electric suppliers, - a $48 million net settlement and curtailment charge related to a large number of employees retiring and exiting our employee benefit plans, - a $44 million net loss on the sale of Panhandle, - a $34 million deferred tax asset valuation reserve established in 2003, - a $24 million charge related to changes in accounting primarily due to energy trading contracts that did not meet the definition of a derivative, and CMS-7 - an $8 million decrease in net income at our gas utility primarily due to increased pension and benefit expense, greater depreciation expense and higher average debt levels, offset partially by the favorable impact of a MPSC rate order. ELECTRIC UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31 2004 2003 CHANGE 2003 2002 CHANGE - ----------------------- ---- ---- ------ ---- ---- ------ IN MILLIONS Net income......................................... $223 $167 $ 56 $167 $264 $(97) ==== ==== ==== ==== ==== ==== REASONS FOR THE CHANGE: Electric deliveries................................ $(34) $(41) Power supply costs and related revenue............. (31) 26 Other operating expenses, other income and non-commodity revenue............................ 86 (80) Regulatory return on capital expenditures.......... 113 -- Gain on asset sales................................ -- (38) General taxes...................................... (8) 10 Fixed charges...................................... (40) (22) Income taxes....................................... (30) 48 ---- ---- Total change....................................... $ 56 $(97) ==== ====
ELECTRIC DELIVERIES: For the year 2004, electric deliveries including transactions with other wholesale marketers, other electric utilities, and customers choosing alternative electric suppliers increased 1.3 billion kWh or 3.3 percent versus 2003. Despite the increase in electric deliveries, electric delivery revenue decreased due to the milder summer temperatures' negative impact on higher margin residential customer air conditioning usage, customers choosing alternative electric suppliers, and tariff revenue reductions. The tariff revenue reductions began on January 1, 2004, and were equivalent to the Big Rock nuclear decommissioning surcharge in effect when our electric retail rates were frozen from June 2000 through December 31, 2003. The tariff revenue reductions decreased electric delivery revenue by $35 million. Surcharges related to the recovery of costs incurred in the transition to customer choice offset partially the reductions to electric delivery revenue. Recovery of these costs began on July 1, 2004 and increased electric delivery revenue by $10 million. For the year 2003, electric delivery revenue decreased, reflecting lower deliveries versus 2002. Most significantly, sales volumes to commercial and industrial customers were lower than in 2002, a result of these sectors' continued migration to alternative electric suppliers as allowed by the Customer Choice Act. Milder summer temperatures reduced air conditioning usage by the higher-margin residential customers, further decreasing electric delivery revenue. Overall, electric deliveries, including transactions with other wholesale marketers and other electric utilities, decreased 0.4 billion kWh or 1.1 percent. POWER SUPPLY COSTS AND RELATED REVENUE: For the year 2004, our recovery of power supply costs was capped for the residential and small commercial customer classes. Operating income decreased $31 million in 2004 versus 2003 primarily due to power supply-related costs exceeding power supply-related revenue charged to capped customers. Power supply-related costs increased in 2004 primarily due to higher priced purchased power necessary to replace the generation loss from an extended refueling outage at our Palisades nuclear generating plant and higher coal prices. For the year 2003, our recovery of power supply costs was fixed for all customers, 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 revenue had been less than actual power supply costs, the impact would have decreased operating income. For the year 2003, power supply-related revenue in excess of actual power supply costs benefited operating income by $26 million versus 2002. This increase was primarily the CMS-8 result of increased intersystem revenue, efficient operation of our generating plants, and lower priced purchased power. OTHER OPERATING EXPENSES, OTHER INCOME AND NON-COMMODITY REVENUE: For the year 2004, other income increased $7 million, other operating expenses decreased $82 million, and non-commodity revenue decreased $3 million versus 2003. Other income increased primarily due to $7 million of interest income related to our 2002 and 2003 Stranded Cost recovery as authorized by the MPSC. Our recognition of this recovery decreased operating expense $57 million in 2004, and along with decreased depreciation, pension, and benefit costs contributed to the reduction in other operating expenses. The decrease in depreciation expense reflects our ability to defer depreciation expense on the excess of capital expenditures over our depreciation base as authorized by the Customer Choice Act. The decrease in pension expense reflects fewer current year retirees choosing to receive a single lump sum distribution and increased plan earnings from higher average plan assets. The reduction in benefit expense is due to the subsidy provided under Part D of the Medicare Prescription Drug, Improvement and Modernization Act. For the year 2003, net other operating expenses, other income and non-commodity revenue decreased operating income versus 2002. The decrease related to increased pension and other benefit costs, a scheduled refueling outage at Palisades, and higher transmission costs. In addition, depreciation and amortization expense increased, reflecting higher levels of plant in service, and higher amortization of securitized assets. Higher non-commodity revenue associated with other income offset slightly the increased operating expenses. REGULATORY RETURN ON CAPITAL EXPENDITURES: As allowed by Section 10d(4) of the Customer Choice Act, on January 1, 2004, we began recording the 2004 portion of the return on certain capital expenditures incurred during the rate freeze period of June 2000 through December 2003. This increased income by $41 million in 2004. Based on an interpretation of the Customer Choice Act by the MPSC in a rate order involving Detroit Edison, in November 2004 we recorded an additional $72 million return on Clean Air Act costs incurred during the period of June 2000 through December 2003. GAIN ON ASSET SALES: The reduction in operating income from asset sales for 2003 versus 2002 reflected 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: For the year 2004, general taxes increased primarily due to increases in property tax expense and the absence of a MSBT credit received in 2003. The 2003 MSBT credit was associated with the construction of our corporate headquarters on a qualifying Brownfield site. For the year 2003, this MSBT credit decreased general taxes versus 2002. FIXED CHARGES: Fixed charges increased for the year 2004 versus 2003 due to higher average debt levels, offset partially by a 46 basis point reduction in the average rate of interest. Additionally, to recognize a recently issued interpretation of the Customer Choice Act by the MPSC, we expensed $31 million of capitalized interest in November related to Clean Air Act costs incurred during the period of June 2000 through December 2003. For the year 2003, fixed charges increased versus 2002 due to higher average debt levels and higher average interest rates. INCOME TAXES: For the year 2004, income taxes increased due to increased earnings from the electric utility versus 2003. The increase in income taxes from the tax treatment of items related to plant, property and equipment as required by past MPSC orders was offset by Part D of the Medicare Prescription Drug, Improvement and Modernization Act which provides a subsidy that is exempt from federal taxation. For the year 2003, income tax expense decreased versus 2002 primarily due to lower earnings by the electric utility. CMS-9 GAS UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31 2004 2003 CHANGE 2003 2002 CHANGE - ----------------------- ---- ---- ------ ---- ---- ------ IN MILLIONS Net income............................................ $71 $38 $ 33 $38 $46 $ (8) === === ==== === === ==== Reasons for the change: Gas deliveries........................................ $ (7) $ (1) Gas rate increase..................................... 28 39 Gas wholesale and retail services, other gas revenue and other income........................................ 8 2 Operation and maintenance............................. 11 (34) General taxes......................................... (4) 3 Depreciation.......................................... 16 (10) Fixed charges......................................... (14) (5) Income taxes.......................................... (5) (2) ---- ---- Total change.......................................... $ 33 $ (8) ==== ====
GAS DELIVERIES: For the year 2004, gas deliveries, including transportation to end-use customers, decreased 15.5 bcf or 4.6 percent due to milder weather versus 2003. Most significantly, temperatures in the first quarter of the year were 12.1 percent warmer than in the same period in 2003. For the year 2003, gas deliveries, including miscellaneous transportation, increased due to colder weather during the first quarter of 2003 versus 2002. Increased deliveries to the residential and commercial sectors resulted in a $6 million increase in gas revenue. This revenue increase was offset by a $7 million reduction to gas revenue associated with our analysis of gas losses related to the gas transmission and distribution system. GAS RATE INCREASE: In December 2003, the MPSC issued an interim gas rate order authorizing a $19 million annual increase to gas tariff rates. In October 2004, the MPSC issued a final order authorizing an increase of $58 million in each of the next two years. As a result of these orders, gas revenues increased $28 million for the year 2004 versus 2003. 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, gas revenue increased $39 million for the year 2003 versus 2002. GAS WHOLESALE AND RETAIL SERVICES, OTHER GAS REVENUE AND OTHER INCOME: In 2004, gas wholesale and retail services and other gas revenue increased primarily due to the absence of certain 2003 reductions to revenue. In 2003, gas revenue was reduced primarily due to an $11 million 2002-2003 GCR disallowance. For the year 2003, gas wholesale and retail services and other gas revenue increased versus 2002. This increase was primarily due to increased gas title tracking services and miscellaneous revenue in 2003. The increased revenue was offset partially by a disallowance for the 2002-2003 GCR year. OPERATION AND MAINTENANCE: For the year 2004 versus 2003, operation and maintenance expenses decreased versus 2003 primarily due to reduced pension and benefit expense of $23 million. The decrease in pension expense reflects fewer current year retirees choosing to receive a single lump sum distribution and increased plan earnings from higher average plan assets. The reduction in benefit expense is due to the subsidy provided under Part D of the Medicare Prescription Drug, Improvement and Modernization Act. These reductions were offset partially by additional expenditures on safety, reliability, and customer service. For the year 2003, operation and maintenance expenses increased versus 2002 due to increases in pension and other benefit costs of $27 million and additional expenditures on safety, reliability, and customer service. GENERAL TAXES: For the year 2004, general taxes increased due to the absence of a MSBT credit received in 2003. The 2003 MSBT credit received from the State of Michigan was associated with the construction of our corporate headquarters on a qualifying Brownfield site. For the year 2003, this MSBT credit decreased general taxes versus 2002. CMS-10 DEPRECIATION: For the year 2004 versus 2003, depreciation expense decreased primarily due to reduced rates authorized by the MPSC's December 2003 interim rate order and the MPSC's October 2004 order, as modified by its December 2004 order granting rehearing. For the year 2003, depreciation expense increased because of increased plant in service versus 2002. FIXED CHARGES: Fixed charges increased for the year 2004 versus 2003 due to higher average debt levels, offset partially by a 46 basis point reduction in the average rate of interest. For the year 2003, fixed charges increased versus 2002 due to higher average debt levels and higher average interest rates. INCOME TAXES: For the year 2004, income taxes increased due to increased earnings from the gas utility versus 2003. The increase in income taxes was offset partially by reductions from the tax treatment of items related to plant, property and equipment as required by past MPSC orders, and by Part D of the Medicare Prescription Drug, Improvement and Modernization Act which provides a subsidy that is exempt from federal taxation. For the year 2003 versus 2002, income tax expense increased primarily due to the tax treatment of items related to plant, property and equipment as required by past MPSC orders. ENTERPRISES RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31 2004 2003 CHANGE 2003 2002 CHANGE - ---------------------- ---- ---- ------ ---- ---- ------ IN MILLIONS Net Income (Loss)................................... $19 $8 $ 11 $8 $(419) $ 427 === == ===== == ===== ======= Reasons for the change: Results of FASB Interpretation No. 46 Entities.... $ (40) $ -- Reasons for change excluding FASB Interpretation No. 46: Operating revenues................................ (334) (3,498) Cost of gas and purchased power................... 375 3,399 Earnings from equity method investees............. (8) 71 Operation and maintenance......................... 31 93 General taxes, depreciation, and other income..... (22) 40 Gain (loss) on sale of assets..................... 53 (3) Asset impairment charges.......................... (75) 508 Environmental remediation......................... (45) -- Fixed charges..................................... 16 (14) Income taxes...................................... 60 (169) ----- ------- Total change...................................... $ 11 $ 427 ===== =======
RESULTS OF FASB INTERPRETATION NO. 46: Due to the implementation of FASB Interpretation No. 46, certain equity investments, determined to be variable interest entities under this interpretation, which were previously included in equity earnings are now included as fully consolidated subsidiaries in the results of operations. The MCV Partnership and the FMLP were determined to be variable interest entities under this interpretation, and are included as fully consolidated subsidiaries in the results of operations in 2004. Three electric generating plants in Michigan, T.E.S. Filer City Station Limited Partnership, Grayling Generating Station Limited Partnership, and Genesee Power Station Limited Partnership, were determined to be variable interest entities under this interpretation and were included in the results of operations beginning in 2003. For comparability purposes, the change in net earnings of these entities is presented separately. For 2004, earnings decreased versus 2003 primarily due to mark-to-market losses related to gas contracts and increased fuel and dispatch costs at the MCV Partnership. These decreases were offset partially by dispatch and variable energy rate variance revenue. For 2003 versus 2002, consolidation of the three electric generating plants in Michigan had no impact on earnings. CMS-11 OPERATING REVENUES AND COST OF GAS AND PURCHASED POWER: For 2004, operating revenues, net of the related cost of gas and purchased power, increased versus 2003. This increase was primarily due to higher margins from South American subsidiaries, offset partially by the sale of wholesale gas and power contracts at CMS ERM. For 2003, operating revenues, net of the related cost of gas and purchased power, decreased versus 2002 primarily due to the sale of wholesale gas and power contracts at CMS ERM. EARNINGS FROM EQUITY METHOD INVESTEES: Earnings from equity method investees decreased for 2004 versus 2003 due to a reduction in earnings from Goldfields, which was sold in August 2004, and losses on the settlement of derivative contracts. These decreases were offset partially by earnings from Shuweihat, which became partially operational during the fourth quarter of 2004. Equity earnings increased for 2003 versus 2002 due to impairment losses in 2002 and an increase in mark-to-market valuation adjustments on interest rate swaps and power contracts in 2003. Lower earnings offset these increases partially in 2003 due to sales of equity investments in 2002. OPERATION AND MAINTENANCE: Operating and maintenance decreased for 2004 versus 2003 and for 2003 versus 2002. These decreases were the result of a reduction in expenses at CMS ERM, which sold its non-essential business segments and moved its headquarters from Houston, Texas to Jackson, Michigan in 2003. GENERAL TAXES, DEPRECIATION AND OTHER INCOME: For 2004, the net of general tax expense, depreciation and other income decreased income versus 2003. The change was due to foreign exchange losses offset partially by lower depreciation due to the sale of non-essential assets at ERM in 2003. For 2003, the net of general tax expense, depreciation and other income increased income versus 2002. The change was due to lower depreciation from assets impaired in 2002, higher interest income, and foreign exchange gains offset partially by higher general taxes. GAIN (LOSS) ON SALE OF ASSETS: Gains on asset sales increased in 2004 versus 2003. This is primarily due to the gains on the sales of Goldfields and land in Moapa, Nevada in 2004. For 2003, loss on asset sales increased versus 2002. This is primarily due to the losses on the sales of CMS ERM Wholesale Gas contracts and Guardian Pipeline in 2003. For additional details, see Note 2, Discontinued Operations, Other Asset Sales, Impairments, and Restructuring. ASSET IMPAIRMENT CHARGES: Asset impairment charges increased in 2004 versus 2003. Impairments recorded in 2004 included a reduction in the fair value of Loy Yang and impairments related to the sales of our interests in SLAP and GVK. In February 2005, we completed the sale of our interest in GVK. We expect to complete the sale of SLAP in 2005. Asset impairment charges decreased in 2003 versus 2002. In 2003, the impairments of our equity investments at CMS Generation and our investment in CMS Electric and Gas' Venezuelan distribution utility were significantly lower than our 2002 asset impairments that were related primarily to DIG and Michigan Power. For additional details, see Note 2, Discontinued Operations, Other Asset Sales, Impairments, and Restructuring. ENVIRONMENTAL REMEDIATION: For 2004, we recorded estimated environmental remediation costs for indemnification claims related to our involvement in Bay Harbor. For additional details, see Note 3, Contingencies. FIXED CHARGES: For 2004, fixed charges decreased versus 2003 due to lower average debt levels and lower average interest rates primarily resulting from the payoff of a short-term revolving credit line held by Enterprises during 2003, offset partially by the payment of preferred dividends to the investor in our Michigan gas assets in 2004 and higher letter of credit fees. CMS-12 For 2003, fixed charges increased versus 2002 due to higher average debt levels and higher average interest rates primarily due to a short-term revolving credit line held by Enterprises during part of 2003. INCOME TAXES: For 2004, income taxes decreased as compared to 2003 primarily due to the foreign earnings repatriation tax benefit arising from the American Jobs Creation Act of 2004, and a decrease in tax reserves. For 2003, income taxes increased as compared to 2002 due to the absence in 2003, of the tax benefit related to the 2002 impairment charges. CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31 2004 2003 CHANGE 2003 2002 CHANGE - ---------------------- ---- ---- ------ ---- ---- ------ IN MILLIONS Net Loss.......................... $(197) $(256) $59 $(256) $(285) $29 ===== ===== === ===== ===== ===
For the year ended December 31, 2004, corporate interest and other net expenses were $197 million, a decrease of $59 million versus the same period in 2003. The decrease reflects $56 million of lower interest due to lower average debt levels and a 58 basis point reduction in the average rate of interest, a $5 million reduction in debt retirement charges, and the absence in 2004 of a $34 million deferred tax asset valuation reserve established in 2003. These decreases were offset partially by a $24 million increase in general taxes primarily due to the absence of MSBT refunds received in 2003, a $10 million increase in the declaration and payment of CMS Energy preferred dividends and a $2 million increase in other various expenses. Our 2003 corporate interest and other net expenses decreased $29 million from 2002 primarily due to reduced restructuring costs and reduced taxes, offset partially by an increase in interest allocated to continuing operations. DISCONTINUED OPERATIONS: For the year ended December 31, 2004, our net loss from Discontinued Operations was $4 million, a decrease of $27 million versus the same period in 2003. The net loss for 2004 was related primarily to income tax adjustments offset partially by gains on asset sales. Income from 2003 primarily reflects an increase to net income due to the reclassification of our international energy distribution business from discontinued operations to continuing operations. The reclassification resulted in a reversal of a previously recognized impairment loss. This increase was offset partially by an impairment of Parmelia, interest allocated to discontinued operations, and a loss on the disposal of CMS Viron. For additional details, see Note 2, Discontinued Operations, Other Asset Sales, Impairments, and Restructuring. ACCOUNTING CHANGES: In 2004, we recorded a $2 million loss for the cumulative effect of a change in accounting principle. The loss was the result of a change in the measurement date on our benefit plans. For additional details, see Note 7, Retirement Benefits. A $24 million loss for the cumulative effect of changes in accounting principle was recognized in the first quarter of 2003, of which $23 million was related to energy trading contracts and $1 million was related to asset retirement obligations. CRITICAL ACCOUNTING POLICIES The following accounting policies are important to an understanding of our results of operations and financial condition and should be considered an integral part of our MD&A: - use of estimates and assumptions in accounting for long-lived assets, contingencies, and equity method investments, - accounting for the effects of industry regulation - accounting for financial and derivative instruments, trading activities, and market risk information, CMS-13 - accounting for international operations and foreign currency, - accounting for pension and OPEB, - 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 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, 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 $15.872 billion at December 31, 2004, 59 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 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 our financial statements. 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 of CMS-14 loss is probable and the amount of loss can be reasonably estimated. 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 pending class actions arising out of round-trip trading and gas price reporting, our electric and gas environmental estimates, our indemnity and environmental remediation obligations at Bay Harbor, and the potential underrecoveries from our power purchase contract with the MCV Partnership. The amount of income taxes we pay is subject to ongoing audits by federal, state, foreign tax authorities, which can result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any likely outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. As a result, our effective tax rate may fluctuate significantly on a quarterly basis. 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. The cost that we incur under the MCV Partnership PPA exceeds the recovery amount allowed by the MPSC. As a result, we estimate that cash underrecoveries of capacity and fixed energy payments will aggregate $150 million from 2005 through 2007. After September 15, 2007, we expect to claim relief under the regulatory out provision in the PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amounts collected from our 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 investment, and - eliminate our underrecoveries of capacity and fixed energy payments. The MCV Partnership has indicated that it may take issue with our exercise of the regulatory out clause after September 2007. We believe that the clause is valid and fully effective, but cannot assure that it will prevail in the event of a dispute. 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 investment in the MCV Partnership. Further, under the PPA, variable energy payments to the MCV Partnership are based on the cost of coal burned at our coal plants and our 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 and the price the MCV Partnership can charge us for energy has not, the MCV Partnership's financial performance has been impacted negatively. Even with the approved RCP, if gas prices continue at present levels or increase, the economics of operating the MCV Facility may be adverse enough to require us to recognize an impairment. In January 2005, the MPSC issued an order approving the RCP, with modifications. The RCP allows us to recover the same amount of capacity and fixed energy charges from customers as approved in prior MPSC orders. However, we are able to dispatch the MCV Facility on the basis of natural gas market prices, which will reduce the MCV Facility's annual production of electricity and, as a result, reduce the MCV Facility's consumption of natural gas by an estimated 30 to 40 bcf annually. This decrease in the quantity of high-priced natural gas consumed by the MCV Facility will benefit our ownership interest in the MCV Partnership. The substantial MCV Facility fuel cost savings will be used first to offset fully the cost of replacement power. Second, $5 million annually will be used to fund a renewable energy program. Remaining savings will be split between the MCV Partnership and Consumers. Consumers' direct savings will be shared 50 percent with its customers in 2005 and 70 percent in 2006 and beyond. Consumers' direct savings from the RCP, after a portion is allocated to customers, will be used to offset our capacity and fixed energy underrecoveries expense. Since the MPSC has excluded these underrecoveries from the rate making process, we anticipate that our savings from the RCP will not affect our return on equity used in our base rate filings. CMS-15 In January 2005, Consumers and the MCV Partnership's general partners accepted the terms of the order and implemented the RCP. The underlying agreement for the RCP between Consumers and the MCV Partnership extends through the term of the PPA. However, either party may terminate that agreement under certain conditions. In February 2005, a group of intervenors in the RCP case filed an application for rehearing of the MPSC order. The Attorney General also filed a claim of appeal with the Michigan Court of Appeals. We cannot predict the outcome of these appeals. For additional details on the MCV Partnership, see Note 3, Contingencies, "Other Consumers' Electric Utility Contingencies -- The Midland Cogeneration Venture." 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, we may record as regulatory assets items that a non-regulated entity normally would expense if the actions of the regulator indicate such expenses will be recovered in future rates. Conversely, we may record as regulatory liabilities items that non-regulated entities may normally recognize as revenues 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, 2004, we had $1.696 billion recorded as regulatory assets and $1.574 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, 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 classified as available-for-sale are reported at fair value determined from quoted market prices. Debt and equity securities classified as held-to-maturity are reported at cost. Unrealized gains or losses resulting from changes in fair value of certain available-for-sale debt and equity securities are reported, net of tax, in equity as part of accumulated other comprehensive income. Unrealized gains or losses are excluded from earnings unless the related changes in fair value are determined to be other than temporary. Unrealized gains or losses on our nuclear decommissioning investments are reflected as regulatory liabilities on our Consolidated Balance Sheets. Realized gains or losses would not affect our earnings or cash flows. DERIVATIVE INSTRUMENTS: We use the criteria in SFAS No. 133 to determine if certain contracts must be accounted for as derivative instruments. This criteria is complex and significant judgment is often required in applying the criteria to specific contracts. 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 is then adjusted quarterly to reflect any change in the market value of the contract, a practice known as marking the contract to market. Changes in fair value (that is, gains or losses) are reported either in earnings or accumulated other comprehensive income, depending on whether the derivative qualifies for cash flow hedge accounting treatment. The types of contracts we typically classify as derivative instruments are interest rate swaps, foreign currency exchange contracts, electric call options, gas supply call and put options, gas fuel futures and swaps, gas fuel options, certain gas fuel contracts, and certain gas and electric forward contracts. The majority of our contracts are not subject to derivative accounting under SFAS No. 133 because they qualify for the normal purchases and sales exception, or because there is not an active market for the commodity. 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 and the significant 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. Similarly, our coal purchase contracts are not accounted for as derivatives due to the lack of an active market for the coal that we purchase. If active CMS-16 markets for these commodities develop in the future, we may be required to account for these contracts as derivatives, and the resulting mark-to-market impact on earnings could be material to our financial statements. The MISO is scheduled to begin the Midwest Energy Market on April 1, 2005, which will include day-ahead and real-time energy market information and centralized dispatch for market participants. At this time, we believe that the commencement of this market will not constitute the development of an active energy market in the state of Michigan. However, after having adequate experience with the Midwest Energy Market, we will reevaluate whether or not the activity level within this market leads to the conclusion that an active energy market exists. For additional information, see "Electric Utility Business Uncertainties -- Competition and Regulatory Restructuring -- Transmission Market Developments" within this MD&A. The MCV Partnership uses natural gas fuel contracts to buy gas as fuel for generation, and to manage gas fuel costs. The MCV Partnership believes that certain of its long-term gas contracts qualify as normal purchases under SFAS No. 133 and therefore, these contracts are not recognized at fair value on the balance sheet. Due to the implementation of the RCP in January 2005, the MCV Partnership has determined that a significant portion of its gas fuel contracts no longer qualify as normal purchases because the contracted gas will not be consumed as fuel for electric production. Accordingly, these contracts will be treated as derivatives and will be marked-to-market through earnings each quarter, which could increase earnings volatility. Based on market prices for natural gas as of January 31, 2005, the accounting for the MCV Partnership's long-term gas contracts, including those affected by the implementation of the RCP, could result in an estimated $100 million (pretax before minority interest) gain recorded to earnings in the first quarter of 2005. This estimated gain will reverse in subsequent quarters as the contracts settle. For further details on the RCP, see "Critical Accounting Policies -- Use of Estimates and Assumptions -- MCV Underrecoveries" within this MD&A. If there are further changes in the level of planned electric production or gas consumption, the MCV Partnership may be required to account for additional long-term gas contracts as derivatives, which could add to earnings volatility. To determine the fair value of our derivative contracts, we use a combination of quoted market prices, prices obtained from external sources, such as brokers, and mathematical valuation models. Valuation models require various inputs, including forward prices, strike prices, volatilities, interest rates, and maturity dates. Changes in forward prices or volatilities could change significantly the calculated fair value of certain contracts. At December 31, 2004, we assumed a market-based interest rate of 2.75 percent and monthly volatility rates ranging between 38 percent and 73 percent to calculate the fair value of our gas options. Also, at December 31, 2004, we assumed a market-based interest rate of 2.75 percent and daily volatility rates ranging between 80 percent and 157 percent to calculate the fair value of our electric options. At December 31, 2004, we assumed market-based interest rates ranging between 2.40 percent and 4.48 percent (depending on the term of the contract) and monthly volatility rates ranging between 25 percent and 68 percent to calculate the fair value of the gas fuel derivative contracts held by the MCV Partnership. 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. In connection with the market valuation of our derivative contracts, we maintain reserves, if necessary, for credit risks based on the financial condition of counterparties. CMS ERM CONTRACTS: CMS ERM enters into and owns energy contracts that are related to activities considered to be an integral part of CMS Energy's ongoing operations. CMS ERM holds certain forward contracts for the purchase and sale of electricity and natural gas that result in physical delivery of the underlying commodity at contractual prices. These contracts are generally long-term in nature and are classified as non-trading. CMS ERM also uses various financial instruments, including swaps, options, and futures, to manage the commodity price risks associated with its forward purchase and sales contracts as well as generation assets owned by CMS Energy or its subsidiaries. These financial contracts are classified as trading activities. Non-trading and trading contracts that meet the definition of a derivative under SFAS No. 133 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. Gains and losses on trading CMS-17 contracts are recorded net in accordance with EITF Issue No. 02-03. Contracts that do not meet the definition of a derivative are accounted for as executory contracts (i.e., on an accrual basis). The fair value of the derivative contracts held by CMS ERM is included in either Price risk management assets or Price risk management liabilities on our Consolidated Balance Sheets. The following tables provide a summary of these contracts as of December 31, 2004:
NON-TRADING TRADING TOTAL ----------- ------- ----- IN MILLIONS Fair value of contracts outstanding as of December 31, 2003...................................................... $(181) $196 $ 15 Fair value of new contracts when entered into during the period(a)................................................. (3) (3) (6) Changes in fair value attributable to changes in valuation techniques and assumptions................................ -- -- -- Contracts realized or otherwise settled during the period... 49 (69) (20) Other changes in fair value(b).............................. (64) 77 13 ----- ---- ---- Fair value of contracts outstanding as of December 31, 2004...................................................... $(199) $201 $ 2 ===== ==== ====
- ------------------------- (a) Reflects only the initial premium payments/(receipts) for new contracts. No unrealized gains or losses were recognized at the inception of any new contracts. (b) 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 NON-TRADING CONTRACTS AT DECEMBER 31, 2004 ------------------------------------------------- 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........................ $ -- $ -- $ -- $ -- $-- Prices obtained from external sources or based on models and other valuation methods....... (199) (52) (89) (49) (9) ----- ---- ---- ---- --- Total......................................... $(199) $(52) $(89) $(49) $(9) ===== ==== ==== ==== ===

FAIR VALUE OF TRADING CONTRACTS AT DECEMBER 31, 2004 ------------------------------------------------- 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........................ $(43) $(11) $(17) $(15) $-- Prices obtained from external sources or based on models and other valuation methods....... 244 64 111 61 8 ---- ---- ---- ---- --- Total......................................... $201 $ 53 $ 94 $ 46 $ 8 ==== ==== ==== ==== ===
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 derivative contracts to manage these risks, including swaps, options, futures, and forward contracts. We intend that gains or losses on these contracts will be offset by an opposite movement in the value of the item at risk. Risk management contracts are classified as either non-trading or 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 through established credit policies that include performing financial credit reviews of our counterparties. Determination of our counterparties' credit CMS-18 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 earnings as a result of counterparty nonperformance. The following risk sensitivities indicate the potential loss in fair value, cash flows, or future earnings from our derivative contracts and other financial instruments based upon a hypothetical 10 percent adverse change in market rates or prices. Changes in excess of the amounts shown in the sensitivity analyses could occur if market rates or prices exceed the 10 percent shift used for the analyses. 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 2004 2003 - ----------------- ---- ---- IN MILLIONS Variable-rate financing -- before-tax annual earnings exposure.................................................. $ 2 $ 1 Fixed-rate financing -- potential loss in fair value(a)..... 216 242
- ------------------------- (a) Fair value exposure could only be realized if we repurchased all of our fixed-rate financing. Certain equity method investees have entered into interest rate swaps. These instruments are not required to be included in the sensitivity analysis, but can have an impact on financial results. Commodity Price Risk: For purposes other than trading, we enter into electric call options and gas supply call and put options. Electric call options are purchased 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. Purchased electric call options give us the right, but not the obligation, to purchase electricity at predetermined fixed prices. Our gas supply call and put options are used to purchase reasonably priced gas supply. Purchases of gas supply call options give us the right, but not the obligation, to purchase gas supply at predetermined fixed prices. Gas supply put options sold give third-party suppliers the right, but not the obligation, to sell gas supply to us at predetermined fixed prices. At December 31, 2004, we held gas supply call options and had sold gas supply put options. Also, at December 31, 2004, CMS ERM held certain non-trading derivative contracts for the purchase and sale of electricity and natural gas as further explained under "CMS ERM Contracts" within this section. The MCV Partnership uses natural gas fuel contracts to buy gas as fuel for generation, and to manage gas fuel costs. Some of these contracts are treated as derivative instruments. The MCV Partnership also enters into natural gas futures contracts, option contracts, and over-the-counter swap transactions in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are being used principally to secure anticipated natural gas requirements necessary for projected electric and steam sales, and to lock in sales prices of natural gas previously obtained in order to optimize the MCV Partnership's existing gas supply, storage, and transportation arrangements. Commodity Price Risk Sensitivity Analysis (assuming a 10 percent adverse change in market prices):
AS OF DECEMBER 31 2004 2003 - ----------------- ---- ---- IN MILLIONS Potential reduction in fair value: Gas supply option contracts............................... $ 1 $ 1 CMS ERM electric and gas forward contracts................ 10 9 Derivative contracts associated with Consumers' investment in the MCV Partnership: Gas fuel contracts..................................... 17 N/A Gas fuel futures and swaps............................. 41 N/A
CMS-19 We did not perform a sensitivity analysis for the derivative contracts held by the MCV Partnership as of December 31, 2003, because the MCV Partnership was not consolidated into our financial statements until 2004, as discussed in Note 16, Implementation of New Accounting Standards. Trading Activity Commodity Price Risk: CMS ERM uses various financial instruments, including swaps, options, and futures, to manage the commodity price risks associated with its forward purchase and sales contracts as well as generation assets owned by CMS Energy or its subsidiaries. Trading Activity Commodity Price Risk Sensitivity Analysis (assuming a 10 percent adverse change in market prices):
AS OF DECEMBER 31 2004 2003 - ----------------- ---- ---- IN MILLIONS Potential reduction in fair value: Electricity-related option contracts...................... $-- $ 1 Gas-related option contracts.............................. 3 -- Gas-related swaps and futures............................. 7 11
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 may use forward exchange contracts and other risk mitigating instruments to hedge currency exchange rates. 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. As of December 31, 2004, we had no outstanding foreign exchange contracts. Investment Securities Price Risk: Our investments in debt and equity securities are exposed to changes in interest rates and price fluctuations in equity markets. The following table shows the potential effect of adverse changes in interest rates and fluctuations in equity prices on our available-for-sale investments. Investment Securities Price Risk Sensitivity Analysis:
AS OF DECEMBER 31 2004 2003 - ----------------- ---- ---- IN MILLIONS Potential reduction in fair value: Available-for-sale investments(a): Equity Securities(b)................................... $ 5 $4 Debt Securities(c)..................................... -- 1
- ------------------------- (a) Primarily SERP Investments. (b) Assumes a 10 percent adverse change in market prices. (c) Assumes a 50 basis point increase in the yield to maturity of the 10-year Treasury Note, which approximates a 10 percent change in market yields. Consumers maintains trust funds, as required by the NRC, which may only be used to fund certain costs of nuclear plant decommissioning. As of December 31, 2004 and 2003, these funds were invested primarily in equity securities, fixed-rate, fixed-income debt securities, and cash and cash equivalents, and are recorded at fair value on our Consolidated Balance Sheets. Those investments are exposed to price fluctuations in equity markets and changes in interest rates. Because the accounting for nuclear plant decommissioning recognizes that costs are recovered through Consumers' electric rates, fluctuations in equity prices or interest rates do not affect earnings or cash flows. For additional details on market risk and derivative activities, see Note 6, Financial and Derivative Instruments. CMS-20 INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY We have investments in energy-related projects in selected markets around the world. As a result of a change in business strategy, 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 on our Consolidated Balance Sheets as "Accumulated Other Comprehensive Loss." As of December 31, 2004, cumulative foreign currency translation decreased stockholders' equity by $319 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: The Foreign Currency Translation component of stockholders' equity at December 31, 2003 included an approximate $110 million unrealized net foreign currency translation loss related to our investment in Loy Yang and an approximate $6 million unrealized net foreign currency translation gain related to our investments in SCP and Parmelia. In March 2004, we recognized the Loy Yang foreign currency translation loss in earnings as a component of the Loy Yang impairment of approximately $81 million, net of tax, recorded as a result of the sale of Loy Yang that was completed in April 2004. In August 2004, we sold our investments in SCP and Parmelia and recognized the $6 million foreign currency translation gain. As of December 31, 2004, we no longer have any investments in Australia. 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 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 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 U.S. dollar, and recorded an initial charge to the Foreign Currency Translation component of stockholders' equity of $400 million. As of December 31, 2004, 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 2.976 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. 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 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 protect the company from the risk associated with adverse changes in currency exchange rates that could affect cash flow materially. These contracts would limit the risk from exchange rate movements because gains and losses on such contracts offset losses and gains, respectively, on assets and liabilities being hedged. 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 certain employees hired after June 30, 2003. We use SFAS No. 87 to account for pension costs. CMS-21 401(k): In our efforts to reduce costs, the employer's match for the 401(k) plan was suspended effective September 1, 2002. The employer's match for the 401(k) plan resumed on January 1, 2005. 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 significantly change the liability and associated expenses recognized in any given year. The following table provides an estimate of our pension cost, OPEB cost, and cash contributions for the next three years:
EXPECTED COSTS PENSION COST OPEB COST CONTRIBUTIONS - -------------- ------------ --------- ------------- IN MILLIONS 2005...................................................... $52 $38 $63 2006...................................................... 73 34 80 2007...................................................... 85 30 114
Actual future pension cost 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 cost for 2005 by $3 million. Lowering the discount rate by 0.25 percent (from 6.00 percent to 5.75 percent) would increase estimated pension cost for 2005 by $4 million. For additional details on postretirement benefits, see Note 7, Retirement Benefits. ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS SFAS No. 143 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. For our regulated utility, as required by SFAS No. 71, we account for the implementation of this standard by recording regulatory assets and liabilities instead of a cumulative effect of a change in accounting principle. 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 in which the ARO is incurred, such as for assets with indeterminate lives, the liability is recognized when a reasonable estimate of fair value can be made. Generally, electric and gas transmission and distribution assets have indeterminate lives. Retirement cash flows cannot be determined and there is a low probability of a retirement date. Therefore, no liability has been recorded CMS-22 for these assets. Also, 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 largely utilize third-party cost estimates. For additional details on ARO, see Note 8, Asset Retirement Obligations. ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS The MPSC and the FERC regulate the recovery of costs to decommission our Big Rock and Palisades nuclear plants. We have established external trust funds to finance the decommissioning of both plants. We record the trust fund balances as a non-current asset on our Consolidated Balance Sheets. 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. 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. The funds provided by the trusts, additional customer surcharges, and potential funds from the DOE litigation are all required to cover fully the decommissioning costs. 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. Based on current projections, the current level of funds provided by the trusts is not adequate to fund fully the decommissioning of Big Rock or Palisades. This is due in part to the DOE's failure to accept the spent nuclear fuel on schedule and lower returns on the trust funds. We are attempting to recover our additional costs for storing spent nuclear fuel through litigation. We are also seeking additional relief from the MPSC. For additional details on nuclear decommissioning, see Note 3, Contingencies, "Other Consumers' Electric Utility Contingencies -- Nuclear Plant Decommissioning" and "Nuclear Matters." 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. 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 nonstandard payment terms or other forms of assurances, including margin calls, in connection with maintenance of ongoing deliveries of gas and electricity. Our current financial plan includes controlling our operating expenses and capital expenditures and evaluating market conditions for financing opportunities. We believe our current level of cash and access to borrowing capacity in the capital markets, along with anticipated cash flows from operating and investing activities, will be sufficient to meet our liquidity needs through 2006. We have not made a specific determination CMS-23 concerning the reinstatement of common stock dividends. The Board of Directors may reconsider or revise its dividend policy based upon certain conditions, including our results of operations, financial condition, and capital requirements, as well as other relevant factors. CASH POSITION, INVESTING, AND FINANCING Our operating, investing, and financing activities meet consolidated cash needs. At December 31, 2004, $725 million consolidated cash was on hand, which includes $56 million of restricted cash and $128 million from the effect of Revised FASB Interpretation No. 46 consolidation. For additional details on cash equivalents and restricted cash, see Note 1, Corporate Structure and Accounting Policies. For additional details on FASB Interpretation No. 46, see Note 16, Implementation of New Accounting Standards. Our primary ongoing source of cash is dividends and other distributions from our subsidiaries, including proceeds from asset sales. For the year ended December 31, 2004, Consumers paid $190 million in common stock dividends and Enterprises paid $336 million in common stock dividends and other distributions to CMS Energy. SUMMARY OF CASH FLOWS:
2004 2003 2002 ---- ---- ---- IN MILLIONS Net cash provided by (used in): Operating activities...................................... $ 398 $(250) $ 614 Investing activities...................................... (392) 203 829 ----- ----- ------- Net cash provided by (used in) operating and investing activities................................................ 6 (47) 1,443 Financing activities...................................... (43) 229 (1,223) Effect of exchange rates on cash............................ -- (1) 8 ----- ----- ------- Net increase (decrease) in cash and cash equivalents........ $ (37) $ 181 $ 228 ===== ===== =======
OPERATING ACTIVITIES: 2004: Net cash provided by operating activities was $398 million in 2004 compared to net cash used in operating activities of $250 million in 2003. The increase of $648 million primarily represents the absence, in 2004, of $560 million in pension contributions made in 2003 and the reduced effect of rising gas prices on inventory. These changes were offset partially by increases in accounts receivable due to higher gas prices and the net effect of the sale of CMS ERM's wholesale gas and power contracts in 2003 resulting from our continued focus to optimize cash flow through the sale of non-strategic assets. 2003: Net cash used in operating activities was $250 million in 2003 compared to net cash provided by operating activities of $614 million in 2002. The change of $864 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 the net effect of the sale of CMS ERM's wholesale gas and power contracts resulting from our focus on optimizing cash flow through the sale of non-strategic assets. INVESTING ACTIVITIES: 2004: Net cash used in investing activities increased $595 million primarily due to a decrease in asset sale proceeds of $720 million and an increase in investments in unconsolidated subsidiaries of $71 million. In 2003, we sold Panhandle, Field Services, and CMS ERM's wholesale gas and power contracts. Our 2004 $71 million investment was primarily for our equity interest in Shuweihat. These changes were offset partially by a decrease in the amount of cash restricted of $308 million resulting from our improved financial condition. In 2004, $145 million in restricted cash was no longer required to be held as collateral for letters of credit. 2003: Net cash provided by investing activities decreased $626 million primarily due to a decrease in asset sale proceeds from Equatorial Guinea, Powder River, and GMS Oil & Gas of $720 million in 2002. This was CMS-24 offset by a decrease in 2003 capital expenditures of $212 million as a result of our strategic plan to reduce capital expenditures. FINANCING ACTIVITIES: 2004: Net cash used in financing activities increased $272 million primarily due to a decrease of $232 million in net proceeds from borrowings. 2003: Net cash provided by financing activities increased $1.452 billion primarily due to an increase in net proceeds from borrowings of $988 million and net proceeds from preferred securities issuances of $272 million. For additional details on long-term debt activity, see Note 4, Financings and Capitalization. SUBSEQUENT FINANCING ACTIVITIES: In January 2005, we redeemed $103 million of general term notes. In January 2005, we issued $150 million of 6.30 percent Senior Notes due 2012. We used the net proceeds of $147 million to redeem the remaining general term notes and for other corporate purposes. In January 2005, Consumers issued $250 million of 5.15 percent FMBs due 2017. Consumers used the net proceeds of $247 million to pay off its $60 million long-term bank loan, to redeem the $73 million 8.36 percent subordinated deferrable interest notes, and to redeem the $124 million 8.20 percent subordinated deferrable interest notes. The subordinated deferrable interest notes are classified as Long-term debt -- related parties on our accompanying Consolidated Balance Sheets. OBLIGATIONS AND COMMITMENTS CONTRACTUAL OBLIGATIONS: The following table summarizes our contractual cash obligations for each of the periods presented. The table shows the timing and effect that such obligations are expected to have on our liquidity and cash flow in future periods. The table excludes all amounts classified as current liabilities on our Consolidated Balance Sheets, other than the current portion of long-term debt and capital and finance leases. The majority of current liabilities will be paid in cash in 2005.
PAYMENTS DUE CONTRACTUAL OBLIGATIONS ------------------------------------------------------------------- AS OF DECEMBER 31, 2004 TOTAL 2005 2006 2007 2008 2009 BEYOND ----------------------- ----- ---- ---- ---- ---- ---- ------ IN MILLIONS CONTRACTUAL OBLIGATIONS Long-term debt....................... $ 6,711 $ 267 $ 554 $ 555 $ 973 $ 877 $3,485 Long-term debt -- related parties.... 684 180 -- -- -- -- 504 Interest payments on long-term debt............................... 3,511 438 424 390 326 262 1,671 Capital and finance leases........... 344 29 28 28 27 27 205 Interest payments on capital and finance leases..................... 224 30 28 27 25 23 91 Operating leases..................... 92 16 15 13 12 8 28 Purchase obligations................. 7,726 1,918 1,063 707 587 526 2,925 Long-term service agreements......... 207 16 17 11 11 12 140 ------- ------ ------ ------ ------ ------ ------ Total contractual obligations........ $19,499 $2,894 $2,129 $1,731 $1,961 $1,735 $9,049 ======= ====== ====== ====== ====== ====== ======
Long-Term Debt: The amounts in the table above represent the principal amounts due on outstanding debt obligations, current and long-term, as of December 31, 2004. For additional details on long-term debt, see Note 4, Financings and Capitalization. Interest Payments on Long-term Debt: The amounts in the table above represent the currently scheduled interest payments on both variable and fixed rate long-term debt and long-term debt -- related parties, current and long-term. Variable interest payments are based on contractual rates in effect at December 31, 2004. CMS-25 Capital and Finance Leases: The amounts in the table above represent the minimum lease payments payable under our capital and finance leases. They are comprised mainly of the leased portion of the MCV Partnership facility, leased service vehicles, and leased office furniture. Interest Payments on Capital and Finance Leases: The amounts in the table represent imputed interest in the capital leases and currently scheduled interest payments on the finance leases. Operating Leases: The amounts in the table above represent the minimum noncancelable lease payments under our leases of railroad cars, certain vehicles, and miscellaneous office buildings and equipment, which are accounted for as operating leases. Purchase Obligations: Long-term contracts for purchase of commodities and services are purchase obligations. These obligations include operating contracts used to assure adequate supply with generating facilities that meet PURPA requirements. The commodities and services include: - natural gas, - electricity, - coal and associated transportation, and - electric transmission. Our purchase obligations include long-term power purchase agreements with various generating plants, which require us to make monthly capacity payments based on the plants' availability or deliverability. These payments will approximate $10 million per month during 2005. 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 3, Contingencies, "Consumers' Electric Utility Rate Matters -- Power Supply Costs." Long-term Service Agreements: These obligations of the MCV Partnership represent the cost of the current MCV Facility maintenance service agreements and cost of spare parts. REVOLVING CREDIT FACILITIES: At December 31, 2004, CMS Energy had $194 million available, Consumers had $475 million available, and the MCV Partnership had $48 million available in secured revolving credit facilities. The facilities are available for general corporate purposes, working capital, and letters of credit. For additional details on revolving credit facilities, see Note 4, Financings and Capitalization. OFF-BALANCE SHEET ARRANGEMENTS: CMS Energy and certain of its subsidiaries enter into guarantee arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include financial and performance guarantees, letters of credit, debt guarantees, surety bonds and indemnifications. For additional details on guarantee arrangements, see Note 4, Financings and Capitalization, "FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," and in "Commercial Commitments" within this section. Non-recourse Debt: Our share of unconsolidated debt associated with partnerships and joint ventures in which we have a minority interest is non-recourse and totals $1.368 billion at December 31, 2004. The timing of the payments of non-recourse debt only affects the cash flow and liquidity of the partnerships and joint ventures. For additional details, see Note 12, Equity Method Investments. Sale of Accounts Receivable: Under a revolving accounts receivable sales program, Consumers may sell up to $325 million of certain accounts receivable. For additional details, see Note 4, Financings and Capitalization. COMMERCIAL COMMITMENTS: Our contingent commercial commitments include guarantees, indemnities, and letters of credit. Guarantees represent our guarantees of performance, commitments, and liabilities of our consolidated and unconsolidated subsidiaries, partnerships, and joint ventures. 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 these obligations and believe it is unlikely that we would be required to perform or otherwise incur CMS-26 any material losses associated with these guarantees. Our off-balance sheet commitments at December 31, 2004, expire as follows:
COMMITMENT EXPIRATION ----------------------------------------------------------- 2010 AND TOTAL 2005 2006 2007 2008 2009 BEYOND ----- ---- ---- ---- ---- ---- -------- IN MILLIONS COMMERCIAL COMMITMENTS Off-balance sheet: Guarantees..................................... $210 $ 37 $ 5 $ -- $ -- $ 9 $159 Surety bonds and other indemnifications(a)..... 25 -- -- -- -- -- 25 Letters of credit.............................. 165 129 6 5 5 13 7 ---- ---- --- ----- ----- --- ---- Total............................................ $400 $166 $11 $ 5 $ 5 $22 $191 ==== ==== === ===== ===== === ====
- ------------------------- (a) The surety bonds are continuous in nature. The need for the bonds is determined on an annual basis. DIVIDEND RESTRICTIONS: Our amended and restated $300 million secured revolving credit facility restricts payments of dividends on our common stock during a 12-month period to $75 million, dependent on the aggregate amounts of unrestricted cash and unused commitments under the facility. Under the provisions of its articles of incorporation, at December 31, 2004, Consumers had $456 million of unrestricted retained earnings available to pay common stock dividends. However, covenants in Consumers' debt facilities cap common stock dividend payments at $300 million in a calendar year. In October 2004, the MPSC rescinded its December 2003 interim gas rate order, which included a $190 million annual dividend cap imposed on Consumers. For the year ended December 31, 2004, we received $190 million of common stock dividends from Consumers. CAPITAL EXPENDITURES: We estimate that we will make the following capital expenditures, including new lease commitments, by business segments during 2005 through 2007. We prepare these estimates for planning purposes and may revise them.
YEARS ENDING DECEMBER 31 2005 2006 2007 - ------------------------ ---- ---- ---- IN MILLIONS Electric utility operations(a)(b)........................... $370 $525 $490 Gas utility operations...................................... 165 205 185 Enterprises................................................. 10 5 5 ---- ---- ---- $545 $735 $680 ==== ==== ====
- ------------------------- (a) These amounts include a portion of Consumers' 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 recent revisions to the Clean Air Act's national air quality standards. OUTLOOK CORPORATE OUTLOOK During 2004, we have continued to implement a business strategy that involves improving our balance sheet and providing superior utility operations and service. This strategy is designed to generate cash to pay down debt and provide for more predictable future operating revenues and earnings. Our primary focus with respect to our non-utility businesses has been to optimize cash flow and further reduce our business risk and leverage through the sale of non-strategic assets, and to improve earnings and cash flow from businesses we plan to retain. Although much of our asset sales program is complete, we still may sell certain remaining businesses that are not strategic to us. As this continues, the percentage of our future earnings relating to our larger equity method investments, including Jorf Lasfar, may increase and our total future earnings CMS-27 may depend more significantly upon the performance of those investments. For additional details, see Note 12, Equity Method Investments. Over the next few years, we expect our business strategy to reduce parent company debt substantially, improve our credit ratings, grow earnings, restore a common stock dividend, and position the company to make new investments consistent with our strengths. In the near term, our new investments will focus principally on the utility. ELECTRIC UTILITY BUSINESS OUTLOOK GROWTH: In 2004, we experienced cooler than normal summer weather. As a result, our electric deliveries in 2004, including deliveries to customers who chose to buy generation service from alternative electric suppliers, increased less than one-half of one percent over the levels experienced in 2003. In 2005, we project electric deliveries to grow almost three percent. This short-term outlook for 2005 assumes a stronger economy than in 2004 and normal weather conditions throughout the year. 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 fluctuations in weather conditions and changes in economic conditions, including utilization and expansion of manufacturing facilities. 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/or Clear Skies legislation compliance, - compliance with legislative proposals that would require reductions in emissions of greenhouse gases, 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, - recovery of our Section 10d(4) Regulatory Assets, - effects of lost electric supply load to alternative electric suppliers, and - status as an electric transmission customer instead of an electric transmission owner and the impact of the evolving RTO infrastructure. Regulatory - financial and operating effects of regulatory requirements imposed by the MISO, the FERC, state and federal regulators, or others, seeking to improve reliability of national and state transmission systems, - inadequate regulatory response to applications for requested rate increases, - responses from regulators regarding the storage and ultimate disposal of spent nuclear fuel, CMS-28 - recovery of nuclear decommissioning costs. For additional details, see "Accounting for Nuclear Decommissioning Costs" within this MD&A, and - potential for the Midwest Energy Market to develop into an active energy market in the state of Michigan and the potential derivative accounting impact. For additional details, see "Accounting for Financial and Derivative Instruments, Trading Activities, and Market Risk Information" within this MD&A. Other - effects of commodity fuel prices such as natural gas, oil, and coal, - pending litigation filed by PURPA qualifying facilities, and - other pending litigation. For additional details about these trends or uncertainties, see Note 3, Contingencies. 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. Clean Air: 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 $802 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 8.06 percent. As of December 31, 2004, we have incurred $525 million in capital expenditures to comply with these regulations and anticipate that the remaining $277 million of capital expenditures will be made between 2005 and 2011. These expenditures include installing selective catalytic reduction technology at four of our coal-fired electric plants. In addition to modifying the coal-fired electric plants, we expect to utilize nitrogen oxide emissions allowances for years 2005 through 2009, most of which have been purchased. The cost of the allowances is estimated to average $8 million per year for 2005-2006. The need for allowances will decrease after year 2006 with the installation of emissions control technology. The cost of the allowances is accounted for as inventory. The allowance inventory is expensed as the coal-fired electric generating units emit nitrogen oxide. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seek modification permits from the EPA. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of "routine maintenance." If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric plants and potentially pay fines. Additionally, the viability of certain plants remaining in operation could be called into question. The EPA has proposed a Clean Air Interstate Rule that would require additional coal-fired electric plant emission controls for nitrogen oxides and sulfur dioxide. If implemented, this rule potentially would require expenditures equivalent to those efforts in progress to reduce nitrogen oxide emissions as required under the Title I provisions of the Clean Air Act. The rule proposes a two-phase program to reduce emissions of sulfur dioxide by 70 percent and nitrogen oxides by 65 percent by 2015. Additionally, the EPA also proposed two alternative sets of rules to reduce emissions of mercury from coal-fired electric plants and nickel from oil-fired electric plants. Until the proposed environmental rules are finalized, an accurate cost of compliance cannot be determined. CMS-29 Our switch to western coal as a primary fuel source has resulted in reduced plant emissions and increased our flexibility in meeting future regulatory compliance requirements. Excess sulfur dioxide allowances optimize our overall cost of regulatory compliance by delaying capital expenditures and minimizing regulatory uncertainty. Additionally, the excess sulfur dioxide allowances can be used to trade for nitrogen oxide allowances supplementing our nitrogen oxide allowance bank. Western coal has reduced our overall cost of fuel and reduced the economic impact from the recent increases in eastern coal prices. Several legislative proposals have been introduced in the United States Congress that would require reductions in emissions of greenhouse gases, however, none have yet been enacted. We cannot predict whether any federal mandatory greenhouse gas emission reduction rules ultimately will be enacted, or the specific requirements of any such rules. To the extent that greenhouse gas emission reduction rules come into effect, such mandatory emissions reduction requirements could have far-reaching and significant implications for the energy sectors. We cannot estimate the potential effect of federal or state level greenhouse gas policy on our future consolidated results of operations, cash flows, or financial position due to the speculative nature of the policies at this time. However, we stay abreast of and engage in the greenhouse gas policy developments and will continue to assess and respond to their potential implications on our business operations. Water: In March 2004, the EPA issued rules that govern generating plant cooling water intake systems. The new rules require significant reduction in fish killed by operating equipment. Some of our facilities will be required to comply with the new rules by 2006. We are currently studying the rules to determine the most cost-effective solutions for compliance. For additional details on electric environmental matters, see Note 3, Contingencies, "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. The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. As of March 2005, alternative electric suppliers are providing 900 MW of generation supply to ROA customers. This amount represents 12 percent of our distribution load and an increase of 23 percent compared to March 2004. Based on current trends, we predict total load loss by the end of 2005 to be in the range of 1,000 MW to 1,200 MW. However, no assurance can be made that the actual load loss will fall within that range. In July 2004, as a result of legislative hearings, several bills were introduced into the Michigan Senate that could change Michigan's Customer Choice Act. The proposals include: - requiring that all rate classes of regulated utilities be based on cost of service, - establishing a defined Stranded Cost calculation method, - allowing customers who stay with or switch to alternative electric suppliers after December 31, 2005 to return to utility services, and requiring them to pay current market rates upon return, - establishing reliability standards that all electric suppliers must follow, - requiring utilities and alternative electric suppliers to maintain a 15 percent power reserve margin, - creating a service charge to fund the Low Income and Energy Efficiency Fund, - giving kindergarten through twelfth-grade schools a discount of 10 percent to 20 percent on electric rates, and - authorizing a service charge payable by all customers for meeting Clean Air Act requirements. This legislation was not enacted before the end of the 2003-2004 legislative session. We anticipate that some or all of the bills may be reintroduced in the 2005-2006 legislative session. We cannot predict the outcome of these legislative proceedings. CMS-30 Implementation Costs: Applications for recovery of $7 million of implementation costs for 2002 and $1 million for 2003 are pending MPSC approval. In September 2004, the ALJ issued a Proposal for Decision recommending full recovery of these costs. We are also pursuing authorization at the FERC for the MISO to reimburse us for approximately $8 million of Alliance RTO development costs. Included in this amount is $5 million pending approval by the MPSC as part of our 2002 implementation costs application. The FERC has denied our request for reimbursement and we are appealing the FERC ruling at the United States Court of Appeals for the District of Columbia. Although we believe these implementation costs are fully recoverable in accordance with the Customer Choice Act, we cannot predict the amount, if any, the MPSC or the FERC will approve as recoverable. Section 10d(4) Regulatory Assets: Section 10d(4) of the Customer Choice Act allows us to recover certain regulatory assets through deferred recovery of annual capital expenditures in excess of depreciation levels and certain other expenses incurred prior to and throughout the rate freeze and rate cap periods, including the cost of money. In October 2004, we filed an application with the MPSC seeking recovery of $628 million of Section 10d(4) Regulatory Assets for the period June 2000 through December 2005 consisting of: - capital expenditures in excess of depreciation, - Clean Air Act costs, - other expenses related to changes in law or governmental action incurred during the rate freeze and rate cap periods, and - the associated cost of money through the period of collection. Of the $628 million, $152 million relates to the cost of money. In March 2005, the MPSC Staff filed testimony recommending the MPSC approve recovery of approximately $323 million. We cannot predict the amount, if any, the MPSC will approve as recoverable. Rate Caps: The Customer Choice Act imposes certain limitations on electric rates that could result in our inability to collect our full cost of conducting business from electric customers. Rate caps are effective 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 period. In particular, if we need to purchase power supply from wholesale suppliers while retail rates are capped, the rate restrictions may preclude full recovery of purchased power and associated transmission costs. Power Supply Costs: 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 capacity and energy contracts for the physical delivery of electricity primarily in the summer months and to a lesser degree in the winter months. We are currently planning for a reserve margin of approximately 11 percent for summer 2005, or supply resources equal to 111 percent of projected summer peak load. Of the 2005 supply resources target of 111 percent, we expect to meet approximately 102 percent from our electric generating plants and long-term power purchase contracts, and approximately 9 percent from short-term contracts, options for physical deliveries, and other agreements. We have purchased capacity and energy contracts partially covering the estimated reserve margin requirements for 2005 through 2007. As a result, we have recognized an asset of $12 million for unexpired capacity and energy contracts as of December 31, 2004. PSCR: The PSCR process assures recovery of all reasonable and prudent power supply costs actually incurred by us. In September 2004, we submitted our 2005 PSCR filing to the MPSC. The proposed PSCR charge would allow us to recover a portion of our increased power supply costs from commercial and industrial customers and, subject to the overall rate caps, from other customers. We self-implemented the proposed 2005 PSCR charge in January 2005. The revenues from the PSCR charges are subject to reconciliation at the end of the year after actual costs have been reviewed for reasonableness and prudence. We cannot predict the outcome of these PSCR proceedings. Special Contracts: We entered into multi-year electric supply contracts with certain industrial and commercial customers. The contracts provide electricity at specially negotiated prices that are at a discount from CMS-31 tariff prices, but above our incremental cost of service. As of February 2005, special contracts for approximately 630 MW of load are in place, most of which are in effect through 2005. We cannot predict the amount of electric load from these customers that will continue with our electric service after their contracts expire. Transmission Costs: In May 2002, we sold our electric transmission system for $290 million to MTH. We are in arbitration with MTH regarding property tax items used in establishing the selling price of our electric transmission system. An unfavorable outcome could result in a reduction of sale proceeds previously recognized by approximately $2 million to $3 million. 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 rulemaking could affect significantly: - transmission cost trends, - delivered power costs to us, and - delivered power costs to our retail electric customers. In November 2004, the FERC ruled on MISO and PJM RTO "through and out" rates. Through and out rates are applied to transmission transactions when a transmission customer purchases electricity that travels through multiple transmission pricing zones. Effective December 1, 2004, regional through and out rates for transactions between the PJM RTO and the MISO were eliminated by the FERC. In that November 2004 order, the FERC conditionally accepted, for a period beginning December 1, 2004 and ending January 31, 2008, a "license plate" pricing structure. License plate pricing provides for access to the combined regional transmission systems of the PJM RTO and the MISO at a single rate, although the rate may vary based on where the customer's load is located. The order also adopts a transitional charge from December 1, 2004 through March 31, 2006, intended to mitigate abrupt cost shifts between transmission owners and customers as a result of the pricing structure change. The manner in which these transitional charges are calculated and implemented is currently the subject of multiple disputes pending at the FERC. Based on the compliance filings with the FERC made by the MISO and PJM RTO transmission owners, the new transitional charges will not have a significant impact on our electric results of operations. However, we cannot predict the outcome of the disputes concerning these transitional charges pending at the FERC. Transmission Market Developments: The MISO is scheduled to begin the Midwest Energy Market on April 1, 2005. At that time, the MISO will implement a day-ahead and real-time energy market and centralized dispatch for the MISO's market participants. These changes are anticipated to ensure that load requirements in the region are met reliably and efficiently, to better manage congestion on the grid, and to produce consumer savings through the centralized dispatch of generation throughout the region. The MISO is expected to provide other functions, including long-term regional planning and market monitoring. In addition, we are evaluating whether or not there may be impacts on electric reliability associated with changes in the composition of transmission markets. For example, Commonwealth Edison Company joined the PJM RTO in May 2004 and American Electric Power Service Corporation joined the PJM RTO in October 2004. These integrations may be creating different patterns of power flow within the Midwest area and could affect adversely our ability to provide reliable service to our customers. We are presently evaluating what financial impacts, if any, these market developments are having on our operations. August 14, 2003 Blackout: The NERC and the U.S. and Canadian Power System Outage Task Force have released electric operations recommendations resulting from their investigation into the August 14, 2003 blackout. Few of the recommendations apply directly to us, since we are not a transmission owner. However, the recommendations could result in increased transmission costs to us and require upgrades to our distribution system. We cannot quantify the financial impact of these recommendations at this time. CMS-32 For additional details and material changes relating to the restructuring of the electric utility industry and electric rate matters, see Note 3, Contingencies, "Consumers' Electric Utility Restructuring Matters," and "Consumers' Electric Utility Rate Matters." ELECTRIC RATE CASE: In December 2004, we filed an application with the MPSC to increase our retail electric base rates. The electric rate case filing requests an annual increase in revenues of approximately $320 million. The primary reasons for the request are increased system maintenance and improvement costs, Clean Air Act related expenditures, and employee pension costs. A final order from the MPSC on our electric rate case is expected in late 2005. If approved as requested, the rate increase would go into effect in January 2006 and would apply to all retail electric customers. We cannot predict the amount or timing of the rate increase, if any, which the MPSC will approve. BURIAL OF OVERHEAD POWER LINES: In September 2004, the Michigan Court of Appeals upheld a lower court decision that requires Detroit Edison to obey a municipal ordinance enacted by the City of Taylor, Michigan. The ordinance requires Detroit Edison to bury a section of its overhead power lines at its own expense. Detroit Edison has filed an appeal with the Michigan Supreme Court. Unless overturned by the Michigan Supreme Court, the decision could encourage other municipalities to adopt similar ordinances, as has occurred or is being discussed in a few municipalities in Consumers' service territory. If incurred, we would seek recovery of these costs from our customers, subject to MPSC approval. This case has potentially broad ramifications for the electric utility industry in Michigan; however, at this time, we cannot predict the outcome of this matter. OTHER ELECTRIC UTILITY BUSINESS UNCERTAINTIES NUCLEAR MATTERS: Big Rock: Dismantlement of plant systems is essentially complete and demolition of the remaining plant structures has begun. The restoration project is on schedule to return approximately 530 acres of the site, including the area formerly occupied by the nuclear plant, to a natural setting for unrestricted use in mid-2006. An additional 30 acres, the area where seven transportable dry casks loaded with spent nuclear fuel and an eighth cask loaded with high-level radioactive waste material are stored, will be returned to a natural state by the end of 2012 if the DOE begins removing the spent nuclear fuel by 2010. Palisades: In August 2004, the NRC completed its mid-cycle plant performance assessment of Palisades. The assessment for Palisades covered the first half of 2004. The NRC determined that Palisades was operated in a manner that preserved public health and safety and fully met all cornerstone objectives. As of December 2004, all inspection findings were classified as having very low safety significance and all performance indicators show performance at a level requiring no additional oversight. Based on the plant's performance, only regularly scheduled inspections are planned through March 2006. The amount of spent nuclear fuel at Palisades exceeds the plant's temporary onsite storage pool capacity. We are using dry casks for temporary onsite storage. As of December 31, 2004, we have loaded 22 dry casks with spent nuclear fuel. For additional information on disposal of spent nuclear fuel, see Note 3, Contingencies, "Other Consumers' Electric Utility Contingencies -- Nuclear Matters." In September 2004, we announced that we will seek a license renewal for the Palisades plant. The plant's current license from the NRC expires in 2011. NMC, which operates the facility, will apply for a 20-year license renewal for the plant on behalf of Consumers. The Palisades renewal application is scheduled to be filed by the end of the first quarter of 2005. We have authorized the purchase of a replacement reactor vessel closure head. The replacement head is being manufactured and scheduled to be installed in 2007. Palisades, like many other nuclear plants, has experienced cracking in reactor head nozzle penetrations. Repairs to two nozzles were made in 2004. The replacement head nozzles will be manufactured from materials less susceptible to cracking and should minimize inspection and repair costs after replacement. 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 CMS-33 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 fuel 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. 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: - fluctuations in weather patterns, - use by independent power producers, - competition in sales and delivery, - Michigan economic conditions, - gas consumption per customer, and - increases in gas commodity prices. In February 2004, we filed an application with the MPSC for a Certificate of Public Convenience and Necessity to construct a 25-mile gas transmission pipeline in northern Oakland County. The project is necessary to meet estimated peak load beginning in the winter of 2005 through 2006. In December 2004, the MPSC approved a settlement agreement authorizing us to construct and operate the pipeline. Construction is expected to begin late spring of 2005. In October 2004, we filed an application with the MPSC for a Certificate of Public Convenience and Necessity to construct a 10.8-mile gas transmission pipeline in northwestern Wayne County. The project is necessary to meet the projected capacity demands beginning in the winter of 2007. If we are unable to construct the pipeline, we will need to pursue more costly alternatives or curtail serving the system's load growth in that area. 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 revenues or income from gas operations. The trends and uncertainties include: Regulatory - inadequate regulatory response to applications for requested rate increases, - response to increases in gas costs, including adverse regulatory response and reduced gas use by customers, and - proposed distribution pipeline integrity rules and mandates. Environmental - potential environmental remediation costs at a number of sites, including sites formerly housing manufactured gas plant facilities. Other - transmission pipeline integrity mandates, maintenance and remediation costs, and CMS-34 - other pending litigation. GAS TITLE TRACKING FEES AND SERVICES: On February 14, 2005, the FERC issued its latest order involving Consumers' Gas Title Transfer Tracking Fees and Services. In doing so, the FERC agreed with us that such orders only apply to a title transfer tracking fee charged and collected in connection with the Consumers' FERC blanket transportation service. Because of the newly stated limits on what fees are subject to refund, we believe that if any such refunds are ultimately required, they will not be material. GAS COST RECOVERY: The GCR process is designed to allow us to recover all of our purchased natural gas costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs for prudency in an annual reconciliation proceeding. The following table summarizes our GCR reconciliation filings with the MPSC. For additional details, see Note 3, Contingencies, "Consumers' Gas Utility Rate Matters -- Gas Cost Recovery." GAS COST RECOVERY RECONCILIATION
NET OVER- GCR YEAR DATE FILED ORDER DATE RECOVERY STATUS - -------- ---------- ---------- --------- ------ 2001-2002 June 2002 May 2004 $ 3 million $2 million has been refunded, $1 million is included in our 2003-2004 GCR reconciliation filing 2002-2003 June 2003 March 2004 $ 5 million Net over-recovery includes interest accrued through March 2003 and an $11 million disallowance settlement agreement 2003-2004 June 2004 February 2005 $31 million Filing includes the $1 million and the $5 million GCR net over-recovery above
Net over-recovery amounts included in the table above include refunds that we received from our suppliers that are required to be refunded to our customers. GCR year 2003-2004: In February 2005, the MPSC approved a settlement agreement that resulted in a credit to our GCR customers for a $28 million over-recovery, plus $3 million interest, using a roll-in refund methodology. The roll-in methodology incorporates a GCR over/under-recovery in the next GCR plan year. GCR plan for year 2004-2005: In December 2003, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2004 through March 2005. In June 2004, the MPSC issued a final Order in our GCR plan approving a settlement. The settlement included a quarterly mechanism for setting a GCR ceiling price. The current ceiling price is $6.57 per mcf. Actual gas costs and revenues will be subject to an annual reconciliation proceeding. GCR plan for year 2005-2006: In December 2004, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2005 through March 2006. Our request proposes using a GCR factor consisting of: - a base GCR factor of $6.98 per mcf, plus - a quarterly GCR ceiling price adjustment contingent upon future events. The GCR factor can be adjusted monthly, provided it remains at or below the current ceiling price. The quarterly adjustment mechanism allows an increase in the GCR ceiling price to reflect a portion of cost increases if the average NYMEX price for a specified period is greater than that used in calculating the base GCR factor. Actual gas costs and revenues will be subject to an annual reconciliation proceeding. 2003 GAS RATE CASE: In March 2003, we filed an application with the MPSC for a gas rate increase in the annual amount of $156 million. In December 2003, the MPSC granted an interim rate increase in the amount of $19 million annually. The MPSC also ordered an annual $34 million reduction in our annual depreciation expense and related taxes. CMS-35 On October 14, 2004, the MPSC issued its Opinion and Order on final rate relief. In the order, the MPSC authorized us to place into effect surcharges that would increase annual gas revenues by $58 million. Further, the MPSC rescinded the $19 million annual interim rate increase. The final rate relief was contingent upon our agreement to: - achieve a common equity level of at least $2.3 billion by year-end 2005 and propose a plan to improve the common equity level thereafter until our target capital structure is reached, - make certain safety-related operation and maintenance, pension, retiree health-care, employee health-care, and storage working capital expenditures for which the surcharge is granted, - refund surcharge revenues when our rate of return on common equity exceeds its authorized 11.4 percent rate, - prepare and file annual reports that address certain issues identified in the order, and - file a general rate case on or before the date that the surcharge expires (which is two years after the surcharge goes into effect). On October 15, 2004, we agreed to these commitments. 2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas utility plant depreciation case originally filed in June 2001. On December 18, 2003, the MPSC ordered an annual $34 million reduction in our depreciation expense and related taxes in an interim rate order issued in our 2003 gas rate case. In October and December 2004, the MPSC issued Opinions and Orders in our gas depreciation case. The October 2004 order requires us to file an application for new depreciation accrual rates for our natural gas utility plant on, or no earlier than three months prior to, the date we file our next natural gas general rate case. The MPSC also directed us to undertake a study to determine why our removal costs are in excess of those of other regulated Michigan natural gas utilities and file a report with the MPSC Staff on or before December 31, 2005. In February 2005, we requested a delay in the filing date for the next depreciation case until after the MPSC considers the removal cost study, and after the MPSC issues an order in a pending case relating to asset retirement obligation accounting. 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. We expect to fund most of these costs through insurance proceeds and through the MPSC approved rates charged to our customers. 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. For additional details, see Note 3, Contingencies, "Consumers' Gas Utility Contingencies -- Gas Environmental Matters." OTHER CONSUMERS' OUTLOOK MCV PARTNERSHIP PROPERTY TAXES: In January 2004, the Michigan Tax Tribunal issued its decision in the MCV Partnership's tax appeal against the City of Midland for tax years 1997 through 2000. The MCV Partnership estimates that the decision will result in a refund to the MCV Partnership of approximately $35 million in taxes plus $10 million of interest. The Michigan Tax Tribunal decision has been appealed to the Michigan Court of Appeals by the City of Midland and the MCV Partnership has filed a cross-appeal at the Michigan Court of Appeals. The MCV Partnership also has a pending case with the Michigan Tax Tribunal for tax years 2001 through 2004. The MCV Partnership cannot predict the outcome of these proceedings; therefore, the above refund (net of approximately $16 million of deferred expenses) has not been recognized in 2004 earnings. COLLECTIVE BARGAINING AGREEMENTS: Approximately 46 percent of our employees are represented by the Utility Workers of America Union. The Union represents Consumers' operating, maintenance, and construction employees and our call center employees. The collective bargaining agreement with the Union for our operating, maintenance, and construction employees will expire on June 1, 2005 and negotiations for a new agreement is CMS-36 underway currently. The collective bargaining agreement with the Union for our call center employees will expire on August 1, 2005. ENTERPRISES OUTLOOK INDEPENDENT POWER PRODUCTION: We plan to continue the restructuring of our IPP business with the objective of narrowing the focus of our operations to primarily North America, South America, and the Middle East/North Africa. We will continue to sell designated assets and investments that are under-performing or are not consistent with this focus. In February 2005, we sold our interest in GVK for $20 million. CMS ERM: CMS ERM has streamlined its portfolio in order to reduce business risk and outstanding credit guarantees. Our future activities will be centered on fuel procurement activities and merchant power marketing in such a way as to optimize the earnings from our IPP generation assets. CMS GAS TRANSMISSION: CMS Gas Transmission has completed its plan to sell the majority of its international assets and businesses. Future operations will be conducted mainly in Michigan and South America. GasAtacama: On March 24, 2004, the Argentine Government authorized the restriction of exports of natural gas to Chile, giving priority to domestic demand in Argentina. This restriction could have a detrimental effect on GasAtacama's earnings since GasAtacama's gas-fired electric generation plant is located in Chile and uses Argentine gas for fuel. From April through December 2004, Bolivia agreed to export 4 million cubic meters of gas per day to Argentina, which allowed Argentina to minimize its curtailments to Chile. Argentina and Bolivia extended the term of that agreement through December 31, 2005. With the Bolivian gas supply, Argentina relaxed its export restrictions to GasAtacama, currently allowing GasAtacama to receive approximately 50 percent of its contracted gas quantities at its electric generation plant. At this point in time, it is not possible to predict the outcome of these events and their effect on the earnings of GasAtacama. Other: 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 contingent note of Cantera Natural Gas, Inc., which is not included in our consolidated financial statements. The contingent 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. The financial performance is dependent primarily on the number of new wells connected, transportation volumes, and revenue with certain EBITDA thresholds required to be achieved in order for us to receive payments on the contingent note. It has not been determined for 2004 results whether we will receive a payment on the note in 2005. 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 business plan, - changes in exchange rates or in local economic or political conditions, particularly in Argentina, Venezuela, Brazil, and the Middle East, - 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 project expenses substantially, - impact of any future rate cases, FERC actions, or orders on regulated businesses, - impact of ratings downgrades on our liquidity, operating costs, and cost of capital, - impact of changes in commodity prices and interest rates on certain derivative contracts that do not qualify for hedge accounting and must be marked to market through earnings, and CMS-37 - changes in available gas supplies or Argentine government regulations that could restrict natural gas exports to our GasAtacama generating plant. OTHER OUTLOOK LITIGATION AND REGULATORY INVESTIGATION: We are the subject of an investigation by the DOJ regarding round-trip trading transactions by CMS MST. Additionally, we are named as a party in various litigation matters including, but not limited to, a shareholder derivative lawsuit, a securities class action lawsuit, a class action lawsuit alleging ERISA violations, and several lawsuits regarding alleged false natural gas price reporting and price manipulation. For additional details regarding these investigations and litigation, see Note 3, Contingencies. NEW ACCOUNTING STANDARDS For a discussion of new pronouncements, see Note 16, Implementation of New Accounting Standards. NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE SFAS NO. 123R, SHARE-BASED PAYMENT: The Statement requires companies to expense the grant date fair value of employee stock options and similar awards. The Statement also clarifies and expands SFAS No. 123's guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods. In addition, this Statement amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits related to the excess of the tax deductible amount over the compensation cost recognized be classified as a financing cash inflow rather than as a reduction of taxes paid in operating cash flows. This Statement is effective for us as of the beginning of the third quarter of 2005. We adopted the fair value method of accounting for share-based awards effective December 2002, and therefore, expect this Statement to have an insignificant impact on our results of operations when it becomes effective. CMS-38 CMS ENERGY CORPORATION MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING CMS Energy's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of management, including its CEO and CFO, CMS Energy conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, CMS Energy's management concluded that its internal control over financial control reporting was effective as of December 31, 2004. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. CMS Energy's management's assessment of the effectiveness of CMS Energy's internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, who audited the consolidated financial statements of CMS Energy included in this Form 10-K. Ernst & Young LLP's attestation report on CMS Energy's management's assessment of internal control over financial reporting follows this report. CMS-39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of CMS Energy Corporation We have audited management's assessment, included in MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING, that CMS Energy Corporation (a Michigan Corporation) and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). CMS Energy Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We did not examine the effectiveness of internal control over financial reporting of Midland Cogeneration Venture Limited Partnership, a 49% owned variable interest entity which has been consolidated pursuant to Revised Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities", whose financial statements reflect total assets and revenues constituting 12% and 12%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004. The effectiveness of Midland Cogeneration Venture Limited Partnership's internal control over financial reporting was audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the effectiveness of Midland Cogeneration Venture Limited Partnership's internal control over financial reporting, is based solely on the report of the other auditors. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, based on our audit and the report of the other auditors, management's assessment that CMS Energy Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, based on our audit and the report of the other auditors, CMS Energy Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CMS Energy Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income (loss), common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004 and our report dated March 7, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Detroit, Michigan March 7, 2005 CMS-40 MCV MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING MCV's management is responsible for establishing and maintaining an adequate system of internal control over financial reporting of MCV. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. MCV's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of MCV; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of MCV are being made only in accordance with authorizations of management and the Management Committee of MCV; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of MCV's assets that could have a material effect on the financial statements. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. MCV management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in "Internal Control -- Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that MCV's system of internal control over financial reporting was effective as of December 31, 2004. MCV management's assessment of the effectiveness of MCV's internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. CMS-41 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED DECEMBER 31 -------------------------- 2004 2003 2002 ---- ---- ---- IN MILLIONS OPERATING REVENUE........................................... $5,472 $5,513 $8,673 EARNINGS FROM EQUITY METHOD INVESTEES....................... 115 164 92 OPERATING EXPENSES Fuel for electric generation.............................. 793 405 341 Purchased and interchange power........................... 344 540 2,677 Purchased power -- related parties........................ -- 455 564 Cost of gas sold.......................................... 1,786 1,791 2,745 Other operating expenses.................................. 954 951 915 Maintenance............................................... 256 226 212 Depreciation, depletion and amortization.................. 431 428 412 General taxes............................................. 270 191 222 Asset impairment charges.................................. 160 95 602 ------ ------ ------ 4,994 5,082 8,690 ------ ------ ------ OPERATING INCOME............................................ 593 595 75 OTHER INCOME (DEDUCTIONS) Accretion expense......................................... (23) (29) (31) Gain (loss) on asset sales, net........................... 52 (3) 37 Interest and dividends.................................... 27 28 15 Regulatory return on capital expenditures................. 113 -- -- Foreign currency gains (losses), net...................... (3) 15 (7) Other income.............................................. 27 25 13 Other expense............................................. (15) (22) (27) ------ ------ ------ 178 14 -- ------ ------ ------ FIXED CHARGES Interest on long-term debt................................ 502 473 404 Interest on long-term debt -- related parties............. 58 58 -- Other interest............................................ 44 59 32 Capitalized interest...................................... 25 (9) (16) Preferred dividends of subsidiaries....................... 5 2 2 Preferred securities distributions........................ -- 10 86 ------ ------ ------ 634 593 508 ------ ------ ------ INCOME (LOSS) BEFORE MINORITY INTERESTS..................... 137 16 (433) MINORITY INTERESTS.......................................... 15 -- 2 ------ ------ ------ INCOME (LOSS) BEFORE INCOME TAXES........................... 122 16 (435) INCOME TAX EXPENSE (BENEFIT)................................ (5) 58 (41) ------ ------ ------ INCOME (LOSS) FROM CONTINUING OPERATIONS.................... 127 (42) (394) GAIN (LOSS) FROM DISCONTINUED OPERATIONS, NET OF $18 TAX EXPENSE IN 2004, $50 TAX EXPENSE IN 2003 AND $118 TAX BENEFIT IN 2002........................................... (4) 23 (274) ------ ------ ------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING................................................ 123 (19) (668) CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING, NET OF $1 TAX BENEFIT IN 2004, $13 TAX BENEFIT IN 2003 AND $10 TAX EXPENSE IN 2002 RETIREMENT BENEFITS....................................... (2) -- -- DERIVATIVES............................................... -- (23) 18 ASSET RETIREMENT OBLIGATIONS, SFAS NO. 143................ -- (1) -- ------ ------ ------ (2) (24) 18 ------ ------ ------ NET INCOME (LOSS)........................................... 121 (43) (650) PREFERRED DIVIDENDS......................................... 11 1 -- ------ ------ ------ NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS.......... $ 110 $ (44) $ (650) ====== ====== ======
CMS-42
YEARS ENDED DECEMBER 31 -------------------------- 2004 2003 2002 ------ ------ ------ IN MILLIONS, EXCEPT PER SHARE AMOUNTS CMS ENERGY NET INCOME (LOSS) Net Income (Loss) Available to Common Stockholders..... $ 110 $ (44) $ (650) ====== ====== ====== BASIC INCOME (LOSS) PER AVERAGE COMMON SHARE Income (Loss) from Continuing Operations............... $ 0.68 $(0.30) $(2.84) Income (Loss) from Discontinued Operations............. (0.02) 0.16 (1.97) Income (Loss) from Changes in Accounting............... (0.01) (0.16) 0.13 ------ ------ ------ Net Income (Loss) Attributable to Common Stock......... $ 0.65 $(0.30) $(4.68) ====== ====== ====== DILUTED INCOME (LOSS) PER AVERAGE COMMON SHARE Income (Loss) from Continuing Operations............... $ 0.67 $(0.30) $(2.84) Income (Loss) from Discontinued Operations............. (0.02) 0.16 (1.97) Income (Loss) from Changes in Accounting............... (0.01) (0.16) 0.13 ------ ------ ------ Net Income (Loss) Attributable to Common Stock......... $ 0.64 $(0.30) $(4.68) ====== ====== ====== DIVIDENDS DECLARED PER COMMON SHARE....................... $ -- $ -- $ 1.09 ------ ------ ------
The accompanying notes are an integral part of these statements. CMS-43 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 ----------------------------- 2004 2003 2002 ------- ------- ------- IN MILLIONS CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)......................................... $ 121 $ (43) $ (650) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation, depletion, and amortization (includes nuclear decommissioning of $6 per year)............. 431 428 412 Depreciation and amortization of discontinued operations.......................................... -- 34 73 Loss on disposal of discontinued operations.......... 2 46 237 Regulatory return on capital expenditures............ (113) -- -- Asset impairment charges............................. 160 95 602 Capital lease and debt discount amortization......... 28 25 18 Accretion expense.................................... 23 29 31 Bad debt expense..................................... 19 28 22 Distributions from related parties less than earnings............................................ (88) (41) (39) Loss (gain) on sale of assets........................ (52) 3 (37) Cumulative effect of changes in accounting........... 2 24 (18) Pension contribution................................. -- (560) (64) Changes in assets and liabilities: Decrease (increase) in accounts receivable and accrued revenue................................ (144) 200 99 Decrease (increase) in inventories................ (109) (288) 140 Increase (decrease) in accounts payable........... 86 (231) (243) Increase (decrease) in accrued expenses........... 37 (49) 195 Deferred income taxes and investment tax credit... 94 242 (398) Decrease (increase) in other current and non-current assets............................. (98) 10 (271) Increase (decrease) in other current and non-current liabilities........................ (1) (202) 505 ------- ------- ------- Net cash provided by (used in) operating activities.......................................... 398 (250) 614 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease)................................................. (525) (535) (747) Investments in partnerships and unconsolidated subsidiaries........................................... (71) -- (55) Cost to retire property................................... (73) (72) (66) Restricted cash........................................... 145 (163) (34) Investments in Electric Restructuring Implementation Plan................................................... (7) (8) (8) Investments in nuclear decommissioning trust funds........ (6) (6) (6) Proceeds from nuclear decommissioning trust funds......... 36 34 30 Proceeds from short-term investments...................... 2,267 -- -- Purchase of short-term investments........................ (2,376) -- -- Maturity of MCV restricted investment securities held-to-maturity....................................... 675 -- -- Purchase of MCV restricted investment securities held-to-maturity....................................... (674) -- -- Proceeds from sale of assets.............................. 219 939 1,659 Other investing........................................... (2) 14 56 ------- ------- ------- Net cash provided by (used in) investing activities.......................................... (392) 203 829 ------- ------- -------
CMS-44
YEARS ENDED DECEMBER 31 ----------------------------- 2004 2003 2002 ------- ------- ------- IN MILLIONS CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes, bonds and other long-term debt....... 1,392 2,080 725 Issuance of common stock.................................. 290 -- -- Issuance of preferred stock............................... -- 272 -- Retirement of bonds and other long-term debt.............. (1,631) (1,656) (1,834) Common stock repurchased.................................. -- -- (8) Payment of common stock dividends......................... -- -- (149) Payment of preferred stock dividends...................... (11) (1) -- Payment of capital and finance lease obligations.......... (44) (13) (15) Increase (decrease) in notes payable...................... -- (470) 75 Other financing........................................... (39) 17 (17) ------- ------- ------- Net cash provided by (used in) financing activities.... (43) 229 (1,223) ------- ------- ------- EFFECT OF EXCHANGE RATES ON CASH............................ -- (1) 8 NET INCREASE IN CASH AND CASH EQUIVALENTS................... (37) 181 228 CASH AND CASH EQUIVALENTS FROM EFFECT OF REVISED FASB INTERPRETATION NO. 46 CONSOLIDATION....................... 174 -- -- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 532 351 123 ------- ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 669 $ 532 $ 351 ======= ======= ======= OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE: CASH TRANSACTIONS Interest paid (net of amounts capitalized)................ $ 601 $ 564 $ 409 Income taxes paid (net of refunds)........................ -- (33) (217) OPEB cash contribution.................................... 63 76 84 NON-CASH TRANSACTIONS Other assets placed under capital lease................... $ 3 $ 19 $ 62 ======= ======= =======
The accompanying notes are an integral part of these statements. CMS-45 CMS ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------- 2004 2003 ---- ---- IN MILLIONS ASSETS PLANT AND PROPERTY (AT COST) Electric utility.......................................... $ 7,967 $ 7,600 Gas utility............................................... 2,995 2,875 Enterprises............................................... 3,391 837 Other..................................................... 28 32 ------- ------- 14,381 11,344 Less accumulated depreciation, depletion, and amortization........................................... 6,115 4,842 ------- ------- 8,266 6,502 Construction work-in-progress............................. 370 388 ------- ------- 8,636 6,890 ------- ------- INVESTMENTS Enterprises............................................... 729 724 Midland Cogeneration Venture Limited Partnership.......... -- 419 First Midland Limited Partnership......................... -- 224 Other..................................................... 23 23 ------- ------- 752 1,390 ------- ------- CURRENT ASSETS Cash and cash equivalents at cost, which approximates market................................................. 669 532 Restricted cash........................................... 56 201 Short-term investments at cost, which approximates market................................................. 109 -- Accounts receivable, notes receivable, and accrued revenue, less allowances of $38 in 2004 and $40 in 2003................................................... 528 363 Accounts receivable and notes receivable -- related parties................................................ 53 73 Inventories at average cost Gas in underground storage............................. 856 741 Materials and supplies................................. 90 98 Generating plant fuel stock............................ 84 52 Assets held for sale...................................... -- 24 Price risk management assets.............................. 91 102 Regulatory assets -- postretirement benefits.............. 19 19 Derivative instruments.................................... 96 2 Deferred property taxes................................... 167 146 Prepayments and other..................................... 181 116 ------- ------- 2,999 2,469 ------- ------- NON-CURRENT ASSETS Regulatory Assets Securitized costs......................................... 604 648 Additional minimum pension................................ 372 -- Postretirement benefits................................... 139 162 Abandoned Midland project................................. 10 10 Other..................................................... 552 266 Assets held for sale...................................... -- 2 Price risk management assets.............................. 214 177 Nuclear decommissioning trust funds....................... 575 575 Prepaid pension costs..................................... -- 388 Goodwill.................................................. 23 25 Notes receivable -- related parties....................... 217 242 Notes receivable.......................................... 178 150 Other..................................................... 601 444 ------- ------- 3,485 3,089 ------- ------- TOTAL ASSETS................................................ $15,872 $13,838 ======= =======
CMS-46 CMS ENERGY CORPORATION
DECEMBER 31 ------------------- 2004 2003 ---- ---- IN MILLIONS STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common stockholders' equity Common stock, authorized 350.0 shares; outstanding 195.0 shares in 2004 and 161.1 shares in 2003................ $ 2 $ 2 Other paid-in capital..................................... 4,140 3,846 Accumulated other comprehensive loss...................... (336) (419) Retained deficit.......................................... (1,734) (1,844) ------- ------- 2,072 1,585 Preferred stock of subsidiary............................. 44 44 Preferred stock........................................... 261 261 Long-term debt............................................ 6,444 6,020 Long-term debt -- related parties......................... 504 684 Non-current portion of capital and finance lease obligations............................................ 315 58 ------- ------- 9,640 8,652 ------- ------- MINORITY INTERESTS.......................................... 733 73 ------- ------- CURRENT LIABILITIES Current portion of long-term debt, capital and finance leases................................................. 296 519 Current portion of long-term debt -- related parties...... 180 -- Accounts payable.......................................... 391 303 Accounts payable -- related parties....................... 1 40 Accrued interest.......................................... 145 130 Accrued taxes............................................. 312 285 Liabilities held for sale................................. -- 2 Price risk management liabilities......................... 90 89 Current portion of purchase power contracts............... -- 27 Current portion of gas supply contract obligations........ 32 29 Deferred income taxes..................................... 19 27 Other..................................................... 289 185 ------- ------- 1,755 1,636 ------- ------- NON-CURRENT LIABILITIES Regulatory Liabilities Regulatory liabilities for cost of removal................ 1,044 983 Income taxes, net...................................... 357 312 Other regulatory liabilities........................... 173 172 Postretirement benefits................................ 275 265 Deferred income taxes..................................... 671 615 Deferred investment tax credit............................ 79 85 Asset retirement obligation............................... 439 359 Price risk management liabilities......................... 213 175 Gas supply contract obligations........................... 176 208 Other..................................................... 317 303 ------- ------- 3,744 3,477 ------- ------- Commitments and Contingencies (Notes 3, 4, 6, 9, 11) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES.............. $15,872 $13,838 ======= =======
The accompanying notes are an integral part of these statements. CMS-47 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31 ---------------------------------------------------------------- 2004 2003 2002 2004 2003 2002 ---- ---- ---- ---- ---- ---- NUMBER OF SHARES IN THOUSANDS IN MILLIONS COMMON STOCK At beginning and end of period........ $ 2 $ 2 $ 1 OTHER PAID-IN CAPITAL At beginning of period................ 161,130 144,088 132,989 3,846 3,605 3,257 Common stock repurchased.............. (43) (14) (39) (1) -- (8) Common stock reacquired............... (270) (217) (220) (5) (5) (1) Common stock issued................... 34,180 17,273 11,358 301 234 357 Common stock reissued................. -- -- -- -- 1 -- Issuance cost of preferred stock...... -- -- -- (1) (8) -- Deferred gain......................... -- -- -- -- 19 -- ------- ------- ------- ------- ------- ------- At end of period................. 194,997 161,130 144,088 4,140 3,846 3,605 ------- ------- ------- ------- ------- ------- ACCUMULATED OTHER COMPREHENSIVE LOSS Minimum Pension Liability At beginning of period............. -- (241) -- Minimum pension liability adjustments(a)................... (17) 241 (241) ------- ------- ------- At end of period................. (17) -- (241) ------- ------- ------- Investments At beginning of period............. 8 2 (5) Unrealized gain on investments(a)................... 1 6 -- Realized gain on investments(a).... -- -- 7 ------- ------- ------- At end of period................. 9 8 2 ------- ------- ------- Derivative Instruments At beginning of period............. (8) (31) (28) Unrealized gain (loss) on derivative instruments(a)........ 5 4 (7) Realized gain (loss) on derivative instruments(a)................... (6) 19 4 ------- ------- ------- At end of period................. (9) (8) (31) ------- ------- ------- FOREIGN CURRENCY TRANSLATION At beginning of period................ (419) (458) (233) Loy Yang sale......................... 110 -- -- Other foreign currency translations... (10) 39 (225) ------- ------- ------- At end of period................. (319) (419) (458) ------- ------- ------- At end of period.............. (336) (419) (728) ------- ------- ------- RETAINED DEFICIT At beginning of period................ (1,844) (1,800) (1,001) Consolidated net income (loss)(a)..... 121 (43) (650) Preferred stock dividends declared.... (11) (1) -- Common stock dividends declared....... -- -- (149) ------- ------- ------- At end of period................. (1,734) (1,844) (1,800) ------- ------- ------- TOTAL COMMON STOCKHOLDERS' EQUITY....... $ 2,072 $ 1,585 $ 1,078 ======= ======= =======
CMS-48
2004 2003 2002 ---- ---- ---- IN MILLIONS (a) DISCLOSURE OF OTHER COMPREHENSIVE INCOME (LOSS): Minimum pension liability Minimum pension liability adjustments, net of tax (tax benefit) of $(9), $132 and $(132), respectively...................................... $ (17) $ 241 $ (241) Investments Unrealized gain on investments, net of tax of $1, $3 and $--, respectively............................. 1 6 -- 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 $12, $--, and $(4), respectively...................................... 5 4 (7) Realized gain (loss) on derivative instruments, net of tax (tax benefit) of $(6), $11, and $2, respectively...................................... (6) 19 4 Foreign currency translation, net...................... 100 39 (225) Consolidated net income (loss)......................... 121 (43) (650) ------- ------- ------- Total Other Comprehensive Income (Loss).............. $ 204 $ 266 $(1,112) ======= ======= =======
The accompanying notes are an integral part of these statements. CMS-49 (This page intentionally left blank) CMS-50 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1: CORPORATE STRUCTURE AND ACCOUNTING POLICIES CORPORATE STRUCTURE: 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 various subsidiaries and equity investments, is engaged in domestic and international diversified energy businesses, including independent power production and natural gas transmission, storage and processing. We manage our businesses by the nature of services each provides and operate principally in three business segments, electric utility, gas utility, and enterprises. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of CMS Energy, Consumers, Enterprises, and all other entities in which we have a controlling financial interest or are the primary beneficiary, in accordance with Revised FASB Interpretation No. 46. The primary beneficiary of a variable interest entity is the party that absorbs or receives a majority of the entity's expected losses or expected residual returns or both as a result of holding variable interests, which are ownership, contractual, or other economic interests. In accordance with Revised FASB Interpretation No. 46, in 2003, we consolidated three Michigan electric generating plants and in 2004, we consolidated the MCV Partnership and the FMLP. For additional details, see Note 16, Implementation of New Accounting Standards. 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 are not the primary beneficiary. Intercompany transactions and balances have been eliminated. USE OF ESTIMATES: We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. 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 consolidated 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 3, Contingencies. 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. ACCRETION EXPENSE: CMS ERM has entered into prepaid sales arrangements to provide natural gas to various entities over periods of up to 12 years at predetermined price levels. CMS ERM has established a liability for these outstanding obligations equal to the discounted present value of the contracts, and has hedged its exposures under these arrangements. The amounts recorded as liabilities on our Consolidated Balance Sheets are guaranteed by Enterprises. As CMS ERM fulfills its obligations under the contracts, it recognizes revenues upon the delivery of natural gas, records a reduction to the outstanding obligation, and recognizes accretion expense. 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. CMS-51 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2004, our restricted cash on hand was $56 million. Restricted cash dedicated for repayment of Securitization bonds is classified as a current asset as the payments on the related Securitization bonds occur within one year. COST METHOD INVESTMENTS: At December 31, 2004, our cost method investments totaled $22 million, substantially all of which were evaluated for impairment in 2004. We periodically reevaluate the fair value of our cost method investments if there are specific events or changes in circumstances that may have a significant adverse effect on the fair value of our investments. EARNINGS PER SHARE: Basic and diluted earnings per share are based on the weighted average number of shares of common stock and dilutive 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, warrants 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 5, Earnings Per Share. FINANCIAL INSTRUMENTS: We account for investments in debt and equity securities using SFAS No. 115. Debt and equity securities classified as available-for-sale are reported at fair value determined from quoted market prices. Debt and equity securities classified as held-to-maturity are reported at cost. Unrealized gains or losses resulting from changes in fair value of certain available-for-sale debt and equity securities are reported, net of tax, in equity as part of accumulated other comprehensive income. Unrealized gains or losses are excluded from earnings unless the related changes in fair value are determined to be other than temporary. Unrealized gains or losses on our nuclear decommissioning investments are reflected as regulatory liabilities on our Consolidated Balance Sheets. Realized gains or losses would not affect our earnings or cash flows. For additional details regarding financial instruments, see Note 6, 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 are shown in the stockholders' equity section on our Consolidated Balance Sheets. 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. GAS INVENTORY: We use the weighted average cost method for valuing working gas and recoverable cushion gas in underground storage facilities. GENERATING PLANT FUEL STOCK INVENTORY: We use the weighted average cost method for valuing coal inventory and classify these costs as generating plant fuel stock on our Consolidated Balance Sheets. The MCV Partnership's natural gas inventory is also included in this category, stated at the lower of cost or market and valued using the last-in, first-out ("LIFO") method. 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 13, 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 investment or asset exceeds its estimated CMS-52 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) undiscounted future 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 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 using straight-line rates approved by the MPSC. The composite depreciation rates for our properties are:
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- Electric utility property................................... 3.2% 3.1% 3.1% Gas utility property........................................ 3.7% 4.6% 4.5% Other property.............................................. 8.4% 8.1% 7.2%
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 certain 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, 2004, we have recorded a liability to the DOE of $141 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 3, Contingencies, "Other Consumers' Electric Utility Contingencies -- Nuclear Matters." OTHER INCOME AND OTHER EXPENSE: The following tables show the components of Other income and Other expense:
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- IN MILLIONS Other income Interest and dividends -- related parties................. $ 6 $ 6 $ 3 Return on stranded costs.................................. 7 -- -- Return on security costs.................................. 2 -- -- Electric restructuring return............................. 6 8 4 Investment sale gain...................................... -- 4 -- All other................................................. 6 7 6 --- --- --- Total other income.......................................... $27 $25 $13 === === ===

YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- IN MILLIONS Other expense Loss on SERP investment................................... $ (3) $ (2) $(10) Donations................................................. (1) (1) (9) CMS ERM remediation costs................................. -- (6) (1) Civic and political expenditures.......................... (2) (2) (3) All other................................................. (9) (11) (4) ---- ---- ---- Total other expense......................................... $(15) $(22) $(27) ==== ==== ====
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. The cost of removal, less salvage, is recorded as a regulatory liability. For additional details, see Note 8, Asset Retirement Obligations. An allowance for funds used during CMS-53 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2004 and 2003, was as follows:
ESTIMATED DEPRECIABLE YEARS ENDED DECEMBER 31 LIFE IN YEARS(e) 2004 2003 - ----------------------- ---------------- ---- ---- IN MILLIONS Electric: Generation................................................ 13-105 $3,433 $3,332 Distribution.............................................. 12-75 4,069 3,799 Other..................................................... 7-50 384 388 Capital leases(a)......................................... 81 81 Gas: Underground storage facilities(b)......................... 30-65 255 232 Transmission.............................................. 15-75 367 342 Distribution.............................................. 40-75 2,057 1,976 Other..................................................... 7-50 290 300 Capital leases(a)......................................... 26 25 Enterprises: IPP....................................................... 3-40 2,982 451 CMS Gas Transmission...................................... 5-40 124 117 CMS Electric and Gas...................................... 2-30 257 241 Other..................................................... 4-25 28 28 Other:...................................................... 7-71 28 32 Construction work-in-progress............................... 370 388 Less accumulated depreciation, depletion, and amortization(c)........................................... 6,115 4,842 ------ ------ Net property, plant, and equipment(d)....................... $8,636 $6,890 ====== ======
- ------------------------- (a) Capital leases presented in this table are gross amounts. Amortization of capital leases was $49 million in 2004 and $38 million in 2003. (b) Includes unrecoverable base natural gas in underground storage of $26 million at December 31, 2004 and $23 million at December 31, 2003, which is not subject to depreciation. (c) Accumulated depreciation, depletion, and amortization is made up of $5.665 billion from our public utility plant assets and $450 million from other plant assets as of December 31, 2004 and $4.417 billion from public utility plant assets and $425 million from other plant assets as of December 31, 2003. (d) Included in net property, plant and equipment are intangible assets related primarily to software development costs, consents, leasehold improvements, and rights of way. The estimated amortization life for software development costs is seven years, leasehold improvements is over the life of the lease and other intangible CMS-54 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) amortization lives range from 50 to 105 years. Intangible assets at December 31, 2004 and 2003 were as follows:
ACCUMULATED INTANGIBLE YEAR ENDED DECEMBER 31, 2004 GROSS COST AMORTIZATION ASSET, NET - ---------------------------- ---------- ------------ ---------- IN MILLIONS Software development................................. $179 $117 $ 62 Rights of way........................................ 94 28 66 Leasehold improvements............................... 22 14 8 Franchises and consents.............................. 19 9 10 Other intangibles.................................... 64 25 39 ---- ---- ---- Totals............................................... $378 $193 $185 ==== ==== ====

ACCUMULATED INTANGIBLE YEAR ENDED DECEMBER 31, 2003 GROSS COST AMORTIZATION ASSET, NET - ---------------------------- ---------- ------------ ---------- IN MILLIONS Software development................................. $178 $107 $ 71 Rights of way........................................ 89 25 64 Leasehold improvements............................... 32 30 2 Franchises and consents.............................. 19 8 11 Other intangibles.................................... 101 41 60 ---- ---- ---- Totals............................................... $419 $211 $208 ==== ==== ====
Pretax amortization expense related to these intangible assets was $21 million for the year ended December 31, 2004, $21 million for the year ended December 31, 2003, and $20 million for the year ended December 31, 2002. Intangible assets amortization is forecasted to range from $10 million to $21 million per year over the next five years. (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 45-50 Coal 39-43 Transmission 60 Nuclear 17-25 Distribution 50 Hydroelectric 55-71 Other 50 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 (loss) for the years presented. CMS-55 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) RELATED-PARTY TRANSACTIONS: We received income from related parties as follows:
TYPE OF INCOME RELATED PARTY 2004 2003 2002 - -------------- ------------- ---- ---- ---- (IN MILLIONS) Income from our investments in related party trusts(c) Trust Preferred Securities $ 2 $ 2 $ -- Companies....................... Electric generating capacity and energy from T.E.S. Filer City, Grayling Generation, and Genesee Power Station(a) Consumers Energy................ -- 64 67 Gas sales, storage, transportation, and other services(b) MCV Partnership................. -- 17 41
We recorded expense from related parties as follows:
TYPE OF COST RELATED PARTY 2004 2003 2002 - ------------ ------------- ---- ---- ---- (IN MILLIONS) Interest expense on long-term debt(c) Trust Preferred Securities $ 58 $ 58 $ -- Companies...................... Electric generating capacity and energy(b) MCV Partnership................ -- 455 497
- ------------------------- (a) At December 31, 2003, we consolidated the T.E.S. Filer City Station Limited Partnership, Grayling Generating Station Limited Partnership, and Genessee Power Station Limited Partnership into our consolidated financial statements in accordance with Revised FASB Interpretation No. 46. For additional details, see Note 16, Implementation of New Accounting Standards. (b) In 2004, we consolidated the MCV Partnership and the FMLP into our consolidated financial statements in accordance with Revised FASB Interpretation No. 46. For additional details, see Note 16, Implementation of New Accounting Standards. (c) We issued Trust Preferred Securities through several CMS Energy and 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 our Consolidated Statements of Income (Loss), Interest on Long-term debt -- related parties to the trusts holding the Trust Preferred Securities. For additional information on our affiliated Trust Preferred Securities companies, see Note 16, Implementation of New Accounting Standards. TRADE RECEIVABLES: We record our accounts receivable at fair value. Accounts deemed uncollectible are charged to operating expense. UNAMORTIZED DEBT PREMIUM, DISCOUNT, AND EXPENSE: We capitalize premiums, discounts, and expenses incurred in connection with the issuance of long-term debt and amortize those costs ratably over the terms of the debt issues. Any refinancing costs are charged to expenses as incurred. For the regulated portions of our businesses, if we refinance debt, we capitalize any remaining unamortized premiums, discounts, and expenses and amortize them ratably over the terms of the newly issued 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. We reflect the following regulatory assets and liabilities, which include both current and non-current amounts, on our Consolidated Balance Sheets. We expect to recover these costs through rates over periods of up CMS-56 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) to 14 years. We recognized an OPEB transition obligation in accordance with SFAS No. 106 and established a regulatory asset for the amount that we expect to recover in rates over the next eight years.
DECEMBER 31 2004 2003 - ----------- ---- ---- (IN MILLIONS) Securitized costs (Note 4).................................. $ 604 $ 648 Postretirement benefits (Note 7)............................ 530 181 Electric Restructuring Implementation Plan (Note 3)......... 88 91 Manufactured gas plant sites (Note 3)....................... 65 67 Abandoned Midland project................................... 10 10 Unamortized debt costs...................................... 71 51 Asset retirement obligation (Note 8)........................ 83 49 Stranded costs (Note 3)..................................... 63 -- Section 10d(4) regulatory asset (Note 3).................... 141 -- Other....................................................... 41 8 ------ ------ Total regulatory assets(a).................................. $1,696 $1,105 ====== ====== Cost of removal (Note 8).................................... $1,044 $ 983 Income taxes (Note 9)....................................... 357 312 Asset retirement obligation (Note 8)........................ 168 168 Other....................................................... 5 4 ------ ------ Total regulatory liabilities(a)............................. $1,574 $1,467 ====== ======
- ------------------------- (a) At December 31, 2004, we classified $19 million of regulatory assets as current regulatory assets and we classified $1.677 billion of regulatory assets as non-current regulatory assets. At December 31, 2003, we classified $19 million of regulatory assets as current regulatory assets and we classified $1.086 billion of regulatory assets as non-current regulatory assets. At December 31, 2004 and December 31, 2003, all of our regulatory liabilities represented non-current regulatory liabilities. 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 $219 million for the year ended December 31, 2004 and $939 million for the year ended December 31, 2003. CMS-57 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2004, we no longer have assets that qualify as "held for sale." At December 31, 2003, "Assets held for sale" included Parmelia, Bluewater Pipeline, and our investment in the American Gas Index fund. The major classes of assets and liabilities held for sale on our Consolidated Balance Sheets are as follows:
DECEMBER 31 2003 - ----------- ---- (IN MILLIONS) Assets Cash...................................................... $ 7 Accounts receivable....................................... 2 Property, plant and equipment -- net...................... 2 Other..................................................... 15 --- Total assets held for sale.................................. $26 === Liabilities Accounts payable.......................................... $ 2 --- Total liabilities held for sale............................. $ 2 ===
DISCONTINUED OPERATIONS We have discontinued the following operations:
PRETAX AFTER-TAX GAIN (LOSS) GAIN (LOSS) BUSINESS/PROJECT DISCONTINUED ON SALE ON SALE STATUS - ---------------- ------------ ----------- ----------- ------ (IN MILLIONS) Equatorial Guinea.................. 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........................ September 2002 (126) (82) Sold September 2002 Panhandle.......................... 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(a)........................ December 2003 10 6 Sold August 2004
- ------------------------- (a) In August 2004, we sold our Parmelia business and our interest in Goldfields, which did not meet the criteria for discontinued operations, to APT for A$204 million (approximately $147 million in U.S. dollars). The $10 million ($6 million after-tax) gain on the sale of Parmelia includes a $3 million ($2 million after-tax) foreign currency translation loss. CMS-58 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following amounts are reflected in the Consolidated Statements of Income (Loss), in the Gain (Loss) From Discontinued Operations line:
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Revenues.................................................... $11 $504 $ 891 === ==== ===== Discontinued operations: Pretax gain (loss) from discontinued operations........... $(1) $115 $ (38) Income tax expense (benefit).............................. 1 46 (1) --- ---- ----- Gain (loss) from discontinued operations.................. (2) 69 (37) Pretax gain (loss) from disposal of discontinued operations............................................. 15 (42) (354) Income tax expense (benefit).............................. 17 4 (117) --- ---- ----- Loss from disposal of discontinued operations............. (2) (46) (237) --- ---- ----- Gain (loss) from discontinued operations.................... $(4) $ 23 $(274) === ==== =====
The gain (loss) from discontinued operations includes a reduction in asset values, a provision for anticipated closing costs, and a portion of CMS Energy's interest expense. Interest expense of less than $1 million for 2004, $22 million for 2003, and $71 million for 2002 has been allocated based on a ratio of the expected proceeds for the asset to be sold divided by CMS Energy's total capitalization of each discontinued operation multiplied by CMS Energy's interest expense. OTHER ASSET SALES Our other asset sales include the following assets. The impacts of these sales are included in Gain (loss) on asset sales, net in our Consolidated Statements of Income (Loss). For the year ended December 31, 2004, 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 GAIN - --------- ---------------- ------ --------- (IN MILLIONS) February Bluewater Pipeline.......................................... $ 1 $ 1 April Loy Yang(a)................................................. -- -- May American Gas Index fund(b).................................. 1 1 August Goldfields(c)............................................... 45 29 December Moapa(d).................................................... 3 2 Various Other....................................................... 2 1 --- --- Total gain on asset sales $52 $34 === ===
- ------------------------- (a) In April 2004, we and our partners sold the 2,000 MW Loy Yang power plant and adjacent coal mine in Victoria, Australia for about A$3.5 billion ($2.6 billion in U.S. dollars), including A$145 million for the project equity. Our share of the proceeds, net of transaction costs and closing adjustments, was $44 million. In anticipation of the sale, we recorded an impairment in the first quarter, as discussed in "Asset Impairments" within this Note. (b) In May 2004, we sold our interest in the American Gas Index fund for $7 million. (c) In August 2004, we sold our interest in Goldfields and our Parmelia business, a discontinued operation, to APT for A$204 million (approximately $147 million in U.S. dollars). The $45 million ($29 million after- CMS-59 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) tax) gain on the sale of Goldfields includes a $9 million ($6 million after-tax) foreign currency translation gain. (d) In December 2004, we sold land in Moapa, Nevada for $3 million. For the year ended December 31, 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) === ===
For the year ended December 31, 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 ==== ====
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-60 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The table below summarizes our asset impairments:
PRETAX AFTER-TAX PRETAX AFTER-TAX PRETAX AFTER-TAX YEARS ENDED DECEMBER 31 2004 2004 2003 2003 2002 2002 - ----------------------- ------ --------- ------ --------- ------ --------- (IN MILLIONS) Asset impairments: Enterprises: Loy Yang(a).......................... $125 $ 81 $-- $-- $ -- $ -- International Energy Distribution(b).................... -- -- 72 53 4 3 GVK(c)............................... 30 20 -- -- -- -- SLAP(c).............................. 5 3 -- -- -- -- CMS Generation DIG(d)............................. -- -- -- -- 460 299 Michigan Power..................... -- -- -- -- 62 40 Craven............................. -- -- -- -- 23 15 Other(e)........................... -- -- 16 11 20 13 Marketing, Services and Trading...... -- -- -- -- 18 11 Other................................ -- -- 7 4 15 10 ---- ---- --- --- ---- ---- Total asset impairments................... $160 $104 $95 $68 $602 $391 ==== ==== === === ==== ====
- ------------------------- (a) In the first quarter of 2004, an impairment charge was recorded to recognize the reduction in fair value as a result of the sale of Loy Yang, completed in April 2004, which included a cumulative net foreign currency translation loss of approximately $110 million. (b) In September 2003, we wrote down our investment in CMS Electric and Gas' Venezuelan electric distribution utility 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. (c) In December 2004, we recorded impairment charges to adjust our carrying value to fair market value as a result of the planned sales of our investments in GVK and SLAP. We closed on the sale of GVK in February 2005. We expect the sale of SLAP to close in the first quarter of 2005. (d) DIG's reduced valuation was primarily a reflection of the unfavorable terms of its power purchase agreement. (e) In 2003, we determined that the fair values of certain equity investments at CMS Generation were lower than their carrying amount, and that these declines in value were other than temporary. Therefore, in accordance with APB No. 18, we recognized an impairment charge of $16 million ($11 million, net of tax). CMS-61 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) RESTRUCTURING AND OTHER COSTS In June 2002, we announced a series of initiatives to reduce our annual operating costs. 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, 2003, and 2004:
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 ---- --- ---- Expense..................................................... -- -- -- Payments.................................................... (1) (3) (4) ---- --- ---- Ending accrual balance at December 31, 2004................. $ 2 $ 3 $ 5 ==== === ====
3: CONTINGENCIES 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 implemented, the recommendations of the Special Committee. CMS Energy is cooperating with an investigation by the DOJ concerning round-trip trading. CMS Energy is unable to predict the outcome of this matter and what effect, if any, this investigation will have on its business. In March 2004, the SEC approved a cease-and-desist order settling an administrative action against CMS Energy related to round-trip trading. The order did not assess a fine and CMS Energy neither admitted to nor denied the order's findings. The settlement resolved the SEC investigation involving CMS Energy and CMS MST. 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. These cases were later consolidated by the court. The plaintiffs generally seek unspecified damages based on allegations that the defendants violated United States securities laws and regulations by making allegedly false and misleading statements about 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 the individual defendants filed motions to dismiss on June 21, 2004. The judge issued an opinion and order dated January 7, 2005, granting the motion to dismiss for Consumers and three of the individual defendants, but denying the motions to dismiss for CMS Energy and the 13 remaining individual defendants. CMS-62 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CMS Energy and the individual defendants will defend themselves vigorously but cannot predict the outcome of this litigation. DEMAND FOR ACTION 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 CMS Energy's best interest 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. 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 were filed in July 2002 in United States District Court for the Eastern District of Michigan and were later consolidated by the court. 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. The judge issued an opinion and order dated December 27, 2004, conditionally granting plaintiffs' motion for class certification. A trial date has not been set, but is expected to be no earlier than late in 2005. 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 ongoing investigation by the DOJ regarding this matter. CMS Energy is unable to predict the outcome of the DOJ investigation and what effect, if any, the investigation will have on its business. The CFTC filed a civil injunctive action against two former CMS Field Services employees in Oklahoma federal district court on February 1, 2005. The action alleges the two engaged in reporting false natural gas trade information, and the action seeks to enjoin such acts, compel compliance with the Commodities Exchange Act, and impose monetary penalties. BAY HARBOR: Certain subsidiaries of CMS Energy participated in the development of Bay Harbor, a residential/commercial real estate project on the site of a discontinued cement and quarry operation near Petoskey, Michigan. As part of the development, which went forward under an agreement with the MDEQ, a golf course was constructed over several abandoned cement kiln dust piles (CKD piles), leftover from the former cement plant operation. Another former CKD area has been converted into a park. Part of the agreement with the MDEQ required the construction of a water collection system to recover seep water from one of the CKD piles. In 2002, CMS Energy sold its interests in Bay Harbor, but retained its obligations under previous environmental indemnifications entered into at the inception of the project. From January to September 2004, the seep collection system was down for maintenance and/or awaiting permission to restart from the City of Petoskey. In September 2004, the MDEQ issued a notice of noncompliance (NON), after finding high pH-seep water in Lake Michigan adjacent to the project. The MDEQ also found higher than acceptable levels of heavy metals, including mercury, in the seep water. CMS-63 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Coincident with the MDEQ inspections, the EPA also assigned an inspector to the site. In November 2004, the EPA issued a Notice of Potential Liability under the Comprehensive Environmental Response, Compensation, and Liability Act, and initiated discussions with the MDEQ, CMS Energy and other parties, toward arriving at a suitable administrative consent order to address problems at Bay Harbor. In February 2005, CMS Energy signed an Administrative Order on Consent (AOC) with the EPA and the EPA has executed the AOC. Under the AOC, CMS Energy is generally obligated, among other things, to: (i) engage in measures to restrict access to seep areas, install methods to interrupt the flow of seep water to Lake Michigan, and take other measures as may be required by the EPA under an approved plan; (ii) investigate and study the extent of hazardous substances at the site, evaluate alternatives to address a long-term remedy, and issue a report of the investigation and study; and (iii) within 120 days after EPA approval of the investigation report, enter into an enforceable agreement with the MDEQ to address a long-term remedy under certain criteria set forth in the AOC. Several parties have issued demand letters to CMS Energy claiming breach of the indemnification provisions, making requests for payment of their expenses related to the NON, and/or claiming damages to property or personal injury with regard to the matter. CMS Energy responded to the indemnification claims by stating that it had not breached its indemnity obligations, it will comply with the indemnities, it has restarted the seep water collection facility and it has responded to the NON. CMS Energy will defend vigorously any property damage and personal injury claims, and has reserved all rights and defenses. Based on preliminary studies, CMS Energy has identified several remediation options. The estimated potential capital and near-term expenditures for these options range from $25 million to $40 million, with continuing yearly operating and maintenance expenses ranging from $0.8 million to $1.6 million. Final remediation and resulting claims against third parties for reimbursement of remediation costs could increase or decrease these amounts. CMS Energy has recorded a liability for its obligations associated with this matter in the amount of $45 million, with a resultant charge to its income statement of $29 million, net of deferred income taxes, in the fourth quarter of 2004, reflecting CMS Energy's current best estimate of both the capital and near-term costs as well as the present value of continuing future operating costs. An adverse outcome of this matter could, depending on the size of any indemnification obligation or liability under environmental laws, have a potentially significant adverse effect on CMS Energy's financial condition and liquidity and could negatively impact CMS Energy's financial results. CMS Energy cannot predict the ultimate cost or outcome of this matter. 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: The EPA and the state regulations require us to make significant capital expenditures estimated to be $802 million. As of December 31, 2004, we have incurred $525 million in capital expenditures to comply with the EPA regulations and anticipate that the remaining $277 million of capital expenditures will be made between 2005 and 2011. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seek modification permits from the EPA. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of "routine maintenance." If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric plants and potentially pay fines. Additionally, the viability of certain plants remaining in operation could be called into question. CMS-64 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In addition to modifying the coal-fired electric plants, we expect to utilize nitrogen oxide emissions allowances for years 2005 through 2009, most of which have been purchased. The cost of the allowances is estimated to average $8 million per year for 2005-2006. The need for allowances will decrease after year 2006 with the installation of emissions control technology. 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, 2004, 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. In February 2004, the Ingham County Circuit Court judge deferred to the primary jurisdiction of the MPSC, dismissing the circuit court case without prejudice. In February 2005, the MPSC issued an order in the 2004 PSCR plan case concluding that we have been correctly administering the energy charge calculation methodology. The eight plaintiff qualifying facilities have appealed the dismissal of the circuit court case to the Michigan Court of Appeals. We cannot predict the outcome of this appeal. CONSUMERS' ELECTRIC UTILITY RESTRUCTURING MATTERS ELECTRIC ROA: 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 alternative electric suppliers. As of March 2005, alternative electric suppliers are providing 900 MW of generation supply to ROA customers. This amount represents 12 percent of our distribution load and an increase of 23 percent compared to March 2004. CMS-65 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ELECTRIC RESTRUCTURING PROCEEDINGS: Below is a discussion of our electric restructuring proceedings. The following chart summarizes our electric restructuring filings with the MPSC:
YEAR(S) YEARS PROCEEDING FILED COVERED REQUESTED AMOUNT STATUS - ---------- ------- ------- ---------------- ------ Stranded Costs 2002-2004 2000-2003 $137 million(a) The MPSC ruled that we experienced zero Stranded Costs for 2000 through 2001. The MPSC approved recovery of $63 million in Stranded Costs for 2002 through 2003. Implementation Costs 1999-2004 1997-2003 $91 million(b) The MPSC allowed $68 million for the years 1997-2001, plus $20 million for the cost of money through 2003. Implementation cost filings for 2002 and 2003 in the amount of $8 million, which includes the cost of money through 2003, are pending MPSC approval. Section 10d(4) 2004 2000-2005 $628 million Filed with the MPSC in October Regulatory Assets 2004.
- ------------------------- (a) Amount includes the cost of money through the year in which we expected to receive recovery from the MPSC and assumes recovery of Clean Air Act costs through the Section 10d(4) Regulatory Asset case. (b) Amount includes the cost of money through the year prior to the year filed. Section 10d(4) Regulatory Assets: Section 10d(4) of the Customer Choice Act allows us to recover certain regulatory assets through deferred recovery of annual capital expenditures in excess of depreciation levels and certain other expenses incurred prior to and throughout the rate freeze and rate cap periods, including the cost of money. The section also allows deferred recovery of expenses incurred during the rate freeze and rate cap periods that result from changes in taxes, laws, or other state or federal governmental actions. In October 2004, we filed an application with the MPSC seeking recovery of $628 million of Section 10d(4) Regulatory Assets for the period June 2000 through December 2005 consisting of: - capital expenditures in excess of depreciation, - Clean Air Act costs, - other expenses related to changes in law or governmental action incurred during the rate freeze and rate cap periods, and - the associated cost of money through the period of collection. Of the $628 million, $152 million relates to the cost of money. As allowed by the Customer Choice Act, in January 2004, we began accruing and deferring for recovery the 2004 portion of our Section 10d(4) Regulatory Assets. In November 2004, the MPSC issued an order in Detroit Edison's general electric rate case which concluded that Detroit Edison's return of and on Clean Air Act costs incurred from June 2000 through December 2003 are recoverable under Section 10d(4). Based on the precedent set by this order, we recorded an additional regulatory asset in November 2004 for our return of and on Clean Air Act expenditures incurred from 2000 through 2003. Unless we receive an order from the MPSC to the contrary, we will continue to record additional accruals. However, certain aspects of Detroit Edison's electric rate case are different from our Section 10d(4) Regulatory Asset filing. In March 2005, the MPSC Staff filed testimony CMS-66 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) recommending the MPSC approve recovery of approximately $323 million. We cannot predict the amount, if any, the MPSC will approve as recoverable. At December 31, 2004, total Section 10d(4) Regulatory Assets totaled $141 million. TRANSMISSION SALE: In May 2002, we sold our electric transmission system to MTH, a non-affiliated limited partnership whose general partner is a subsidiary of Trans-Elect, Inc. We are in arbitration with MTH regarding property tax items used in establishing the selling price of our electric transmission system. An unfavorable outcome could result in a reduction of sale proceeds previously recognized of approximately $2 million to $3 million. CONSUMERS' ELECTRIC UTILITY RATE MATTERS ELECTRIC RATE CASE: In December 2004, we filed an application with the MPSC to increase our retail electric base rates. The electric rate case filing requests an annual increase in revenues of approximately $320 million. The primary reasons for the request are increased system maintenance and improvement costs, Clean Air Act related expenditures, and employee pension costs. A final order from the MPSC on our electric rate case is expected in late 2005. If approved as requested, the rate increase would go into effect in January 2006 and would apply to all retail electric customers. We cannot predict the amount or timing of the rate increase, if any, which the MPSC will approve. POWER SUPPLY COSTS: 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 capacity and energy contracts for the physical delivery of electricity primarily in the summer months and to a lesser degree in the winter months. We have purchased capacity and energy contracts partially covering the estimated reserve margin requirements for 2005 through 2007. As a result, we have recognized an asset of $12 million for unexpired capacity and energy contracts as of December 31, 2004. The total premium costs of electric capacity and energy contracts for 2004 were approximately $12 million. PSCR: The PSCR process assures recovery of all reasonable and prudent power supply costs actually incurred by us. In September 2004, we submitted our 2005 PSCR filing to the MPSC. The proposed PSCR charge would allow us to recover a portion of our increased power supply costs from commercial and industrial customers and, subject to the overall rate caps, from other customers. We self-implemented the proposed 2005 PSCR charge in January 2005. We estimate the increased recovery of power supply costs from commercial and industrial customers to be approximately $49 million in 2005. The revenues from the PSCR charges are subject to reconciliation at the end of the year after actual costs have been reviewed for reasonableness and prudence. We cannot predict the outcome of these PSCR proceedings. OTHER CONSUMERS' ELECTRIC UTILITY CONTINGENCIES 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 a 49 percent partnership interest in the MCV Partnership, and a 35 percent lessor interest in the MCV Facility. In 2004, we consolidated the MCV Partnership and the FMLP into our consolidated financial statements in accordance with Revised FASB Interpretation No. 46. For additional details, see Note 16, Implementation of New Accounting Standards. Our consolidated retained earnings include undistributed earnings from the MCV Partnership of $237 million at December 31, 2004 and $245 million at December 31, 2003. CMS-67 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The cost that we incur under the MCV Partnership PPA exceeds the recovery amount allowed by the MPSC. We expense all cash underrecoveries directly to income. We estimate cash underrecoveries of capacity and fixed energy payments as follows:
2005 2006 2007 ---- ---- ---- ~~Estimated cash underrecoveries.............................. $56 $55 $39 === === ===~~
After September 15, 2007, we expect to claim relief under 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 MCV Partnership has indicated that it may take issue with our exercise of the regulatory out clause after September 2007. We believe that the clause is valid and fully effective, but cannot assure that it will prevail in the event of a dispute. The MPSC's future actions on the capacity and fixed energy payments recoverable from customers subsequent to September 15, 2007 may affect negatively the earnings of the MCV Partnership and the value of our investment in the MCV Partnership. Further, under the PPA, variable energy payments to the MCV Partnership are based on the cost of coal burned at our coal plants and our 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 and the price the MCV Partnership can charge us for energy has not, the MCV Partnership's financial performance has been impacted negatively. Even with the approved RCP, if gas prices continue at present levels or increase, the economics of operating the MCV Facility may be adverse enough to require us to recognize an impairment. In January 2005, the MPSC issued an order approving the RCP, with modifications. The RCP allows us to recover the same amount of capacity and fixed energy charges from customers as approved in prior MPSC orders. However, we are able to dispatch the MCV Facility on the basis of natural gas market prices, which will reduce the MCV Facility's annual production of electricity and, as a result, reduce the MCV Facility's consumption of natural gas by an estimated 30 to 40 bcf annually. This decrease in the quantity of high-priced natural gas consumed by the MCV Facility will benefit our ownership interest in the MCV Partnership. The substantial MCV Facility fuel cost savings will be used first to offset fully the cost of replacement power. Second, $5 million annually will be used to fund a renewable energy program. Remaining savings will be split between the MCV Partnership and Consumers. Consumers' direct savings will be shared 50 percent with its customers in 2005 and 70 percent in 2006 and beyond. Consumers' direct savings from the RCP, after a portion is allocated to customers, will be used to offset our capacity and fixed energy underrecoveries expense. Since the MPSC has excluded these underrecoveries from the rate making process, we anticipate that our savings from the RCP will not affect our return on equity used in our base rate filings. In January 2005, Consumers and the MCV Partnership's general partners accepted the terms of the order and implemented the RCP. The underlying agreement for the RCP between Consumers and the MCV Partnership extends through the term of the PPA. However, either party may terminate that agreement under certain conditions. In February 2005, a group of intervenors in the RCP case filed an application for rehearing of the MPSC order. The Attorney General also filed a claim of appeal with the Michigan Court of Appeals. We cannot predict the outcome of these appeals. MCV PARTNERSHIP PROPERTY TAXES: In January 2004, the Michigan Tax Tribunal issued its decision in the MCV Partnership's tax appeal against the City of Midland for tax years 1997 through 2000. The MCV Partnership estimates that the decision will result in a refund to the MCV Partnership of approximately $35 million in taxes plus $10 million of interest. The Michigan Tax Tribunal decision has been appealed to the Michigan Court of Appeals by the City of Midland and the MCV Partnership has filed a cross-appeal at the Michigan Court of Appeals. The MCV Partnership also has a pending case with the Michigan Tax Tribunal for tax years 2001 through 2004. The MCV Partnership cannot predict the outcome of these proceedings; therefore, CMS-68 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the above refund (net of approximately $16 million of deferred expenses) has not been recognized in 2004 earnings. NUCLEAR PLANT DECOMMISSIONING: Decommissioning funding practices approved by the MPSC require us to file a report on the adequacy of funds for decommissioning at three-year intervals. We prepared and filed updated cost estimates for Big Rock and Palisades on March 31, 2004. Excluding additional costs for spent nuclear fuel storage, due to the DOE's failure to accept this spent nuclear fuel on schedule, these reports show a decommissioning cost of $361 million for Big Rock and $868 million for Palisades. Since Big Rock is currently in the process of being decommissioned, the estimated cost includes historical expenditures in nominal dollars and future costs in 2003 dollars, with all Palisades costs given in 2003 dollars. In 1999, the MPSC orders for Big Rock and Palisades provided for fully funding the decommissioning trust funds for both sites. In December 2000, funding of the Big Rock trust fund stopped because the MPSC-authorized decommissioning surcharge collection period expired. The MPSC order set the annual decommissioning surcharge for Palisades at $6 million through 2007. Amounts collected from electric retail customers and deposited in trusts, including trust earnings, are credited to a regulatory liability and asset retirement obligation. BIG ROCK: Excluding the additional nuclear fuel storage costs due to the DOE's failure to accept this spent fuel on schedule, we are currently projecting that the level of funds provided by the trust for Big Rock will fall short of the amount needed to complete the decommissioning by $26 million. At this time, we plan to provide the additional amounts needed from our corporate funds and, subsequent to the completion of radiological decommissioning work, seek recovery of such expenditures at the MPSC. We cannot predict how the MPSC will rule on our request. The following table shows our Big Rock decommissioning activities:
YEAR-TO-DATE CUMULATIVE DECEMBER 31, 2004 TOTAL-TO-DATE ----------------- ------------- (IN MILLIONS) Decommissioning expenditures(a)............................. $35 $298 Withdrawals from trust funds................................ 36 279 === ====
- ------------------------- (a) Includes site restoration expenditures. These activities had no material impact on net income. At December 31, 2004, we have an investment in nuclear decommissioning trust funds of $52 million for Big Rock. In addition, at December 31, 2004, we have charged $8 million to our FERC jurisdictional depreciation reserve for the decommissioning of Big Rock. PALISADES: Excluding additional nuclear fuel storage costs due to the DOE's failure to accept this spent fuel on schedule, we concluded that the existing surcharge for Palisades needed to be increased to $25 million annually, beginning January 1, 2006, and continue through 2011, our current license expiration date. In June 2004, we filed an application with the MPSC seeking approval to increase the surcharge for recovery of decommissioning costs related to Palisades beginning in 2006. In September 2004, we announced that we will seek a 20-year license renewal for Palisades. In January 2005, we filed a settlement agreement with the MPSC that was agreed to by four of the six parties. The settlement agreement provides for the continuation of the existing $6 million annual decommissioning surcharge through 2011 and for the next periodic review to be filed in March 2007. We are seeking MPSC approval of the settlement, under a contested settlement proceeding, but cannot predict the outcome. At December 31, 2004, we have an investment in the MPSC nuclear decommissioning trust funds of $513 million for Palisades. In addition, at December 31, 2004, 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 8, Asset Retirement Obligations. CMS-69 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NUCLEAR MATTERS: 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. Over 60 utilities have initiated litigation in the United States Court of Claims; we filed our complaint in December 2002. In July 2004, the DOE filed an amended answer and motion to dismiss the complaint. In October 2004, we filed a response to the DOE's motion and our motion for summary judgment on liability. Oral argument has been held, and the motions are now before the Court for a decision. If our litigation against the DOE is successful, we anticipate future recoveries from the DOE. We plan to use recoveries 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. We expect that the DOE will submit an application to the NRC sometime in 2005 for a license to begin construction of the repository. The application and review process is estimated to take several years. 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 $27 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 $10.761 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 under which 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. CONSUMERS' GAS UTILITY CONTINGENCIES GAS ENVIRONMENTAL MATTERS: We expect to incur 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 CMS-70 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. We base the estimates on discounted 2003 costs using a discount rate of three percent. The discount rate represents a 10-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 MPSC-approved rates. As of December 31, 2004, we have recorded a liability of $38 million, net of $44 million of expenditures incurred to date, and a regulatory asset of $65 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 GCR process is designed to allow us to recover all of our purchased natural gas costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs for prudency in an annual reconciliation proceeding. The following table summarizes our GCR reconciliation filings with the MPSC. Additional details related to these proceedings follow the table. GAS COST RECOVERY RECONCILIATION
NET OVER GCR YEAR DATE FILED ORDER DATE RECOVERY STATUS - -------- ---------- ---------- -------- ------ 2001-2002 June 2002 May 2004 $3 million $2 million has been refunded, $1 million is included in our 2003-2004 GCR reconciliation filing 2002-2003 June 2003 March 2004 $5 million Net over-recovery includes interest accrued through March 2003, and an $11 million disallowance settlement agreement 2003-2004 June 2004 February 2005 $31 million Filing includes the $1 million and the $5 million GCR net over-recovery above
Net over-recovery amounts included in the table above include refunds that we received from our suppliers which are required to be refunded to our customers. GCR Year 2003-2004: In February 2005, the MPSC approved a settlement agreement that resulted in a credit to our GCR customers for a $28 million over-recovery, plus $3 million interest, using a roll-in refund methodology. The roll-in methodology incorporates a GCR over/under-recovery in the next GCR plan year. GCR Plan for Year 2004-2005: In December 2003, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2004 through March 2005. In June 2004, the MPSC issued a final Order in our GCR plan approving a settlement. The settlement included a quarterly mechanism for setting a GCR CMS-71 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ceiling price. The current ceiling price is $6.57 per mcf. Actual gas costs and revenues will be subject to an annual reconciliation proceeding. GCR Plan for Year 2005-2006: In December 2004, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2005 through March 2006. Our request proposes using a GCR factor consisting of: - a base GCR factor of $6.98 per mcf, plus - a quarterly GCR ceiling price adjustment contingent upon future events. The GCR factor can be adjusted monthly, provided it remains at or below the current ceiling price. The quarterly adjustment mechanism allows an increase in the GCR ceiling price to reflect a portion of cost increases if the average NYMEX price for a specified period is greater than that used in calculating the base GCR factor. Actual gas costs and revenues will be subject to an annual reconciliation proceeding. 2003 GAS RATE CASE: In March 2003, we filed an application with the MPSC for a gas rate increase in the annual amount of $156 million. In December 2003, the MPSC granted an interim rate increase in the amount of $19 million annually. The MPSC also ordered an annual $34 million reduction in our annual depreciation expense and related taxes. On October 14, 2004, the MPSC issued its Opinion and Order on final rate relief. In the order, the MPSC authorized us to place into effect surcharges that would increase annual gas revenues by $58 million. Further, the MPSC rescinded the $19 million annual interim rate increase. The final rate relief was contingent upon our agreement to: - achieve a common equity level of at least $2.3 billion by year-end 2005 and propose a plan to improve the common equity level thereafter until our target capital structure is reached, - make certain safety-related operation and maintenance, pension, retiree health-care, employee health-care, and storage working capital expenditures for which the surcharge is granted, - refund surcharge revenues when our rate of return on common equity exceeds its authorized 11.4 percent rate, - prepare and file annual reports that address certain issues identified in the order, and - file a general rate case on or before the date that the surcharge expires (which is two years after the surcharge goes into effect). On October 15, 2004, we agreed to these commitments. 2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas utility plant depreciation case originally filed in June 2001. On December 18, 2003, the MPSC ordered an annual $34 million reduction in our depreciation expense and related taxes in an interim rate order issued in our 2003 gas rate case. In October and December 2004, the MPSC issued Opinions and Orders in our gas depreciation case. The October 2004 order requires us to file an application for new depreciation accrual rates for our natural gas utility plant on, or no earlier than three months prior to, the date we file our next natural gas general rate case. The MPSC also directed us to undertake a study to determine why our removal costs are in excess of those of other regulated Michigan natural gas utilities and file a report with the MPSC Staff on or before December 31, 2005. In February 2005, we requested a delay in the filing date for the next depreciation case until after the MPSC considers the removal cost study, and after the MPSC issues an order in a pending case relating to asset retirement obligation accounting. CMS-72 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OTHER MATTERS COLLECTIVE BARGAINING AGREEMENTS: Approximately 46 percent of our employees are represented by the Utility Workers of America Union. The Union represents Consumers' operating, maintenance, and construction employees and our call center employees. The collective bargaining agreement with the Union for our operating, maintenance, and construction employees will expire on June 1, 2005 and negotiations for a new agreement is underway currently. The collective bargaining agreement with the Union for our call center employees will expire on August 1, 2005. OTHER CONTINGENCIES EQUATORIAL GUINEA TAX CLAIM: CMS Energy received a request for indemnification from Perenco, the purchaser of CMS Oil and Gas. The indemnification claim relates to the sale by CMS Energy of its oil, gas, and methanol projects in Equatorial Guinea and the claim of the government of Equatorial Guinea that $142 million in taxes is owed it in connection with that sale. Based on information currently available, CMS Energy and its tax advisors have concluded that the government's tax claim is without merit, and Perenco has submitted a response to the government rejecting the claim. CMS Energy cannot predict the outcome of this matter. GAS INDEX PRICE REPORTING LITIGATION: CMS Energy, CMS MST, CMS Field Services, Cantera Natural Gas, Inc. (the company that purchased CMS Field Services) and Cantera Gas Company are named as defendants in various lawsuits arising as a result of false natural gas price reporting. Allegations include manipulation of NYMEX natural gas futures and options prices, price-fixing conspiracies, and artificial inflation of natural gas retail prices in California and Tennessee. CMS Energy and the other CMS defendants will defend themselves vigorously against these matters but cannot predict their outcome. 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 NOISE ABATEMENT LAWSUIT: In February 2003, DIG was served with a three-count first amended complaint filed in Wayne County Circuit Court seeking damages and injunctive relief based upon allegations of excessive noise and vibration created by operation of the power plant on behalf of six named plaintiffs, all alleged to be adjacent or nearby residents or property owners and a class of "potentially thousands" who have been similarly affected. The parties entered into a settlement agreement on June 25, 2004, whereby DIG agreed to remediate the sound emitted from various pieces of plant equipment to a level below the ambient noise level and pay a substantial portion of plaintiffs' attorney fees and costs. The court entered an Order for Conditional Class Certification and Settlement Approval on August 27, 2004. No class members opted out of the settlement. DIG believes remediation is now complete at a cost of approximately $0.6 million. The parties shall seek a Final Order for Class Certification and Settlement Approval and dismissal of the action. Until such time as the entry of this Order, DIG cannot predict the final cost associated with the settlement of this matter, but expects that it will be less than $1 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 CMS-73 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Terra has appealed this judgment. Enterprises has an indemnity obligation with regard to losses to Terra that might result from this litigation. LEONARD FIELD DISPUTE: CMS Gas Transmission is involved in various disputes related to the Leonard Storage Field in Addison Township, Michigan. The dispute centers around excess odor discharge and untimely removal of certain equipment from the Leonard Facility. CMS Gas Transmission cannot predict the outcome of this matter, and the ultimate consequence of an adverse outcome would be our inability to extract approximately 500,000 mcf of gas remaining in the Leonard Field that has a $1 million book value at December 31, 2004. CMS ENSENADA CUSTOMER DISPUTE: Pursuant to a long-term power purchase agreement, CMS Ensenada sells power and steam to YPF Repsol at the YPF refinery in La Plata, Argentina. As a result of the so-called "Emergency Laws," payments by YPF Repsol under the power purchase agreement have been converted to pesos at the exchange rate of one U.S. dollar to one Argentine peso. Such payments are currently insufficient to cover CMS Ensenada's operating costs, including quarterly debt service payments to the OPIC. Enterprises is party to a Sponsor Support Agreement pursuant to which Enterprises has guaranteed CMS Ensenada's debt service payments to OPIC up to an amount which is in dispute, but which Enterprises estimated to be approximately $9 million at June 30, 2004. Following a payment made to OPIC in July 2004, Enterprises now believes this amount to be approximately $7 million. The Argentine commercial court granted injunctive relief to CMS Ensenada pursuant to an ex parte action, and such relief will remain in effect until completion of an arbitration on the matter, to be administered by the International Chamber of Commerce. OTHER: 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 within 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 within 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-74 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4: FINANCINGS AND CAPITALIZATION Long-term debt as of December 31 follows:
INTEREST RATE (%) MATURITY 2004 2003 ----------------- -------- ---- ---- (IN MILLIONS) CMS ENERGY CORPORATION Senior notes..................................... 7.625 2004 $ -- $ 176 9.875 2007 468 468 8.900 2008 260 260 7.500 2009 409 409 7.750 2010 300 300 8.500 2011 300 300 3.375(a) 2023 150 150 2.875(a) 2024 288 -- ------ ------ 2,175 2,063 ------ ------ General term notes(b)............................ 7.327(c) 2005-2009 220 496 Extendible tenor rate adjusted securities (X-TRAS)....................................... 7.000 2005 -- 180 Revolving credit facilities and other............ 5 7 ------ ------ Total -- CMS Energy Corporation................ 2,400 2,746 ------ ------ CONSUMERS ENERGY COMPANY First mortgage bonds............................. 4.250 2008 250 250 4.800 2009 200 200 4.400 2009 150 -- 4.000 2010 250 250 5.000 2012 300 -- 5.375 2013 375 375 6.000 2014 200 200 5.000 2015 225 -- 5.500 2016 350 -- 7.375 2023 -- 208 ------ ------ 2,300 1,483 ------ ------ Senior notes..................................... 6.000 2005 -- 300 6.500 2005 -- 141 6.250 2006 332 332 6.375 2008 159 159 6.875 2018 180 180 6.500 2028 141 142 ------ ------ 812 1,254 ------ ------ Securitization bonds............................. 5.188(c) 2005-2015 398 426 FMLP debt........................................ 296 -- Nuclear fuel disposal liability.................. (d) 141 139 Tax-exempt pollution control revenue bonds....... Various 2010-2018 126 126 Long-term bank debt(e)........................... Variable 2006 60 200 Other............................................ 1 4 ------ ------ Total -- Consumers Energy Company.............. 4,134 3,632 ------ ------ ENTERPRISES........................................ 208 191 ------ ------ Total principal amount outstanding................. 6,742 6,569 Current amounts.................................. (267) (509) Net unamortized discount......................... (31) (40) ------ ------ Total long-term debt............................... $6,444 $6,020 ====== ======
- ------------------------- (a) Contingently convertible notes. See "Contingently Convertible Securities" within this Note for further discussion of the conversion features. (b) Redeemed $103 million in January 2005 and $117 million in February 2005. (c) Represents the weighted average interest rate at December 31, 2004. CMS-75 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (d) Maturity date uncertain. (e) Paid off in January 2005. FINANCINGS: The following is a summary of significant long-term debt issuances and retirements during 2004:
PRINCIPAL ISSUE/RETIREMENT (IN MILLIONS) INTEREST RATE (%) DATE MATURITY DATE ------------- ----------------- ---------------- ------------- DEBT ISSUANCES CMS ENERGY Senior notes..................... $ 288 2.875 December 2004 December 2024 CONSUMERS FMB.............................. 150 4.400 August 2004 August 2009 FMB.............................. 300 5.000 August 2004 February 2012 FMB.............................. 350 5.500 August 2004 August 2016 FMB.............................. 225 5.000 December 2004 March 2015 ------ Total debt issuances........ $1,313 ====== DEBT RETIREMENTS CMS ENERGY Senior notes..................... $ 176 7.625 November 2004 November 2004 X-TRAS........................... 180 7.000 December 2004 January 2005 CONSUMERS FMLP debt........................ 115 11.750 July 2004 July 2004 Long-term bank debt.............. 140 Variable August 2004 March 2009 Senior notes..................... 141 6.500 September 2004 June 2018 Senior notes..................... 300 6.000 September 2004 March 2005 FMB.............................. 208 7.375 December 2004 September 2023 ------ Total debt retirements...... $1,260 ======
Issuance costs associated with the issuances of senior notes totaled $8 million and are being amortized ratably over the lives of the related debt. Issuance costs associated with the issuances of FMBs totaled $7 million and are being amortized ratably over the lives of the related debt. Call premiums associated with the Consumers debt retirements totaled $20 million and are being amortized ratably over the lives of the newly issued debt. An option payment associated with CMS Energy's retirement of the X-TRAS totaled $22 million and was charged to other interest expense in 2004. SUBSEQUENT FINANCING ACTIVITIES: In January 2005, we redeemed $103 million of general term notes. In January 2005, we issued $150 million of 6.30 percent Senior Notes due 2012. We used the net proceeds of $147 million to redeem the remaining general term notes and for other corporate purposes. In January 2005, Consumers issued $250 million of 5.15 percent FMBs due 2017. Consumers used the net proceeds of $247 million to pay off its $60 million long-term bank loan and to redeem the $73 million 8.36 percent and the $124 million 8.20 percent subordinated deferrable interest notes. The subordinated deferrable interest notes are classified as Long-term debt -- related parties on the accompanying Consolidated Balance Sheets. FIRST MORTGAGE BONDS: Consumers secures its FMBs 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. CMS-76 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SECURITIZATION BONDS: Securitization bonds are collateralized by certain regulatory assets. The bondholders have no recourse to our other assets. Through Consumers' rate structure, we bill customers for securitization surcharges to fund the payment of principal, interest, and other related expenses on the Securitization bonds. Securitization surcharges totaled $50 million annually in 2003 and 2004. FMLP DEBT: We consolidate the FMLP in accordance with Revised FASB Interpretation No. 46. At December 31, 2004, long-term debt of the FMLP consists of:
MATURITY IN MILLIONS -------- ----------- 11.75% subordinated secured notes........................... 2005 $ 70 13.25% subordinated secured notes........................... 2006 75 6.875% tax-exempt subordinated secured notes................ 2009 137 6.750% tax-exempt subordinated secured notes................ 2009 14 ---- Total amount outstanding.................................. $296 ====
The FMLP debt is essentially project debt secured by certain assets of the MCV Partnership and the FMLP. The debt is non-recourse to other assets of CMS Energy and Consumers. LONG-TERM DEBT -- RELATED PARTIES: 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 ourselves. The sole assets of the trusts consist of the debentures described below. These debentures have terms similar to those of the mandatorily redeemable preferred securities the trusts issued. We determined that we do not hold the controlling financial interest in our trust preferred security structures. Accordingly, those entities were deconsolidated as of December 31, 2003 and are reflected in Long-term debt -- related parties. The trust preferred securities were previously included in mezzanine equity. The following is a summary of Long-term debt -- related parties as of December 31:
DEBENTURE AND RELATED PARTY INTEREST RATE (%) MATURITY 2004 2003 - --------------------------- ----------------- -------- ---- ---- (IN MILLIONS) Convertible subordinated debentures, CMS Energy Trust I................................. 7.75 2027 $ 178 $178 Subordinated deferrable interest notes, Consumers Power Company Financing I(a)............. 8.36 2015 73 73 Subordinated deferrable interest notes, Consumers Energy Company Financing II(a)........... 8.20 2027 124 124 Subordinated debentures, Consumers Energy Company Financing III(b).......... 9.25 2029 180 180 Subordinated debentures, Consumers Energy Company Financing IV.............. 9.00 2031 129 129 ----- ---- Total principal amounts outstanding.................. 684 684 Current amounts.................................... (180) -- ----- ---- Total Long-term debt -- related parties.............. $ 504 $684 ===== ====
- ------------------------- (a) Redeemed in February 2005. (b) Redeemed in January 2005 with available cash. In the event of default, holders of the trust preferred securities would 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 CMS-77 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. DEBT MATURITIES: At December 31, 2004, the aggregate annual maturities for long-term debt for the next five years are:
PAYMENTS DUE ------------------------------------ 2005 2006 2007 2008 2009 ---- ---- ---- ---- ---- (IN MILLIONS) ~~Long-term debt.............................................. $267 $554 $555 $973 $877~~
REGULATORY AUTHORIZATION FOR FINANCINGS: Consumers has FERC authorization to issue or guarantee up to $1.1 billion of short-term securities and up to $1.1 billion of short-term FMBs as collateral for such short-term securities. Consumers has FERC authorization to issue up to $1 billion of long-term securities for refinancing or refunding purposes, $1.5 billion of long-term securities for general corporate purposes, and $2.5 billion of long-term FMBs to be issued solely as collateral for other long-term securities. REVOLVING CREDIT FACILITIES: The following secured revolving credit facilities with banks are available as of December 31, 2004:
OUTSTANDING AMOUNT OF AMOUNT LETTERS-OF- AMOUNT COMPANY EXPIRATION DATE FACILITY BORROWED CREDIT AVAILABLE - ------- --------------- --------- -------- ----------- --------- (IN MILLIONS) CMS Energy(a)........................ August 3, 2007 $300 $ -- $106 $194 Consumers(b)......................... 500 -- 25 475 The MCV Partnership.................. August 27, 2005 50 -- 2 48
- ------------------------- (a) The annual interest rate on borrowings under this facility is LIBOR plus 275 basis points. Annual fees for letters-of-credit are 275 basis points on the amount outstanding. A quarterly fee of 50 basis points is payable on the average daily unused balance. (b) This facility expires in August 2005 and may be extended annually at Consumers' option to July 31, 2007. The annual interest rate on borrowings under this facility is LIBOR plus 125 basis points. Annual fees for letters-of-credit are 125 basis points on the amount outstanding. A quarterly fee of 22.5 basis points is payable on the average daily unused balance. 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. We sold $304 million of receivables at December 31, 2004 and we sold $297 million of receivables at December 31, 2003. These sold amounts are excluded from accounts receivable on our Consolidated Balance Sheets. We continue to service the receivables sold to the special purpose entity. 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 under our accounts receivable sales program are shown in the following table:
YEARS ENDED DECEMBER 31 2004 2003 - ----------------------- ---- ---- (IN MILLIONS) Net cash flow as a result of accounts receivable $ 7 $ (28) financing................................................. Collections from customers.................................. $4,541 $4,361
CMS-78 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DIVIDEND RESTRICTIONS: Our amended and restated $300 million secured revolving credit facility restricts payments of dividends on our common stock during a 12-month period to $75 million, dependent on the aggregate amounts of unrestricted cash and unused commitments under the facility. Under the provisions of its articles of incorporation, at December 31, 2004, Consumers had $456 million of unrestricted retained earnings available to pay common stock dividends. However, covenants in Consumers' debt facilities cap common stock dividend payments at $300 million in a calendar year. In October 2004, the MPSC rescinded its December 2003 interim gas rate order, which included a $190 million annual dividend cap imposed on Consumers. For the year ended December 31, 2004, we received $190 million of common stock dividends from Consumers. CAPITALIZATION: The authorized capital stock of CMS Energy consists of: - 350 million shares of CMS Energy Common Stock, par value $0.01 per share; and - 10 million shares of CMS Energy Preferred Stock, par value $0.01 per share. In October 2004, we issued 32.8 million shares of our common stock. We realized net proceeds of $288 million. PREFERRED STOCK: Our Preferred Stock outstanding follows:
NUMBER OF SHARES ---------------------- DECEMBER 31 2004 2003 2004 2003 - ----------- ---- ---- ---- ---- (IN MILLIONS) Preferred Stock 4.50% convertible, Authorized 10,000,000 shares(a)...... 5,000,000 5,000,000 $250 $250 Preferred subsidiary interest(b)........................ 11 11 ---- ---- Total Preferred stock..................................... $261 $261 ==== ====
- ------------------------- (a) See the "Contingently Convertible Securities" section within this Note for further discussion of the convertible preferred stock. (b) In December 2003, we sold, in a private placement, a non-voting preferred interest in an indirect subsidiary of 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. PREFERRED STOCK OF SUBSIDIARY: Consumers' Preferred Stock outstanding follows:
OPTIONAL NUMBER OF SHARES REDEMPTION ------------------ DECEMBER 31 SERIES PRICE 2004 2003 2004 2003 - ----------- ------ ---------- ---- ---- ---- ---- (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 of subsidiary.......... $44 $44 === ===
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 CMS-79 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) issued. At the inception 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 describes our guarantees at December 31, 2004:
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 $1,206 $ 1 $ -- Letters of credit.......................... Various Various 165 -- -- Surety bonds and other indemnifications.... Various Various 25 -- -- Other guarantees........................... Various Various 210 -- -- Nuclear insurance retrospective premiums... Various Various 134 -- --
- ------------------------- (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. 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 recorded on our balance sheet that are entered into subsequent to January 1, 2003. (c) Recourse provision indicates the approximate recovery from third parties including assets held as collateral. The following table provides additional information regarding our guarantees:
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 Letters of credit Normal operations of coal Noncompliance with power plants environmental regulations and non-responsiveness to demands for corrective action Natural gas transportation Nonperformance Self-insurance requirement Nonperformance Nuclear plant closure Nonperformance Surety bonds and other Normal operating activity, Nonperformance indemnifications permits and license Other guarantees Normal operating activity Nonperformance or non-payment by a subsidiary under a related contract Nuclear insurance Normal operations of nuclear Call by NEIL and retrospective premiums plants Price-Anderson Act for nuclear incident
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 CMS-80 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) agreements generally are not limited in amount and, while a maximum amount of exposure cannot be identified, the 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 $400 million as of December 31, 2004. 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. CONTINGENTLY CONVERTIBLE SECURITIES: The following transactions took place in December 2004: - we completed an exchange offering in which 82 percent of our 3.375 percent contingently convertible senior notes and 98 percent of our 4.50 percent contingently convertible preferred stock were exchanged, and - we issued $287.5 million of 2.875 percent contingently convertible senior notes. At December 31, 2004, the significant terms of our contingently convertible securities were as follows:
CONTINGENTLY CONVERTIBLE YEAR NUMBER OF OUTSTANDING CONVERSION TRIGGER SETTLEMENT METHOD SECURITY(a) ISSUED UNITS (IN MILLIONS) PRICE(b) PRICE(b) UPON CONVERSION(c) - ------------------------ ------ --------- ------------- ---------- -------- ------------------ 3.375% senior notes....... 2004 122,850 $122.9 $10.67 $12.81 Net share settlement 3.375% senior notes....... 2003 27,150 27.1 $10.67 $12.81 Common stock --------- ------ 150,000 $150.0 4.50% preferred stock..... 2004 4,910,000 $245.5 $ 9.89 $11.87 Net share settlement 4.50% preferred stock..... 2003 90,000 4.5 $ 9.89 $11.87 Common stock --------- ------ 5,000,000 $250.0 2.875% senior notes....... 2004 287,500 $287.5 $14.75 $17.70 Net share settlement
- ------------------------- (a) The notes are putable to CMS Energy by the note holders at par on July 15, 2008, 2013, and 2018 for our 3.375 percent convertible senior notes and on December 1, 2011, 2014, and 2019 for our 2.875 percent convertible senior notes. On or after December 5, 2008, we may cause the 4.50 percent convertible preferred stock to convert if the closing price of our common stock remains at or above $12.86 for 20 of any 30 consecutive trading days. The $12.86 price may be adjusted if there is a payment or distribution to our common stockholders. (b) The securities become convertible for a calendar quarter if the price of our common stock remains at or above the trigger price for 20 of 30 consecutive trading days ending on the last trading day the previous quarter. The trigger price at which these securities become convertible is 120 percent of the conversion price, which may be adjusted if there is a payment or distribution to our common stockholders. (c) The exchanged 3.375 percent convertible senior notes, the exchanged 4.50 percent convertible preferred stock, and all of our 2.875 percent convertible senior notes require us, if converted, to pay cash up to the principal (or par) amount of the securities and any conversion value in excess of that amount in shares of our common stock. This method of conversion is referred to as the "net share settlement" method. The remaining securities that were not exchanged retained their original settlement features. In January 2005, the remaining 18 percent, or $27.1 million of our 3.375 percent convertible senior notes and the remaining 2 percent, or $4.5 million of our 4.50 percent convertible preferred stock were exchanged, bringing the total exchanged for both securities to 100 percent. As a result, all of our contingently convertible securities now have a net share settlement feature. CMS-81 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5: EARNINGS PER SHARE The following table presents the basic and diluted earnings per share computations.
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) EARNINGS AVAILABLE TO COMMON STOCK: Income (Loss) from Continuing Operations.................. $ 127 $ (42) $ (394) Less Preferred Dividends.................................. (11) (1) -- ------ ------ ------ Income (Loss) from Continuing Operations Available to Common Stock -- Basic.................................. $ 116 $ (43) $ (394) Add conversion of Contingently Convertible Securities (net of tax)................................................ 1 --(a) --(a) ------ ------ ------ Income (Loss) from Continuing Operations Available to Common Stock -- Diluted................................ $ 117 $ (43) $ (394) ====== ====== ====== AVERAGE COMMON SHARES OUTSTANDING APPLICABLE TO BASIC AND DILUTED EPS CMS Energy: Average Shares -- Basic................................ 168.6 150.4 139.0 Add conversion of Contingently Convertible Securities............................................ 3.0 --(a) --(a) Add Dilutive Stock Options and Warrants................ 0.5(b) --(b) --(b) ------ ------ ------ Average Shares -- Diluted.............................. 172.1 150.4 139.0 ====== ====== ====== EARNINGS (LOSS) PER AVERAGE COMMON SHARE AVAILABLE TO COMMON STOCK Basic..................................................... $ 0.68 $(0.30) $(2.84) Diluted................................................... $ 0.67 $(0.30) $(2.84)
- ------------------------- (a) Computation of diluted earnings per share for the years ended 2002 and 2003 excluded conversion of our 3.375 percent contingently convertible senior notes and our 4.50 percent contingently convertible preferred stock. Neither security was outstanding in 2002. In 2003, both securities were excluded from diluted earnings per share due to antidilution. (b) Since the exercise price was greater than the average market price of the common stock, options and warrants to purchase 4.5 million shares of common stock were excluded from the computation of diluted earnings per share for the year ended 2004. Due to antidilution, options and warrants to purchase 6.0 million shares of common stock were excluded for the year ended 2003, and 5.1 million shares of common stock were excluded for the year ended 2002. Contingently Convertible Securities: At its September 2004 meeting, the EITF reached a final consensus that contingently convertible instruments should be included in the diluted earnings per share computation (if dilutive) regardless of whether the market price trigger has been met. We adopted EITF Issue No. 04-8 for the period ending December 31, 2004. For additional details, see Note 16, Implementation of New Accounting Standards. Prior to our adoption of EITF Issue No. 04-8, we completed an exchange offer for our 3.375 percent contingently convertible senior notes and our 4.50 percent contingently convertible preferred stock, intended to mitigate the earnings per share impact. The exchanged securities have the potential to dilute earnings per share to the extent that the conversion value exceeds the principal or par value. The remaining contingently convertible securities that were not exchanged were included in the diluted earnings per share calculation using the "if-converted" method for the year ended December 31, 2004. All such CMS-82 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) remaining contingently convertible securities were exchanged in January 2005. For additional details, see Note 4, Financings and Capitalization, "Contingently Convertible Securities." Trust Preferred Securities: Due to antidilution, the computation of diluted earnings per share excluded the conversion of Trust Preferred Securities into 4.2 million shares of common stock and an $8.7 million reduction of interest expense, net of tax, for the years ended 2002, 2003, and 2004. Effective July 2001, we can revoke the conversion rights if certain conditions are met. Other: In October 2004, we issued 32.8 million shares of our common stock. For additional details, see Note 4, Financings and Capitalization. 6: 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 financial instruments based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar instruments, or other valuation techniques. The cost and fair value of our long-term financial instruments are as follows:
2004 2003 ------------------------------- ------------------------------- FAIR UNREALIZED FAIR UNREALIZED DECEMBER 31 COST VALUE GAIN (LOSS) COST VALUE GAIN (LOSS) - ----------- ---- ----- ----------- ---- ----- ----------- (IN MILLIONS) Long-term debt(a)...................... $6,711 $7,052 $(341) $6,529 $6,762 $(233) Long-term debt -- related parties(b)... 684 653 31 684 648 36 Available-for-sale securities: SERP: Equity securities.................... 33 47 14 32 43 11 Debt securities(d)................... 20 20 -- 22 23 1 Nuclear decommissioning investments(c): Equity securities.................... 136 262 126 143 260 117 Debt securities(d)................... 291 302 11 288 304 16
- ------------------------- (a) Includes current maturities of $267 million at December 31, 2004 and $509 million at December 31, 2003. Settlement of long-term debt is generally not expected until maturity. (b) Includes current maturities of $180 million at December 31, 2004. (c) Nuclear decommissioning investments include cash and equivalents and accrued income totaling $11 million at December 31, 2004 and $11 million at December 31, 2003. Unrealized gains and losses on nuclear decommissioning investments are reflected as regulatory liabilities. (d) The fair value of available-for-sale debt securities by contractual maturity as of December 31, 2004 is as follows:
(IN MILLIONS) Due in one year or less..................................... $ 31 Due after one year through five years....................... 127 Due after five years through ten years...................... 126 Due after ten years......................................... 38 ---- Total..................................................... $322 ====
CMS-83 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Our held-to-maturity investments consist of debt securities held by the MCV Partnership totaling $139 million as of December 31, 2004. These securities represent funds restricted primarily for future lease payments and are classified as Other assets on our Consolidated Balance Sheets. These investments have original maturity dates of approximately one year or less and, because of their short maturities, their carrying amounts approximate their fair values. 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, futures, 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. Risk management contracts are classified as either non-trading or 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 through established credit policies that include performing financial credit reviews of 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 earnings as a result of counterparty nonperformance. Contracts used to manage market risks 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 is then adjusted quarterly to reflect any change in the market value of the contract, a practice known as marking the contract to market. Changes in fair value (that is, gains or losses) are reported either in earnings or accumulated other comprehensive income, depending on whether the derivative qualifies for cash flow hedge accounting treatment. For derivative instruments to qualify for hedge accounting, 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 recognized immediately 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. The ineffective portion, if any, of all hedges is recognized in earnings. We use a combination of quoted market prices, prices obtained from external sources, such as brokers, and mathematical valuation models to determine the fair value of those contracts requiring derivative accounting. 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. In connection with the market valuation of our derivative contracts, we maintain reserves, if necessary, for credit risks based on the financial condition of counterparties. The majority of our contracts are not subject to derivative accounting under SFAS No. 133 because they qualify for the normal purchases and sales exception, or because there is not an active market for the commodity. Certain of our electric capacity and energy contracts are not accounted for as derivatives due to the lack of an CMS-84 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) active energy market in the state of Michigan and the significant 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. Similarly, our coal purchase contracts are not accounted for as derivatives due to the lack of an active market for the coal that we purchase. If active markets for these commodities develop in the future, we may be required to account for these contracts as derivatives, and the resulting mark-to-market impact on earnings could be material to our financial statements. The MISO is scheduled to begin the Midwest Energy Market on April 1, 2005, which will include day-ahead and real-time energy market information and centralized dispatch for market participants. At this time, we believe that the commencement of this market will not constitute the development of an active energy market in the state of Michigan. However, after having adequate experience with the Midwest Energy Market, we will reevaluate whether or not the activity level within this market leads to the conclusion that an active energy market exists. Derivative accounting is required for certain contracts used to limit our exposure to commodity price risk, interest rate risk, and foreign exchange risk. The following table reflects the fair value of all contracts requiring derivative accounting:
DECEMBER 31 2004 2003 - ----------- ---------------------------- ----------------------------- FAIR UNREALIZED FAIR UNREALIZED DERIVATIVE INSTRUMENTS COST VALUE GAIN (LOSS) COST VALUE GAIN (LOSS) - ---------------------- ---- ----- ----------- ---- ----- ----------- (IN MILLIONS) Non-trading: Gas contracts.............................. $ 2 $ -- $ (2) $ 3 $ 2 $ (1) Interest rate risk contracts............... -- (1) (1) -- (3) (3) Derivative contracts associated with Consumers' investment in the MCV Partnership: Prior to consolidation(a)............... -- -- -- -- 15 15 After consolidation: Gas fuel contracts.................... -- 56 56 -- -- -- Gas fuel futures and swaps............ -- 64 64 -- -- -- CMS ERM contracts: Non-trading electric/gas contracts......... -- (199) (199) -- (181) (181) Trading electric/gas contracts............. (4) 201 205 (2) 196 198 Derivative contracts associated with equity investments in: Shuweihat.................................. -- (25) (25) -- (27) (27) Taweelah................................... (35) (24) 11 -- (26) (26) Jorf Lasfar................................ -- (11) (11) -- (11) (11) Other...................................... -- -- -- -- 1 1
- ------------------------- (a) The amount associated with derivative contracts held by the MCV Partnership as of December 31, 2003 represents our proportionate share of the unrealized gain on those contracts accounted for as cash flow hedges included in Accumulated other comprehensive loss. Our proportionate share of the total fair value of all derivative instruments held by the MCV Partnership as of December 31, 2003 was $51 million, and is included in Investments -- Midland Cogeneration Venture Limited Partnership on our Consolidated Balance Sheets. The fair value of our non-trading gas contracts, interest rate risk contracts, and the derivative contracts associated with Consumers' investment in the MCV Partnership is included in Derivative instruments, Other assets, or Other liabilities on our Consolidated Balance Sheets. The fair value of the derivative contracts held by CMS ERM is included in either Price risk management assets or Price risk management liabilities on our CMS-85 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Consolidated Balance Sheets. The fair value of derivative contracts associated with our equity investments is included in Investments -- Enterprises on our Consolidated Balance Sheets. GAS CONTRACTS: Our gas utility business uses fixed-priced weather-based gas supply call options and fixed-priced gas supply call and put options 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 as part of the GCR process. At December 31, 2004, we held fixed-priced weather- based gas supply call options and had sold fixed-priced gas supply put options. INTEREST RATE RISK CONTRACTS: We use interest rate swaps to hedge the risk associated with forecasted interest payments on variable-rate debt and to reduce the impact of interest rate fluctuations. Most of our interest rate swaps are designated as cash flow hedges. As such, we record changes in the fair value of these contracts in Accumulated other comprehensive loss unless the swaps are sold. For interest rate swaps that did not qualify for hedge accounting treatment, we record changes in the fair value of these contracts in earnings as part of Other income. The following table reflects the outstanding floating-to-fixed interest rates swaps:
FLOATING TO FIXED NOTIONAL MATURITY FAIR INTEREST RATE SWAPS AMOUNT DATE VALUE - ------------------- -------- -------- ----- (IN MILLIONS) ~~December 31, 2004........................................... $25 2005-2006 $(1) December 31, 2003........................................... 28 2005-2006 (3)~~
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, 2004 and December 31, 2003. There was no ineffectiveness associated with any of the interest rate swaps that qualified for hedge accounting treatment. As of December 31, 2004, we have recorded an unrealized loss of $1 million, net of tax, in Accumulated other comprehensive loss related to interest rate risk contracts accounted for as cash flow hedges. We expect to reclassify this amount as a decrease to earnings during the next 12 months primarily to offset the variable-rate interest expense on hedged debt. At December 31, 2004 and 2003, Shuweihat, Taweelah, and Jorf Lasfar, three of our equity method investees, held interest rate swaps that hedged the risk associated with variable-rate debt. These instruments are not included in this analysis, but can have an impact on financial results. The accounting for these instruments depends on whether they qualify for cash flow hedge accounting treatment. The interest rate swaps held by Taweelah do not qualify as cash flow hedges, and therefore, we record our proportionate share of the change in the fair value of these contracts in Earnings from Equity Method Investees. The remainder of these instruments do qualify as cash flow hedges, and we record our proportionate share of the change in the fair value of these contracts in Accumulated other comprehensive loss. DERIVATIVE CONTRACTS ASSOCIATED WITH CONSUMERS' INVESTMENT IN THE MCV PARTNERSHIP: Gas Fuel Contracts: The MCV Partnership uses natural gas fuel contracts to buy gas as fuel for generation, and to manage gas fuel costs. The MCV Partnership believes that certain of its long-term natural gas contracts qualify as normal purchases under SFAS No. 133 and therefore, these contracts were not recognized at fair value on the balance sheet as of December 31, 2004. The MCV Partnership also held certain long-term gas contracts that did not qualify as normal purchases as of December 31, 2004, because these contracts contained volume optionality. Accordingly, these contracts were accounted for as derivatives, with changes in fair value recorded in earnings each quarter. The MCV Partnership expects future earnings volatility on these contracts, since gains and CMS-86 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) losses will be recorded each quarter. For the year ended December 31, 2004, we recorded a $19 million net loss associated with these gas contracts in Fuel for electric generation on our Consolidated Statements of Income. The fair value of these contracts will reverse over the remaining life of the contracts ranging from 2005 to 2007. Due to the implementation of the RCP in January 2005, the MCV Partnership has determined that a significant portion of its gas fuel contracts no longer qualify as normal purchases because the contracted gas will not be consumed for electric production. Accordingly, these contracts will be treated as derivatives and will be marked-to-market through earnings each quarter, which could increase earnings volatility. Based on market prices for natural gas as of January 31, 2005, the accounting for the MCV Partnership's long-term gas contracts, including those affected by the implementation of the RCP, could result in an estimated $100 million (pretax before minority interest) gain recorded to earnings in the first quarter of 2005. This estimated gain will reverse in subsequent quarters as the contracts settle. For further details on the RCP, see Note 3, Contingencies, "Other Consumers' Electric Utility Contingencies -- The Midland Cogeneration Venture." If there are further changes in the level of planned electric production or gas consumption, the MCV Partnership may be required to account for additional long-term gas contracts as derivatives, which could add to earnings volatility. Gas Fuel Futures and Swaps: The MCV Partnership enters into natural gas futures contracts, option contracts, and over-the-counter swap transactions in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are used principally to secure anticipated natural gas requirements necessary for projected electric and steam sales, and to lock in sales prices of natural gas previously obtained in order to optimize the MCV Partnership's existing gas supply, storage, and transportation arrangements. At December 31, 2004, the MCV Partnership held gas fuel futures and swaps. The contracts that are used to secure anticipated natural gas requirements necessary for projected electric and steam sales qualify as cash flow hedges under SFAS No. 133. The MCV Partnership also engages in cost mitigation activities to offset the fixed charges the MCV Partnership incurs in operating the MCV 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 the MCV 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 the MCV Partnership and do not qualify as hedges. Therefore, the mark-to-market gains and losses from these cost mitigation activities are recorded in earnings each quarter. As of December 31, 2004, we have recorded a cumulative net gain of $21 million, net of tax, in Accumulated other comprehensive loss relating to our proportionate share of the contracts held by the MCV Partnership that qualify as cash flow hedges. This balance represents natural gas futures, options, and swaps with maturities ranging from January 2005 to December 2009, of which $11 million of this gain is expected to be reclassified as an increase to earnings during the next 12 months. In addition, for the year ended December 31, 2004, we recorded a net gain of $37 million in earnings from hedging activities related to natural gas requirements for the MCV Facility operations and a net gain of $2 million in earnings from the MCV Partnership's cost mitigation activities. CMS ERM CONTRACTS: Through December 31, 2002, our wholesale power and gas trading activities were accounted for under the mark-to-market method of accounting in accordance with EITF Issue No. 98-10. Effective January 1, 2003, EITF Issue No. 98-10 was rescinded and replaced by EITF Issue No. 02-03. As a result, only energy contracts that meet the definition of a derivative under SFAS No. 133 are to 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 the three month period ended March 31, 2003. During 2003, we sold a majority of our wholesale natural gas and power-trading portfolio, and exited the energy services and retail customer choice business. As a result, our trading activities have been reduced CMS-87 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) significantly. Our current activities center around entering into energy contracts that are related to the activities considered to be an integral part of our ongoing operations. CMS ERM holds certain forward contracts for the purchase and sale of electricity and natural gas that result in physical delivery of the underlying commodity at contractual prices. These contracts are generally long-term in nature and are classified as non-trading. CMS ERM also uses various financial instruments, including swaps, options, and futures, to manage the commodity price risks associated with its forward purchase and sales contracts as well as generation assets owned by CMS Energy or its subsidiaries. These financial contracts are classified as trading activities. Non-trading and trading contracts that meet the definition of a derivative under SFAS No. 133 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 as a component of Operating Revenue in the period in which the changes occur. Gains and losses on trading contracts are recorded net in accordance with EITF Issue No. 02-03. Contracts that do not meet the definition of a derivative are accounted for as executory contracts (i.e., on an accrual basis). FOREIGN EXCHANGE DERIVATIVES: We may use forward exchange and option contracts to hedge certain receivables, payables, long-term debt, and equity value relating to our investments in foreign operations. 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 limit the risk from exchange rate movements because gains and losses on such contracts offset losses and gains, respectively, on assets and liabilities being hedged. At December 31, 2004 and 2003, we had no outstanding foreign exchange contracts. The impact of hedges on our investments in foreign operations is reflected in Accumulated other comprehensive loss as a component of the foreign currency translation adjustment on our Consolidated Balance Sheets. 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, 2004, the total foreign currency translation adjustment was a net loss of $319 million, which included a net hedging loss of $27 million, net of tax, related to settled contracts. At December 31, 2004 and 2003, Taweelah, one of our equity method investees, held a foreign exchange contract that hedged the foreign currency risk associated with payments to be made under an operating and maintenance service agreement. This contract did not qualify as a cash flow hedge; and therefore, we record our proportionate share of the change in the fair value of the contract in Earnings from Equity Method Investees. 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, - a defined contribution 401(k) plan, - benefits to a select group of management under EISP, and - health care and life insurance benefits under OPEB. 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 CMS-88 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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) in 2003 as a result of the increase in the additional minimum pension liability. As a result of Company contributions in 2003, 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. As a result, in 2003, we 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 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 $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 $67 million at December 31, 2004, and $66 million at December 31, 2003. The assets are classified as Other non-current assets. The Accumulated Benefit Obligation for SERP was $67 million at December 31, 2004 and $62 million at December 31, 2003. 401(k): Employer matching contributions to the 401(k) plan are invested in CMS Energy common stock. The amount charged to expense for this plan was $12 million in 2002. The employer's match for the 401(k) plan was suspended on September 1, 2002 and was resumed on January 1, 2005. The MCV Partnership sponsors a defined contribution retirement plan covering all employees. Under the terms of the plan, the MCV Partnership makes contributions of either 5 or 10 percent of an employee's eligible annual compensation dependent upon the employee's age. The MCV Partnership 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. Amounts contributed under these plans were $1 million in 2004. 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 less than $1 million in 2004, $1 million in 2003, and $2 million in 2002. The Accumulated Benefit Obligation for EISP was $4 million at December 31, 2004 and $3 million at December 31, 2003. OPEB: Retiree health care costs at December 31, 2004 are based on the assumption that costs would increase 7.5 percent in 2004. The rate of increase is expected to be 10 percent for 2005. The rate of increase is expected to slow to an estimated 5 percent by 2010 and thereafter. The MCV Partnership sponsors defined cost postretirement health care plans that cover all full-time employees, except key management. Participants in the postretirement health care plans 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 accumulated benefit obligation of the MCV Partnership's postretirement plans was $5 million at December 31, 2004. The MCV Partnership's net periodic postretirement health care cost for 2004 was less than $1 million. CMS-89 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The health care cost trend rate assumption affects the estimated costs recorded. A one-percentage point change in the assumed health care cost trend assumption would have the following effects:
ONE ONE PERCENTAGE PERCENTAGE POINT INCREASE POINT DECREASE -------------- -------------- (IN MILLIONS) ~~Effect on total service and interest cost component......... $ 13 $ (11) Effect on postretirement benefit obligation................. $157 $(137)~~
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. 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. The measurement date for all CMS Energy plans is November 30 for 2004, and December 31 for 2003 and 2002. We believe accelerating the measurement date on our benefits plans by one month is preferable as it improves control procedures and allows more time to review the completeness and accuracy of the actuarial measurements. As a result of the measurement date change in 2004, we recorded a $2 million cumulative effect of change in accounting, net of tax benefit, as a decrease to earnings. We also increased the amount of accrued benefit cost on our Consolidated Balance Sheets by $4 million. The effect of the measurement date change was immaterial. The measurement date for the MCV Partnership's plan is December 31, 2004. Assumptions: The following table recaps the weighted-average assumptions used in our retirement benefits plans to determine benefit obligations and net periodic benefit cost:
PENSION & SERP OPEB ----------------------- ----------------------- 2004 2003 2002 2004 2003 2002 ---- ---- ---- ---- ---- ---- Discount rate................................. 6.00% 6.25% 6.75% 6.00% 6.25% 6.75% Expected long-term rate of return on plan assets(a)................................... 8.75% 8.75% 8.75% Union....................................... 8.75% 8.75% 8.75% Non-Union................................... 6.00% 6.00% 6.00% Rate of compensation increase: Pension..................................... 3.50% 3.25% 3.50% 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 expert opinions 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. CMS-90 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Costs: The following table recaps the costs incurred in our retirement benefits plans:
PENSION & SERP OPEB ---------------------- -------------------- YEARS ENDED DECEMBER 31 2004 2003 2002 2004 2003 2002 - ----------------------- ----- ---- ----- ---- ---- ---- (IN MILLIONS) Service cost......................................... $ 37 $ 40 $ 44 $ 19 $ 21 $ 20 Interest expense..................................... 79 79 89 58 66 69 Expected return on plan assets....................... (109) (81) (103) (48) (42) (43) Plan amendments...................................... -- -- 4 -- -- -- Curtailment credit................................... -- (2) -- -- (8) -- Settlement charge.................................... -- 84 -- -- -- -- Amortization of: Net (Gain) Loss.................................... 14 9 (1) 10 19 10 Prior service cost................................. 6 7 8 (9) (7) (1) ----- ---- ----- ---- ---- ---- Net periodic pension and postretirement benefit cost............................................... $ 27 $136 $ 41 $ 30 $ 49 $ 55 ===== ==== ===== ==== ==== ====
Reconciliations: The following table reconciles the funding of our retirement benefits plans with our retirement benefits plans' liability:
PENSION PLAN SERP OPEB ---------------- ------------ --------------- YEARS ENDED DECEMBER 31 2004 2003 2004 2003 2004 2003 - ----------------------- ---- ---- ---- ---- ---- ---- (IN MILLIONS) Benefit obligation at beginning of period........ $1,189 $1,256 $ 76 $ 81 $ 871 $ 982 Service cost..................................... 35 38 2 2 19 21 Interest cost.................................... 74 74 5 5 58 66 Plan amendment................................... -- (19) -- -- -- (47) Actuarial loss (gain)............................ 138 55 3 (10) 166 (67) Business combinations............................ -- -- -- -- -- (42) Benefits paid.................................... (108) (215) (3) (2) (41) (42) ------ ------ ---- ---- ------ ----- Benefit obligation at end of period(a)........... 1,328 1,189 83 76 1,073 871 ------ ------ ---- ---- ------ ----- Plan assets at fair value at beginning of period......................................... 1,067 607 -- -- 618 508 Actual return on plan assets..................... 81 115 -- -- 28 75 Company contribution............................. -- 560 3 2 48 76 Actual benefits paid............................. (108) (215) (3) (2) (40) (41) ------ ------ ---- ---- ------ ----- Plan assets at fair value at end of period....... 1,040 1,067 -- -- 654 618 ------ ------ ---- ---- ------ ----- Benefit obligation in excess of plan assets...... (288) (122) (83) (76) (419) (253) Unrecognized net loss from experience different than assumed................................... 642 501 5 3 340 155 Unrecognized prior service cost (benefit)........ 23 29 1 1 (103) (112) ------ ------ ---- ---- ------ ----- Net Balance Sheet Asset (Liability).............. 377 408 (77) (72) (182) (210) Additional VEBA Contributions or Non-Trust Benefit Payments............................... 15 Additional minimum liability adjustment(b)....... (419) -- -- -- -- -- ------ ------ ---- ---- ------ ----- Total Net Balance Sheet Asset (Liability)........ $ (42) $ 408 $(77) $(72) $ (167) $(210) ====== ====== ==== ==== ====== =====
- ------------------------- (a) The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law in December 2003. The Act establishes a prescription drug benefit under Medicare (Medicare Part D), and a federal subsidy, which is tax exempt, to sponsors of retiree health care benefit plans that provide a benefit that is actuarially equivalent to Medicare Part D. CMS-91 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) We believe our plan is actuarially equivalent to Medicare Part D and have incorporated, retroactively, the effects of the subsidy into our financial statements as of June 30, 2004, in accordance with FASB Staff Position, No. SFAS 106-2. We remeasured our obligation as of December 31, 2003 to incorporate the impact of the Act, which resulted in a reduction to the accumulated postretirement benefit obligation of $158 million. The remeasurement resulted in a reduction of OPEB cost of $24 million for 2004. The reduction of $24 million includes $7 million in capitalized OPEB costs. For additional details, see Note 16, Implementation of New Accounting Standards. (b) The Pension Plan's Accumulated Benefit Obligation of $1.082 billion exceeded the value of the Pension Plan assets and net balance sheet asset at December 31, 2004. As a result, we recorded an additional minimum liability of $419 million. Consistent with MPSC guidance, Consumers recognized the cost of their additional minimum liability as a regulatory asset. Accordingly, our additional minimum liability includes an intangible asset of $22 million, $17 million, net of tax of accumulated other comprehensive income, and a regulatory asset of $372 million. The Accumulated Benefit Obligation for the Pension Plan was $1.019 billion at December 31, 2003. Plan Assets: The following table recaps the categories of plan assets in our retirement benefits plans:
PENSION OPEB -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Asset Category: Fixed Income.............................................. 34% 52%(b) 45% 51% Equity Securities......................................... 61% 44% 54% 48% CMS Energy Common Stock(a)............................. 5% 4% 1% 1%
- ------------------------- (a) At November 30, 2004, there were 4,892,000 shares of CMS Energy Common Stock in the Pension Plan assets with a fair value of $50 million, and 493,000 shares in the OPEB plan assets with a fair value of $5 million. 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. (b) The percentage of fixed income at December 31, 2003 is high because our December 2003 contribution of $350 million was deposited temporarily into fixed income securities. We contributed $63 million to our OPEB plan in 2004. We plan to contribute $63 million to our OPEB plan in 2005. We did not contribute to our Pension Plan in 2004. We do not plan to contribute to our Pension Plan in 2005. 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 a 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 CMS-92 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Benefit Payments: The expected benefit payments for each of the next five years and the five-year period thereafter are as follows:
PENSION SERP OPEB(a) ------- ---- ------- (IN MILLIONS) 2005........................................................ $113 $ 4 $ 53 2006........................................................ 105 4 51 2007........................................................ 96 4 53 2008........................................................ 90 4 54 2009........................................................ 89 4 56 2010-2014................................................... 423 22 322 ==== === ====
- ------------------------- (a) OPEB benefit payments are net of employee contributions and expected Medicare Part D prescription drug subsidy payments. 8: ASSET RETIREMENT OBLIGATIONS SFAS NO. 143: 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 remove them. We have legal obligations to remove some of our assets, including our nuclear plants, at the end of their useful lives. For our regulated utility, as required by SFAS No. 71, we account for the implementation of this standard by recording regulatory assets and liabilities instead of a cumulative effect of a change in accounting principle. 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 increase by $22 million. If a reasonable estimate of fair value cannot be made in the period in which the ARO is incurred, such as for assets with indeterminate lives, the liability is to be recognized when a reasonable estimate of fair value can be made. Generally, electric and gas transmission and distribution assets have indeterminate lives. Retirement cash flows cannot be determined and there is a low probability of a retirement date. Therefore, no liability has been recorded for these assets. Also, 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 largely utilize third-party cost estimates. CMS-93 CMS ENERGY CORPORATION 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 ARO DESCRIPTION DATE LONG LIVED ASSETS TRUST FUND - --------------- ---------- ----------------- ------------- (IN MILLIONS) December 31, 2004 Palisades-decommission plant site...... 1972 Palisades nuclear plant $523 Big Rock-decommission plant site....... 1962 Big Rock nuclear plant 52 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 -- Natural gas-fired power plant.......... 1997 Gas fueled power plant -- Close gas treating plant and gas wells................................ Various Gas transmission and storage --

ARO ARO LIABILITY CASH FLOW LIABILITY ARO DESCRIPTION 1/1/03 INCURRED SETTLED ACCRETION REVISIONS 12/31/03 - --------------- --------- -------- ------- --------- --------- --------- (IN MILLIONS) Palisades-decommission................... $249 $-- $ -- $19 $-- $268 Big Rock-decommission.................... 61 -- (40) 13 -- 34 JHCampbell intake line................... -- -- -- -- -- -- Coal ash disposal areas.................. 51 -- (3) 5 -- 53 Wells at gas storage fields.............. 2 -- -- -- -- 2 Indoor gas services relocations.......... 1 -- -- -- -- 1 Natural gas-fired power plant............ 1 -- -- -- -- 1 Closure of gas pipelines(a).............. 8 -- (8) -- -- -- ---- --- ---- --- --- ---- Total............................. $373 $-- $(51) $37 $-- $359 ==== === ==== === === ====
- ------------------------- (a) ARO Liability was settled in 2003 as a result of the sales of Panhandle and CMS Field Services.
ARO ARO LIABILITY CASH FLOW LIABILITY ARO DESCRIPTION 12/31/03 INCURRED SETTLED ACCRETION REVISIONS 12/31/04 - --------------- --------- -------- ------- --------- --------- --------- (IN MILLIONS) Palisades-decommission................... $268 $-- $ -- $22 $60 $350 Big Rock-decommission.................... 34 -- (40) 14 22 30 JHCampbell intake line................... -- -- -- -- -- -- Coal ash disposal areas.................. 53 -- (4) 5 -- 54 Wells at gas storage fields.............. 2 -- (1) -- -- 1 Indoor gas services relocations.......... 1 -- -- -- -- 1 Natural gas-fired power plant............ 1 -- -- -- -- 1 Close gas treating plant and gas wells... -- 1 -- 1 -- 2 ---- --- ---- --- --- ---- Total.................................... $359 $ 1 $(45) $42 $82 $439 ==== === ==== === === ====
The Palisades and Big Rock cash flow revisions resulted from new decommissioning reports filed with the MPSC in March 2004. The Palisades ARO also reflects a cash flow revision for the probability of operating license renewal; the renewal would extend the plant's operating license by twenty years. For additional details, see Note 3, Contingencies, "Other Consumers' Electric Utility Contingencies -- Nuclear Plant Decommissioning." On October 14, 2004, the MPSC issued a generic proceeding to review SFAS No. 143, Accounting for Asset Retirement Obligations, FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing Requirements for Asset Retirement Obligations, and their accounting and ratemaking issues. Utilities are required to respond to CMS-94 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the Order by March 15, 2005. We consider the proceeding a clarification of accounting and reporting issues that relate to all Michigan utilities; we anticipate no financial impact. 9: 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 utilize deferred tax accounting for temporary differences. 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, 2004, we had AMT credit carryforwards in the amount of $218 million that do not expire and tax loss carryforwards in the amount of $1.348 billion that expire from 2021 through 2024. We do not believe that a valuation allowance is required, as we expect to utilize the loss carryforward prior to its expiration. In addition, we had general business credit carryforwards in the amount of $41 million and charitable contribution carryforwards in the amount of $21 million that primarily expire in 2005, for which valuation allowances have been provided. 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 determine annually 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 $211 million at December 31, 2004. It is impractical to estimate the amount of unrecognized deferred income taxes or withholding taxes on these undistributed earnings. Also, at December 31, 2004 and 2003, 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 American Jobs Creation Act of 2004 creates a one-year opportunity to receive a tax benefit for U.S. corporations that reinvest dividends from controlled foreign corporations in the U.S. in a 12-month period (calendar year 2005 for CMS Energy). Although the tax benefit is subject to a number of limitations, we believe that we have the information necessary to make an informed decision on the impact of this act on our repatriation plan. In January 2005, we repatriated $80 million in cash, $71 million of which should qualify for the tax benefit. Historically, we recorded deferred taxes on these repatriated earnings. Since this repatriation should qualify for the tax benefit and our decision to repatriate was made in 2004, we have reversed $21 million of our deferred tax liability. This adjustment was recorded as a component of income from continuing operations in 2004. During 2005, we may have the ability to repatriate additional amounts that may qualify for the repatriation tax benefit. If successful, our current estimate is that additional amounts could range between $100 million and $120 million. The amount of additional repatriation remains uncertain because it is based on future foreign subsidiary operations, cash flow, financings, and repatriation limitations. This potential additional repatriation could reduce our recorded deferred tax liability $30 million to $36 million. We expect to be in a position to finalize our assessment, which may be higher or lower, regarding any potential repatriation in the fourth quarter of 2005. CMS-95 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The significant components of income tax expense (benefit) on continuing operations consisted of:
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Current income taxes: Federal................................................... $ -- $(17) $(171) State and local........................................... 3 1 (8) Foreign................................................... 9 17 28 ---- ---- ----- $ 12 $ 1 $(151) Deferred income taxes Federal................................................... $ 8 $ 54 $ 107 Federal tax benefit of American Jobs Creation Act of 2004................................................... (21) -- -- State..................................................... (5) 4 7 Foreign................................................... 6 5 2 ---- ---- ----- $(12) $ 63 $ 116 Deferred ITC, net........................................... (5) (6) (6) ---- ---- ----- Tax expense (benefit)....................................... $ (5) $ 58 $ (41) ==== ==== =====
Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts in the financial statements. Deferred tax assets and liabilities are classified as current or noncurrent according to the classification of the related assets or liabilities. Deferred tax assets and liabilities not related to assets or liabilities are classified according to the expected reversal date of the temporary differences. The principal components of deferred tax assets (liabilities) recognized in our Consolidated Balance Sheets are as follows:
DECEMBER 31 2004 2003 - ----------- ---- ---- (IN MILLIONS) Property.................................................... $(1,128) $(1,096) Securitization costs........................................ (176) (186) Employee benefits........................................... (64) (76) Gas inventories............................................. (126) (100) Tax loss/credit carryforwards............................... 738 668 Valuation allowances........................................ (42) (42) Regulatory liabilities...................................... 135 120 Other, net.................................................. (27) 70 ------- ------- Net deferred tax liabilities.............................. $ (690) $ (642) ======= ======= Deferred tax liabilities.................................... $(1,795) $(1,581) Deferred tax assets, net of valuation reserves.............. 1,105 939 ------- ------- Net deferred tax liabilities.............................. $ (690) $ (642) ======= =======
CMS-96 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 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Income (loss) from continuing operations before income taxes(a) Domestic.................................................. $199 $ (74) $(527) Foreign................................................... (77) 90 92 ---- ----- ----- Total................................................ 122 16 (435) Statutory federal income tax rate........................... X 35% X 35% X 35% ---- ----- ----- Expected income tax expense (benefit)....................... 42 6 (152) Increase (decrease) in taxes from: Property differences...................................... 13 18 18 Income tax effect of foreign investments.................. (25) (18) 47 Benefit of qualifying foreign dividends received deduction.............................................. (21) -- -- Tax credits............................................... (6) (6) 51 State and local income taxes, net of federal benefit...... (1) -- (7) Tax return accrual adjustments............................ (5) (1) (7) Medicare part D exempt income............................. (6) -- -- Tax exempt income......................................... (3) (3) -- Tax contingency reserves.................................. 5 -- -- Valuation allowance provision............................. -- 50 -- Other, net................................................ 2 12 9 ---- ----- ----- Recorded income tax expense (benefit)(a).................... $ (5) $ 58 $ (41) ---- ----- ----- Effective tax rate.......................................... (4.1)% (b) 9.4% ==== ===== =====
- ------------------------- (a) The increased income tax expense from 2002 to 2003 is primarily attributable to the valuation reserve provisions for the possible lost general business credit, capital loss, and charitable contribution carryforwards. The decreased income tax expense from 2003 to 2004 is primarily attributable to the benefit recorded from the American Jobs Creation Act of 2004 of $21 million. (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. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities, which can result in proposed assessments. The IRS is currently conducting audits of our federal income tax returns for the years 1998 through 2002. Our estimate for the potential outcome for any uncertain tax issue is highly judgmental. We believe that our accrued tax liabilities are adequate for all years. 10: EXECUTIVE INCENTIVE COMPENSATION We provide a Performance Incentive Stock Plan (the Plan) to key employees and non-employee Directors or consultants based on their contributions to the successful management of the company. On May 28, 2004, shareholders approved an amendment to the Plan, with an effective date of June 1, 2004. The amendment established a 5-year term for the Plan. The Plan includes the following type of awards: - phantom shares, - performance units, - restricted stock, CMS-97 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - stock options, - stock appreciation rights, and - management stock purchases. Phantom shares are valued at the fair market price of common stock when granted. They give the holder the right to receive the appreciation value of common stock on one or more valuation dates, according to a specified vesting schedule determined at time of grant. These shares are subject to forfeiture if employment terminates before vesting. Performance units have an initial value that is established at time of grant. Performance criteria are established at the time of grant and, depending upon the extent to which they are met, will determine the value of the payout, which may be in the form of cash, common stock, or a combination of both. These units are subject to forfeiture if employment terminates. Restricted shares of common stock are outstanding shares with full voting and dividend rights. These awards vest 100 percent after three years and are subject to achievement of specified levels of total shareholder return including a comparison to a peer group of companies. Some awards vest based solely on continued employment. These awards 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, defined as the excess of the market price of the stock at the date of exercise over the grant date price. All stock options and stock appreciation rights are valued at fair market price when granted. All options and rights may be exercised upon grant, and expire up to 10 years and one month from the date of grant. Management stock purchases are the election of select participants in the Officer's Incentive Compensation Plan to receive all or a portion of their incentive payments in the form of shares of restricted common stock or shares of restricted stock units. These participants may also receive awards of additional restricted common stock or restricted stock units provided that the total value of these additional grants does not exceed $2.5 million for any fiscal year. Under the revised Plan, shares awarded or subject to options, phantom shares and performance units may not exceed 6 million shares from June 2004 through May 2009, nor may such grants or awards to any participant exceed 250,000 shares in any fiscal year. Shares for which payment or exercise is in cash, as well as shares or options that are forfeited, may be awarded or granted again under the Plan. Awards of up to 5,482,690 shares of CMS Energy Common Stock may be issued as of December 31, 2004. All grants awarded under this Plan in 2004 were in the form of restricted stock. CMS-98 CMS ENERGY CORPORATION 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 OF NUMBER OF WEIGHTED AVERAGE CMS ENERGY COMMON STOCK SHARES SHARES EXERCISE PRICE - ----------------------- --------- --------- ---------------- Outstanding at January 1, 2002..................... 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 Granted.......................................... 525,310 -- -- Exercised or Issued.............................. (142,699) (600,000) $ 6.67 Forfeited or Expired............................. (269,629) (433,550) $27.84 --------- --------- ------ Outstanding at December 31, 2004................... 1,377,010 4,788,026 $22.50 ========= ========= ======
At December 31, 2004, 426,500 of the 1,377,010 shares of restricted common stock outstanding are subject to performance objectives. Compensation expense included in income for restricted stock was $2 million for 2004, $2 million in 2003, and less than $1 million in 2002. The following table summarizes our stock options outstanding at December 31, 2004:
NUMBER OF SHARES WEIGHTED AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING REMAINING LIFE - ------------------------ ---------------- ---------------- CMS ENERGY COMMON STOCK: $6.35-$8.12.................................... 1,544,500 8.42 years $ 6.86 $17.00-$22.20.................................. 1,051,420 6.39 years $19.97 $22.69-$31.04.................................. 1,050,602 4.79 years $29.75 $34.80-$43.38.................................. 1,141,504 3.91 years $39.34 --------- --------- ------ $6.35-$43.38................................... 4,788,026 6.10 years $22.50 ========= ========= ======
The number of stock options exercisable was 4,778,488 at December 31, 2004, 5,795,145 at December 31, 2003 and 5,007,329 at December 31, 2002. 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 2004(a) 2003 2002(b) - ------------------ ------- ---- ------- ~~Fair value at grant date.................................... -- $2.96 $3.84, $1.44~~
- ------------------------- (a) There were no stock option grants during 2004. (b) For 2002, there were two stock option grants totaling 1,492,200 options. CMS-99 CMS ENERGY CORPORATION 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 2004(a) 2003 2002(b) - ----------------------- ------- ----- --------------- CMS ENERGY COMMON STOCK OPTIONS Risk-free interest rate................................ -- 3.02% 3.95%, 3.16% Expected stock price volatility........................ -- 55.46% 32.44%, 40.81% Expected dividend rate................................. -- -- $0.365, $0.1825 Expected option life (years)........................... -- 4.2 4.2
- ------------------------- (a) There were no stock option grants during 2004. (b) For 2002, there were two stock option grants totaling 1,492,200 options. 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. 11: 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 fair value, or - renew the lease at fair rental value. Our capital leases are comprised mainly of leased service vehicles and office furniture. As of December 31, 2004, capital lease obligations totaled $58 million. Consumers is authorized by the MPSC to record both capital and operating lease payments as operating expenses and recover the total costs from their customers. Capital lease expenses were $13 million in 2004, $17 million in 2003, and $20 million in 2002. In November 2003, we exercised our purchase option under the capital lease agreement for our main headquarters building in Jackson, Michigan. Operating lease charges were $14 million in 2004, $14 million in 2003, and $13 million in 2002. Income from subleases was $1 million in 2004 and $1 million in 2003. In order to obtain permanent financing for the MCV Facility, the MCV Partnership entered into a sale and lease back agreement with a lessor group, which includes the FMLP, for substantially all of the MCV Partnership's fixed assets. In accordance with SFAS No. 98, the MCV Partnership accounted for the transaction as a financing arrangement. As of December 31, 2004, finance lease obligations totaled $286 million, which represents the third-party portion of the MCV Partnership's finance lease obligation. Charges under the MCV Partnership's finance lease obligation were $105 million in 2004. For additional details on transactions with the MCV Partnership and the FMLP, see Note 3, Contingencies, "Other Consumers' Electric Utility Contingencies -- The Midland Cogeneration Venture." CMS-100 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Minimum annual rental commitments under our non-cancelable leases at December 31, 2004 were:
CAPITAL FINANCE OPERATING LEASES LEASE LEASES ------- ------- --------- (IN MILLIONS) 2005........................................................ $13 $ 19 $15 2006........................................................ 13 18 14 2007........................................................ 12 18 12 2008........................................................ 10 19 12 2009........................................................ 8 20 8 2010 and thereafter......................................... 15 192 28 --- ---- --- Total minimum lease payments(a)............................. 71 286 89 Less imputed interest....................................... 13 -- -- --- ---- --- Present value of net minimum lease payments................. 58 286 -- Less current portion........................................ 10 19 -- --- ---- --- Non-current portion......................................... $48 $267 $89 === ==== ===
- ------------------------- (a) Minimum payments have not been reduced by minimum sublease rentals of $2 million due in the future under noncancelable subleases. 12: 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. Net income from these investments included undistributed earnings of $88 million in 2004, $41 million in 2003, and $39 million in 2002. The most significant of these investments are: - our 50 percent interest in Jorf Lasfar, and - our 40 percent interest in Taweelah. CMS-101 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Summarized financial information for these equity method investments is as follows: Income Statement Data
YEAR ENDED DECEMBER 31, 2004 ----------------------------------------- JORF ALL LASFAR(a) TAWEELAH OTHERS TOTAL --------- -------- ------ ----- (IN MILLIONS) Operating revenue......................................... $461 $99 $1,448 $2,008 Operating expenses........................................ 282 40 1,207 1,529 ---- --- ------ ------ Operating income.......................................... 179 59 241 479 Other expense, net........................................ 53 23 140 216 ---- --- ------ ------ Net income................................................ $126 $36 $ 101 $ 263 ==== === ====== ======

YEAR ENDED DECEMBER 31, 2003 --------------------------------------------------------------------------- JORF ALL LASFAR(a) FMLP(b) TAWEELAH SCP(c) ATACAMA OTHERS TOTAL(d) --------- ------- -------- ------ ------- ------ -------- (IN MILLIONS) Operating revenue................. $369 $79 $99 $74 $182 $1,054 $1,857 Operating expenses................ 191 4 38 18 144 932 1,327 ---- --- --- --- ---- ------ ------ Operating income.................. 178 75 61 56 38 122 530 Other expense, net................ 58 43 18 25 25 39 208 ---- --- --- --- ---- ------ ------ Net income........................ $120 $32 $43 $31 $ 13 $ 83 $ 322 ==== === === === ==== ====== ======

YEAR ENDED DECEMBER 31, 2002 ---------------------------------------------------------------- JORF ALL LASFAR(a) FMLP(b) TAWEELAH SCP(c) OTHERS TOTAL(d) --------- ------- -------- ------ ------ -------- (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 16 210 417 ---- --- ---- --- ------ ------ Net income (loss)......................... $132 $38 $(18) $14 $ (43) $ 123 ==== === ==== === ====== ======
CMS-102 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Balance Sheet Data
DECEMBER 31, 2004 ----------------------------------------- JORF ALL LASFAR(A) TAWEELAH OTHERS TOTAL --------- -------- ------ ----- (IN MILLIONS) Assets Current assets.......................................... $ 314 $122 $ 554 $ 990 Property, plant and equipment, net...................... 12 629 3,104 3,745 Other assets............................................ 1,088 -- 910 1,998 ------ ---- ------ ------ $1,414 $751 $4,568 $6,733 ====== ==== ====== ====== Liabilities Current liabilities..................................... $ 234 $ 75 $ 240 $ 549 Long-term debt and other non-current liabilities........ 562 523 3,079 4,164 Equity.................................................... 618 153 1,249 2,020 ------ ---- ------ ------ $1,414 $751 $4,568 $6,733 ====== ==== ====== ======

DECEMBER 31, 2003 --------------------------------------------------------------------------- JORF ALL LASFAR(A) FMLP(B) TAWEELAH SCP(C) ATACAMA OTHERS TOTAL(D) --------- ------- -------- ------ ------- ------ -------- (IN MILLIONS) Assets Current assets...................... $ 277 $ -- $ 93 $ 60 $103 $ 326 $ 859 Property, plant and equipment, net.............................. 10 -- 638 383 676 2,099 3,806 Other assets........................ 1,152 893 10 -- 27 715 2,797 -------- ---- ---- ---- ---- ------ ------ $ 1,439 $893 $741 $443 $806 $3,140 $7,462 ======== ==== ==== ==== ==== ====== ====== Liabilities Current liabilities................. $ 314 $ 21 $ 81 $ 19 $ 41 $ 360 $ 836 Long-term debt and other non-current liabilities...................... 612 411 509 225 443 2,315 4,515 Equity................................ 513 461 151 199 322 465 2,111 -------- ---- ---- ---- ---- ------ ------ $ 1,439 $893 $741 $443 $806 $3,140 $7,462 ======== ==== ==== ==== ==== ====== ======
- ------------------------- (a) Our investment in Jorf Lasfar was $309 million at December 31, 2004 and $256 million at December 31, 2003. Our share of net income from Jorf Lasfar was $63 million for the year ended December 31, 2004, $60 million for the year ended December 31, 2003, and $66 million for the year ended December 31, 2002. (b) Under Revised FASB Interpretation No. 46, we are the primary beneficiary of the FMLP and have consolidated their assets, liabilities, and financial activities for 2004. (c) In August 2004, we sold our investment in SCP. (d) For 2003 and 2002, the MCV Partnership was accounted for as an equity method investment but their summarized financial information is not included in these tables. Our 49 percent investment in the MCV Partnership was $419 million at December 31, 2003 and our share of net income was $29 million for the year ended December 31, 2003 and $65 million for the year ended December 31, 2002. Such information is shown below in the section "Summarized Financial Information of Significant Related Energy Supplier." Under Revised FASB Interpretation No. 46, we are the primary beneficiary of the MCV Partnership. We consolidated their assets, liabilities, and financial activities into our financial statements as of and for the CMS-103 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) year ended December 31, 2004. As of December 31, 2004, the MCV Partnership had total assets of $1.980 billion and a net loss of $24 million for the year. SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER: Under the PPA with the MCV Partnership discussed in Note 3, Contingencies, 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 for 2003 and 2002 follows: Statements of Income
YEARS ENDED DECEMBER 31 2003 2002 - ----------------------- ----- ----- (IN MILLIONS) Operating revenue(a)........................................ $584 $597 Operating expenses.......................................... 416 409 ---- ---- Operating income............................................ 168 188 Other expense, net.......................................... 108 114 ---- ---- Income before cumulative effect of accounting change........ 60 74 Cumulative effect of change in method of accounting for derivative options contracts(b)........................... -- 58 ---- ---- Net Income.................................................. $ 60 $132 ==== ====
Balance Sheet
DECEMBER 31 2003 - ----------- ------------- (IN MILLIONS) ASSETS Current assets(c)............ $ 389 Plant, net................... 1,494 Other assets................. 187 ------ $2,070 ======

DECEMBER 31 2003 - ----------- ------------- (IN MILLIONS) LIABILITIES AND EQUITY Current liabilities.......... $ 250 Non-current liabilities(d)... 1,021 Partners' equity(e).......... 799 ------ $2,070 ======
- ------------------------- (a) Revenue from Consumers totaled $514 million in 2003 and $557 million in 2002. (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) in 2002. (c) Receivables from Consumers totaled $40 million for December 31, 2003. (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 the FMLP. The MCV Partnership's CMS-104 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 ----------- ---- (IN MILLIONS) Balance Sheet: MCV Partnership: Lease obligation......................................... $894 FMLP: Non-recourse debt........................................ 431 Lease payment to service non-recourse debt (including interest)................................................ 158 CMS Holdings: Share of interest portion of lease payment............... 37 Share of principle portion of lease payment.............. 36

YEARS ENDED DECEMBER 31 2003 2002 ----------------------- ---- ---- (IN MILLIONS) ~~Income Statement: FMLP: Earnings................................................. $32 $38~~
(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. 13: GOODWILL The changes in the carrying amount of goodwill for the years ended December 31, 2003 and 2004, by reportable segment, are as follows:
ELECTRIC GAS UTILITY UTILITY ENTERPRISES OTHER TOTAL -------- ------- ----------- ----- ----- (IN MILLIONS) Balance as of January 1, 2003......................... $ -- $ -- $ 31 $ -- $ 31 Impairments(a)...................................... -- -- (18) -- (18) Additions........................................... -- -- 5 -- 5 Currency translation adjustment..................... -- -- 6 -- 6 Other/reclassification.............................. -- -- 1 -- 1 ----- ----- ---- ----- ---- Balance as of December 31, 2003....................... $ -- $ -- $ 25 $ -- $ 25 Impairments(b)...................................... -- -- (5) -- (5) Currency translation adjustment..................... -- -- 3 -- 3 ----- ----- ---- ----- ---- Balance as of December 31, 2004....................... $ -- $ -- $ 23 $ -- $ 23 ===== ===== ==== ===== ====
- ------------------------- (a) In 2003, we performed an impairment test on the Enterprises segment which determined the book value of our goodwill related to CPEE exceeded the fair value. Therefore, we recorded a goodwill impairment. (b) In the fourth quarter of 2004, an impairment charge was recorded to recognize a reduction in fair value as a result of the sale of GVK, which included a goodwill impairment of $5 million. We closed on the sale of GVK in February 2005. 14: 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 CMS-105 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ownership interest. The following table indicates the extent of our investment in jointly owned regulated utility facilities:
NET INVESTMENT CONSTRUCTION ----------------- ACCUMULATED WORK IN OWNERSHIP DEPRECIATION PROGRESS SHARE ------------ ------------ DECEMBER 31 (PERCENT) 2004 2003 2004 2003 2004 - ----------- --------- ---- ---- ---- ---- ---- (IN MILLIONS) Campbell Unit 3............................. 93.3 $284 $299 $339 $328 $158 $113 Ludington................................... 51.0 79 84 91 87 -- (1) Distribution................................ Various 77 74 33 32 6 5
15: 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 regulated activities associated with the generation and distribution of electricity in the state of Michigan through our subsidiary, Consumers. The gas utility segment consists of regulated activities associated with the transportation, storage, and distribution of natural gas in the state of Michigan through our 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. Accounting policies of our 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 individual segments where it is appropriate. We allocate accounts between the segments where common accounts are attributable to more than one segment. The allocations are based on certain measures of business activities, such as revenue, labor dollars, customers, other operation and maintenance expense, 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. We account for inter-segment sales and transfers at current market prices and eliminate them in consolidated net income (loss) by segment. The "Other" segment includes corporate interest and other, discontinued operations, and the cumulative effect of accounting changes. The following tables show our financial information by reportable segment: Reportable Segments
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Operating Revenues Electric utility.......................................... $ 2,583 $ 2,583 $ 2,644 Gas utility............................................... 2,081 1,845 1,519 Enterprises............................................... 808 1,085 4,508 Other..................................................... -- -- 2 ------- ------- ------- $ 5,472 $ 5,513 $ 8,673 ======= ======= =======
CMS-106 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Earnings from Equity Method Investees Enterprises............................................... $ 113 $ 164 $ 92 Other..................................................... 2 -- -- ------- ------- ------- $ 115 $ 164 $ 92 ======= ======= ======= Depreciation, Depletion, and Amortization Electric utility.......................................... $ 189 $ 247 $ 228 Gas utility............................................... 112 128 118 Enterprises............................................... 129 52 64 Other..................................................... 1 1 2 ------- ------- ------- $ 431 $ 428 $ 412 ======= ======= ======= Interest Charges Electric utility.......................................... $ 203 $ 164 $ 109 Gas utility............................................... 64 51 36 Enterprises............................................... 87 37 10 Other..................................................... 275 329 265 ------- ------- ------- $ 629 $ 581 $ 420 ======= ======= ======= Income Tax Expense (Benefit) Electric utility.......................................... $ 120 $ 90 $ 138 Gas utility............................................... 40 35 33 Enterprises............................................... (46) 14 (155) Other..................................................... (119) (81) (57) ------- ------- ------- $ (5) $ 58 $ (41) ======= ======= ======= Net Income (Loss) Available to Common Stockholders Electric utility.......................................... $ 223 $ 167 $ 264 Gas utility............................................... 71 38 46 Enterprises............................................... 19 8 (419) Other..................................................... (203) (257) (541) ------- ------- ------- $ 110 $ (44) $ (650) ======= ======= ======= Investments in Equity Method Investees Enterprises............................................... $ 729 $ 1,367 $ 1,367 Other..................................................... 23 23 2 ------- ------- ------- $ 752 $ 1,390 $ 1,369 ======= ======= ======= Total Assets Electric utility(a)....................................... $ 7,289 $ 6,831 $ 6,058 Gas utility(a)............................................ 3,187 2,983 2,586 Enterprises............................................... 4,980 3,670 5,724 Other..................................................... 416 354 413 ------- ------- ------- $15,872 $13,838 $14,781 ======= ======= =======
CMS-107 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Capital Expenditures(b) Electric utility.......................................... $ 360 $ 310 $ 437 Gas utility............................................... 137 135 181 Enterprises............................................... 37 49 235 Other..................................................... 1 -- 8 ------- ------- ------- $ 535 $ 494 $ 861 ======= ======= =======
Geographic Areas(c)
2004 2003 2002 ---- ---- ---- (IN MILLIONS) United States Operating Revenue......................................... $ 5,163 $ 5,222 $ 8,361 Operating Income (Loss)................................... 586 511 (36) Total Assets.............................................. 14,419 12,372 13,355 International Operating Revenue......................................... $ 309 $ 291 $ 312 Operating Income.......................................... 7 84 111 Total Assets.............................................. 1,453 1,466 1,426
- ------------------------- (a) Amounts includes a portion of Consumers' assets for both the Electric and Gas utility units. (b) Amounts include electric restructuring implementation plan, purchase of nuclear fuel, and other assets. 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. 16: IMPLEMENTATION OF NEW ACCOUNTING STANDARDS FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: The 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, known as the primary beneficiary, in a variable interest entity to consolidate the entity. In December 2003, the FASB issued Revised FASB Interpretation No. 46. For entities that had not previously adopted FASB Interpretation No. 46, Revised FASB Interpretation No. 46 provided an implementation deferral until the first quarter of 2004. As of and for the quarter ended March 31, 2004, we adopted Revised FASB Interpretation No. 46 for all entities. We determined that we are the primary beneficiary of both the MCV Partnership and the FMLP. We have a 49 percent partnership interest in the MCV Partnership and a 46.4 percent partnership interest in the FMLP. Consumers is the primary purchaser of power from the MCV Partnership through a long-term power purchase agreement. The FMLP holds a 75.5 percent lessor interest in the MCV Facility, which results in Consumers holding a 35 percent lessor interest in the MCV Facility. Collectively, these interests make us the primary beneficiary of these entities. As such, we consolidated their assets, liabilities, and activities into our financial statements as of and for the year ended December 31, 2004. These partnerships have third-party obligations totaling $582 million at December 31, 2004. Property, plant, and equipment serving as collateral for these CMS-108 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) obligations has a carrying value of $1.426 billion at December 31, 2004. The creditors of these partnerships do not have recourse to the general credit of CMS Energy. At December 31, 2003, we determined that we are the primary beneficiary of three other entities that are determined to be variable interest entities. We have 50 percent partnership interest in the T.E.S. Filer City Station Limited Partnership, the Grayling Generating Station Limited Partnership, and the 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 make us the primary beneficiary as defined by the Interpretation. Therefore, we consolidated these partnerships into our consolidated financial statements beginning in 2003. These partnerships have third-party obligations totaling $116 million at December 31, 2004. Property, plant, and equipment serving as collateral for these obligations has a carrying value of $168 million as of December 31, 2004. Other than outstanding letters of credit and guarantees of $5 million, the creditors of these partnerships do not have recourse to the general credit of CMS Energy. We determined that we are not the primary beneficiary of our trust preferred security structures. Accordingly, those entities were deconsolidated as of December 31, 2003. Company Obligated Trust Preferred Securities totaling $663 million that were previously included in mezzanine equity, were eliminated due to deconsolidation. At December 31, 2004, we reflected Long-term debt -- related parties of $504 million, current portion of Long-term debt -- related parties of $180 million, and an investment in related parties of $21 million. We are not required to restate prior periods for the impact of this accounting change. Additionally, we have variable interest entities in which we are not the primary beneficiary. FASB Interpretation No. 46 requires us to disclose certain information about these entities. The following chart details our involvement in these entities at December 31, 2004:
INVESTMENT OPERATING TOTAL NAME NATURE OF THE INVOLVEMENT BALANCE AGREEMENT WITH GENERATING (OWNERSHIP INTEREST) ENTITY COUNTRY DATE (IN MILLIONS) CMS ENERGY CAPACITY - -------------------- ------------- ------- ----------- ------------- -------------- ---------- Taweelah (40%) Generator United Arab 1999 $ 81 Yes 777 MW Emirates Jubail (25%) Generator -- Saudi Arabia 2001 $ -- Yes 250 MW Under Construction Shuweihat (20%) Generator United Arab 2001 $ 41(a) Yes 1,500 MW Emirates ---- -------- Total $122 2,527 MW ==== ========
- ------------------------- (a) At December 31, 2004, the balance includes our proportionate share of the negative fair value of derivative instruments of $25 million. Our maximum exposure to loss through our interests in these variable interest entities is limited to our investment balance of $122 million, and letters of credit, guarantees, and indemnities relating to Taweelah and Shuweihat totaling $84 million. In the third quarter of 2004, we contributed an investment of $70 million in Shuweihat. The contribution was made pursuant to the Shuweihat Shareholders' Agreement, which was entered into in 2001. FASB STAFF POSITION, NO. SFAS 106-2, ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT, AND MODERNIZATION ACT OF 2003: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) was signed into law in December 2003. The Act establishes a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy, which is exempt CMS-109 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) from federal taxation, to sponsors of retiree health care benefit plans that provide a benefit that is actuarially equivalent to Medicare Part D. We believe our plan is actuarially equivalent to Medicare Part D and have incorporated retroactively the effects of the subsidy into our financial statements as of June 30, 2004, in accordance with FASB Staff Position, No. SFAS 106-2. We remeasured our obligation as of December 31, 2003 to incorporate the impact of the Act, which resulted in a reduction to the accumulated postretirement benefit obligation of $158 million. The remeasurement resulted in a total OPEB cost reduction of $24 million for 2004. Consumers capitalizes a portion of OPEB cost in accordance with regulatory accounting. As such, the remeasurement resulted in a net reduction of OPEB expense of $17 million for 2004. EITF ISSUE NO. 04-8, THE EFFECT OF CONTINGENTLY CONVERTIBLE DEBT ON DILUTED EARNINGS PER SHARE: At its September 2004 meeting, the EITF reached a final consensus that contingently convertible instruments should be included in the diluted earnings per share computation (if dilutive) regardless of whether the market price trigger has been met. In December 2004, we completed an exchange offer for our 3.375 percent contingently convertible senior notes and our 4.50 percent contingently convertible preferred stock. For additional information, see Note 4, Financings and Capitalization, "Contingently Convertible Securities." We adopted the provisions of EITF Issue No. 04-8 as of December 31, 2004. Upon adoption, our 2004 year-to-date diluted earnings per share was reduced by $0.01 per share. Adoption of this EITF Issue did not impact our diluted earnings per share for any prior periods. FSP 109-1, ACCOUNTING AND DISCLOSURE GUIDANCE FOR THE TAX DEDUCTION PROVIDED TO U.S. BASED MANUFACTURERS BY THE AMERICAN JOBS CREATION ACT OF 2004: The American Jobs Creation Act of 2004 provides for a deduction, starting in 2005, of a portion of the income from certain production activities, including the production of electricity. FSP 109-1 indicates that the deduction should be accounted for as a special deduction rather than a tax rate reduction under SFAS No. 109. We are currently studying this act for its impact on us; however, we do not anticipate a material amount of tax benefit from the domestic production activities deduction in the near future. FSP 109-2, ACCOUNTING AND DISCLOSURE GUIDANCE FOR THE FOREIGN EARNINGS REPATRIATION PROVISION WITHIN THE AMERICAN JOBS CREATION ACT OF 2004: The American Jobs Creation Act of 2004 creates a one-year opportunity to receive a tax benefit for U.S. corporations that reinvest dividends from controlled foreign corporations in the U.S. in a 12-month period (2005 for CMS Energy). Although the tax benefit is subject to a number of limitations, we believe that we have the information necessary to make an informed decision on the impact of this act on our repatriation plan. FSP 109-2 provides accounting guidance and disclosure requirements relating to this act. For additional details, see Note 9, Income Taxes. EITF ISSUE NO. 03-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENTS: The Issue addresses the definition of an other-than-temporary impairment of certain investments and provides additional disclosure requirements. The scope of EITF Issue No. 03-1 includes debt and equity securities accounted for under SFAS No. 115, debt and equity securities held by non-profit organizations under SFAS No. 124, and cost method investments under APB No. 18. We analyzed our in-scope investments under the guidance of this Issue and have provided additional disclosures. NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE SFAS NO. 123R, SHARE-BASED PAYMENT: The Statement requires companies to expense the grant date fair value of employee stock options and similar awards. The Statement also clarifies and expands SFAS No. 123's guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods. CMS-110 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In addition, this Statement amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits related to the excess of the tax deductible amount over the compensation cost recognized be classified as a financing cash inflow rather than as a reduction of taxes paid in operating cash flows. This Statement is effective for us as of the beginning of the third quarter of 2005. We adopted the fair value method of accounting for share-based awards effective December 2002, and therefore, expect this Statement to have an insignificant impact on our results of operations when it becomes effective. 17: QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION (UNAUDITED)
2004 ------------------------------------------ QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - -------------- -------- ------- -------- ------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Operating revenue(a)....................................... $1,754 $1,093 $1,063 $1,562 Operating income(a)(d)..................................... 145 148 158 142 Income (loss) from continuing operations(d)................ (2) 19 51 59 Income (loss) from discontinued operations(b).............. (2) -- 8 (10) Cumulative effect of change in accounting(b)(c)............ (2) -- -- -- Net income (loss)(c)(d).................................... (6) 19 59 49 Preferred dividends........................................ 3 3 3 2 Net income (loss) available to common stockholders(c)(d)... (9) 16 56 47 Income (loss) from continuing operations per average common share -- basic........................................... (0.04) 0.10 0.30 0.30 Income (loss) from continuing operations per average common share -- diluted......................................... (0.04) 0.10 0.29 0.29 Basic earnings (loss) per average common share(e).......... (0.06) 0.10 0.35 0.25 Diluted earnings (loss) per average common share(e)........ (0.06) 0.10 0.34 0.24 Common stock prices(f) High..................................................... 9.51 9.32 9.73 10.53 Low...................................................... 8.36 7.90 8.59 8.93 ====== ====== ====== ======
CMS-111 CMS ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2003 ------------------------------------------ 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) (34) Discontinued operations(b)................................. 31 (53) 2 43 Cumulative effect of change in accounting(b)............... (24) -- -- -- Net income (loss).......................................... 82 (65) (69) 9 Preferred dividends........................................ -- -- -- 1 Net income (loss) available to common stockholders......... 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(e).......... 0.57 (0.45) (0.46) 0.05 Diluted earnings (loss) per average common share(e)........ 0.52 (0.45) (0.46) 0.05 Common stock prices(f) High..................................................... 10.59 8.50 7.99 8.63 Low...................................................... 3.49 4.58 6.11 7.44 ====== ====== ====== ======
- ------------------------- (a) As of March 31, 2004, we determined that the MCV Partnership and the FMLP should be consolidated in accordance with revised FASB Interpretation No. 46. As such, we consolidated their financial activities into our financial statements as of and for the year ended December 31, 2004. For additional details, see Note 16, Implementation of New Accounting Standards. (b) Net of tax. (c) Quarterly data for March 31, 2004 differs from amounts previously reported as a result of accelerating the measurement date on our benefit plans by one month. For additional information, see Note 7, Retirement Benefits. (d) Quarterly data for March 31, 2004 differs from amounts previously reported due to the remeasurement of our post retirement benefit obligation in accordance with FASB Staff Position, No. SFAS 106-2. For additional information, see Note 16, Implementation of New Accounting Standards. (e) Sum of the quarters may not equal the annual earnings per share due to changes in shares outstanding. (f) Based on New York Stock Exchange -- Composite transactions. CMS-112 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of CMS Energy Corporation We have audited the accompanying consolidated balance sheets of CMS Energy Corporation (a Michigan corporation) as of December 31, 2004 and 2003, 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, 2004. 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 49% owned variable interest entity which has been consolidated in 2004 pursuant to Revised Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities" and accounted for under the equity method of accounting in 2003 and 2002 and Jorf Lasfar Energy Company S.C.A., which represents an investment accounted for under the equity method of accounting, have been audited by other auditors 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 the standards of the Public Company Accounting Oversight Board (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 at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles. 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 Note 16 to the consolidated financial statements, in 2004, the Company adopted Revised Financial Accounting Standards Board (FASB) Interpretation No. 46, "Consolidation of Variable Interest Entities". In addition, as discussed in Note 7 to the consolidated financial statements, in 2004, the Company changed its measurement date for all CMS Energy Corporation pension and postretirement benefit plans. As discussed in Notes 6, 8, and 16 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 FASB Interpretation No. 46, "Consolidation of Variable Interest Entities". We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of CMS Energy Corporation's internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2005 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP Detroit, Michigan March 7, 2005 CMS-113 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Partners and the Management Committee of Midland Cogeneration Venture Limited Partnership: We have completed an integrated audit of Midland Cogeneration Venture Limited Partnership's 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. CONSOLIDATED FINANCIAL STATEMENTS In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, partners' equity and cash flows (not presented herein) present fairly, in all material respects, the financial position of Midland Cogeneration Limited Partnership (a Michigan limited partnership) and its subsidiaries (MCV) at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 the standards of the Public Company Accounting Oversight Board (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 of financial statements 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. 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. INTERNAL CONTROL OVER FINANCIAL REPORTING Also, in our opinion, management's assessment, included in Management's Report on Internal Control Over Financial Reporting, that MCV maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, MCV maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by COSO. MCV's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of MCV's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, CMS-114 accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Detroit, Michigan February 25, 2005 CMS-115 REPORT OF INDEPENDENT AUDITORS To the Management Committee and Stockholders of Jorf Lasfar Energy Company S.C.A. B.P. 99 Sidi Bouzid El Jadida We have audited the accompanying balance sheets of Jorf Lasfar Energy Company S.C.A. (the "Company") as of December 31, 2004, 2003 and 2002, 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 the standards of the Public Company Accounting Oversight Board (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, 2004, 2003 and 2002, 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. /s/ Price Waterhouse Price Waterhouse Casablanca, Morocco, February 11, 2005 CMS-116 [CONSUMERS ENERGY LOGO] 2004 CONSOLIDATED FINANCIAL STATEMENTS CE-1 CONSUMERS ENERGY COMPANY SELECTED FINANCIAL INFORMATION
2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- Operating revenue (in millions)................... ($) 4,711 4,435 4,169 3,976 3,878 Earnings from equity method investees (in millions)....................................... ($) 1 42 53 38 57 Income before cumulative effect of change in accounting principle (in millions).............. ($) 280 196 363 199 284 Net income (in millions)(a)....................... ($) 279 196 381 188 284 Net income available to common stockholder (in millions)....................................... ($) 277 194 335 145 248 Cash from operations (in millions)................ ($) 640 5 760 518 515 Capital expenditures, excluding capital lease additions (in millions)......................... ($) 508 486 559 745 498 Total assets (in millions)(b)..................... ($) 12,811 10,745 9,598 9,191 8,672 Long-term debt, excluding current portion (in millions)(b).................................... ($) 4,000 3,583 2,442 2,472 2,110 Long-term debt -- related parties, excluding current portion (in millions)(c)................ ($) 326 506 -- -- -- Non-current portion of capital leases (in millions)....................................... ($) 315 58 116 72 49 Total preferred stock (in millions)............... ($) 44 44 44 44 44 Total Trust Preferred Securities (in millions)(c).................................... ($) -- -- 490 520 395 Number of preferred shareholders at year-end...... 1,931 2,032 2,132 2,220 2,365 Book value per common share at year-end........... ($) 28.68 24.51 22.46 22.81 23.85 Number of full-time equivalent employees at year-end Consumers.................................... 8,050 7,947 8,311 8,405 8,698 Michigan Gas Storage(d)...................... -- -- -- 62 57 ELECTRIC STATISTICS Sales (billions of kWh)......................... 40 39 39 40 41 Customers (in thousands)........................ 1,772 1,754 1,734 1,712 1,691 Average sales rate per kWh...................... (c) 6.88 6.91 6.88 6.65 6.56 GAS UTILITY STATISTICS Sales and transportation deliveries (bcf)....... 385 380 376 367 410 Customers (in thousands)(e)..................... 1,691 1,671 1,652 1,630 1,611 Average sales rate per mcf...................... ($) 8.04 6.72 5.67 5.34 4.39
- ------------------------- (a) See Notes 1 and 2 in the notes to the consolidated financial statements. (b) Under revised FASB Interpretation No. 46, we are the primary beneficiary of the MCV Partnership and the FMLP. As a result, we have consolidated their assets, liabilities and activities into our financial statements as of and for the year ended December 31, 2004. These partnerships had third party obligations totaling $582 million at December 31, 2004. Property, plant and equipment serving as collateral for these obligations had a carrying value of $1.426 billion at December 31, 2004. (c) Effective December 31, 2003, Trust Preferred Securities are classified on the balance sheets as Long-term debt -- related parties. (d) Effective November 2002, Michigan Gas Storage Company was merged into Consumers. (e) Excludes off-system transportation customers. 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 of services each provides. We 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 include the purchase, transportation, storage, distribution, and sale of natural gas. We earn our revenue and generate cash from operations by providing electric and natural gas utility services, electric power generation, gas transmission and storage, and other energy related services. Our businesses are affected primarily 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 business strategy involves improving our balance sheet and maintaining focus on our core strength: superior utility operation and service. Over the next few years, we expect that this strategy will result in improved credit ratings, earnings growth, and a company positioned to make new investments. Despite strong financial and operational performance, we face important challenges in the future. We continue to lose industrial and commercial customers to alternative electric suppliers as a result of Michigan's Customer Choice Act. As of March 2005, we have lost 900 MW, or 12 percent, of our electric load to these alternative electric suppliers. Based on current trends, we predict total load loss by the end of 2005 to be in the range of 1,000 MW to 1,200 MW. However, no assurance can be made that the actual load loss will fall within that range. Existing state legislation encourages competition and provides for recovery of Stranded Costs caused by the lost sales. In fact, in November 2004, the MPSC ordered us to recover 2002 and 2003 Stranded Costs in the amount of $63 million. In 2004, several bills were introduced into the Michigan Senate that could change Michigan's Customer Choice Act. Another important challenge relates to the economics of the MCV Partnership. 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 and the price the MCV Partnership can charge us for energy has not, the MCV Partnership's financial performance has been impacted negatively. In January 2005, the MPSC issued an order approving the RCP to change the way the facility is used. The purpose of the RCP is to conserve natural gas through a change in the dispatch of the MCV Facility and thereby improve the financial performance of the MCV Partnership without increased costs to customers. The approved plan will: - allow for dispatching the MCV Facility based on natural gas market prices, which is expected to reduce gas consumption by an estimated 30 to 40 bcf per year, CE-3 - allocate 50 percent of our direct savings to customers in 2005 and 70 percent of our direct savings to customers thereafter, and - fund $5 million annually for renewable energy sources such as wind power projects. We are focused on further reducing our business, financial, and regulatory risks, while growing the equity base of our company. In 2004, we issued over $1 billion in FMBs. Proceeds from these transactions were used to retire other higher-interest rate long-term debt. Also in 2004, we received cash contributions from CMS Energy of $250 million, providing additional liquidity and flexibility for our operations. In January 2005, we continued to retire higher-interest rate debt through the use of proceeds from the issuance of $250 million of FMBs. We also received an additional cash contribution from CMS Energy of $200 million in January 2005. The efforts, and others, are designed to lead us to be a strong, reliable utility company that will be poised to take advantage of opportunities for further growth. CONSOLIDATION OF THE MCV PARTNERSHIP AND THE FMLP Under Revised FASB Interpretation No. 46, we are the primary beneficiary of the MCV Partnership and the FMLP. As a result, we have consolidated the assets, liabilities, and activities of these entities into our financial statements as of and for the year ended December 31, 2004. These entities are reported as equity method investments in our financial statements for all periods prior to January 1, 2004. For additional details, see Note 13, Implementation of New Accounting Standards. 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 by the Private Securities Litigation Reform Act of 1995. 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: - capital and financial market conditions, including the price of CMS Energy Common Stock and the effect of such market conditions on the Pension Plan, interest rates, and access to the capital markets as well as 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, - credit 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, - international, national, regional, and local economic, competitive, and regulatory policies, conditions and developments, - adverse regulatory or legal decisions, including those related to environmental laws and regulations, and potential environmental remediation costs associated with such decisions, - potentially adverse regulatory treatment and/or regulatory lag concerning a number of significant questions presently before the MPSC relating to the Customer Choice Act including: - recovery of future Stranded Costs incurred due to customers choosing alternative energy suppliers, - recovery of Clean Air Act costs and other environmental and safety-related expenditures, - power supply and natural gas supply costs when oil prices and other fuel prices are rapidly increasing, CE-4 - timely recognition in rates of additional equity investments in Consumers, and - adequate and timely recovery of additional electric and gas rate-based expenditures, - the impact of adverse natural gas prices on the MCV Partnership investment, and regulatory decisions that limit our recovery of capacity and fixed energy payments, - federal regulation of electric sales and transmission of electricity including periodic re-examination by federal regulators of our market-based sales authorizations in wholesale power markets without price restrictions, - energy markets, including the timing and extent of changes in commodity prices for oil, coal, natural gas, natural gas liquids, electricity, and certain related products due to lower or higher demand, shortages, transportation problems, or other developments, - potential for the Midwest Energy Market to develop into an active energy market in the state of Michigan, which may lead us to account for electric capacity and energy contracts with the MCV Partnership and other independent power producers as derivatives, - the GAAP requirement that we utilize mark-to-market accounting on certain of our energy commodity contracts and interest rate swaps, which may have, in any given period, a significant positive or negative effect on earnings, which could change dramatically or be eliminated in subsequent periods and could add to earnings volatility, - 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, - achievement of capital expenditure and operating expense goals, - changes in financial or regulatory accounting principles or policies, - outcome, cost, and other effects of legal and administrative proceedings, settlements, investigations and claims, - 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 Consumers' or CMS Energy's 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. CE-5 RESULTS OF OPERATIONS NET INCOME AVAILABLE TO COMMON STOCKHOLDER
YEARS ENDED DECEMBER 31, ------------------------------------------------ 2004 2003 CHANGE 2003 2002 CHANGE ---- ---- ------ ---- ---- ------ (IN MILLIONS) Net income available to common stockholder Electric......................................... $222 $167 $55 $167 $264 $ (97) Gas.............................................. 71 38 33 38 46 (8) Other (Includes MCV partnership interest)........ (16) (11) (5) (11) 25 (36) ---- ---- --- ---- ---- ----- Total net income available to common stockholder... $277 $194 $83 $194 $335 $(141) ==== ==== === ==== ==== =====
For the year 2004, our net income available to the common stockholder was $277 million, compared to net income available to the common stockholder of $194 million for the year 2003. The $83 million increase in net income available to the common stockholder reflects: - an $82 million decrease in operating expense, reflecting the MPSC's approval for recovery of stranded costs for 2002 and 2003, the deferral of electric depreciation expense on our excess capital expenditures as permitted by the Customer Choice Act, reduced gas depreciation rates as authorized by the MPSC, decreased pension costs, and the 2004 reduction to benefit expense due to the subsidy provided under Part D of the Medicare Prescription Drug, Improvement and Modernization Act, - a $73 million increase in other income, reflecting the return on certain costs recoverable under the Customer Choice Act beginning in 2004, - an $18 million increase in gas utility revenues due to the MPSC's December 2003 interim and October 2004 final gas rate orders, - the absence of a $12 million charge taken in 2003 to reflect a decline in the market value of CMS Energy common stock held by us, - a $5 million increase in gas wholesale and retail services and other gas revenues, primarily due to the absence of a 2003 revenue reduction due to the 2002-2003 GCR disallowance. These increases to net income available to the common stockholder were offset partially by reductions to net income available to the common stockholder from: - a $33 million increase in fixed charges because we expensed capitalized interest on the Clean Air Act costs incurred during the period of June 2000 through December 2003 and increased our average borrowings, - a $22 million decrease in electric delivery revenue primarily due to tariff revenue reductions, customers choosing alternative electric suppliers, and milder summer temperatures' negative impact on air conditioning usage, - a $19 million decrease in earnings from our ownership interest in the MCV Partnership primarily due to increases in non-recoverable fuel costs incurred at the MCV Facility, - a $20 million underrecovery of power supply revenue due to non-recoverable power supply costs related to capped customers, - an $8 million increase in general taxes primarily due to the absence of a 2003 reduction to MSBT expense from a tax credit received for construction of our corporate headquarters on a Brownfield site, and - a $5 million reduction in gas delivery revenue due to milder weather. CE-6 For the year 2003, our net income available to the common stockholder was $194 million, compared to net income available to the common stockholder of $335 million for the year 2002. The $141 million decrease in net income available to the common stockholder primarily reflects: - an $80 million increase in operating expense due to higher pension and other benefit costs, and increased depreciation and amortization expense, - a $27 million decrease in electric delivery revenue due to milder summer weather and the migration of commercial and industrial customers to alternative electric suppliers, - a $27 million decline in earnings from our ownership interest in the MCV Partnership primarily due to the decrease in fair value of certain gas contracts held by the MCV Partnership, - a $23 million increase in fixed charges due to higher average debt levels and higher average interest rates, - a $7 million charge at CMS Holdings to reflect the loss of certain tax credits, and - the absence of a $31 million gain primarily associated with the sale of our electric transmission system in 2002. These decreases to net income were offset partially by increases to net income from: - a $25 million increase in gas tariff rates authorized by the MPSC in late 2002, - an $8 million decrease of general tax expense primarily due to reduced MSBT expense from a tax credit received for building our corporate headquarters on a Brownfield site, and - a $17 million benefit from power supply overrecoveries due to lower average fuel costs and higher market prices for excess capacity sold. For additional details, see "Electric Utility Results of Operations" and "Gas Utility Results of Operations" within this section and Note 2, Contingencies. ELECTRIC UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------------ 2004 2003 CHANGE 2003 2002 CHANGE ---- ---- ------ ---- ---- ------ (IN MILLIONS) Net income......................................... $222 $167 $ 55 $167 $264 $(97) ==== ==== ==== ==== ==== ==== Reasons for the change: Electric deliveries................................ $(34) $(41) Power supply costs and related revenue............. (31) 26 Other operating expenses, other income and non-commodity revenue............................ 86 (80) Regulatory return on capital expenditures.......... 113 -- Gain on asset sales................................ -- (38) General taxes...................................... (8) 10 Fixed charges...................................... (40) (22) Income taxes....................................... (30) 48 Cumulative effect of change in accounting, net of tax expense...................................... (1) -- ---- ---- Total change....................................... $ 55 $(97) ==== ====
ELECTRIC DELIVERIES: For the year 2004, electric deliveries including transactions with other wholesale marketers, other electric utilities, and customers choosing alternative electric suppliers increased 1.3 billion kWh or 3.3 percent versus 2003. Despite the increase in electric deliveries, electric delivery revenue decreased due to the milder summer temperatures' negative impact on higher margin residential customer air conditioning usage, customers choosing alternative electric suppliers, and tariff revenue reductions. The tariff revenue reductions CE-7 began on January 1, 2004, and were equivalent to the Big Rock nuclear decommissioning surcharge in effect when our electric retail rates were frozen from June 2000 through December 31, 2003. The tariff revenue reductions decreased electric delivery revenue by $35 million. Surcharges related to the recovery of costs incurred in the transition to customer choice offset partially the reductions to electric delivery revenue. Recovery of these costs began on July 1, 2004 and increased electric delivery revenue by $10 million. For the year 2003, electric delivery revenue decreased, reflecting lower deliveries versus 2002. Most significantly, sales volumes to commercial and industrial customers were lower than in 2002, a result of these sectors' continued migration to alternative electric suppliers as allowed by the Customer Choice Act. Milder summer temperatures reduced air conditioning usage by the higher-margin residential customers, further decreasing electric delivery revenue. Overall, electric deliveries, including transactions with other wholesale marketers and other electric utilities, decreased 0.4 billion kWh or 1.1 percent. POWER SUPPLY COSTS AND RELATED REVENUE: For the year 2004, our recovery of power supply costs was capped for the residential and small commercial customer classes. Operating income decreased $31 million in 2004 versus 2003 primarily due to power supply-related costs exceeding power supply-related revenue charged to capped customers. Power supply-related costs increased in 2004 primarily due to higher priced purchased power necessary to replace the generation loss from an extended refueling outage at our Palisades nuclear generating plant and higher coal prices. For the year 2003, our recovery of power supply costs was fixed for all customers, 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 revenue had been less than actual power supply costs, the impact would have decreased operating income. For the year 2003, power supply-related revenue in excess of actual power supply costs benefited operating income by $26 million versus 2002. This increase was primarily the result of increased intersystem revenue, efficient operation of our generating plants, and lower priced purchased power. OTHER OPERATING EXPENSES, OTHER INCOME AND NON-COMMODITY REVENUE: For the year 2004, other income increased $7 million, other operating expenses decreased $82 million, and non-commodity revenue decreased $3 million versus 2003. Other income increased primarily due to $7 million of interest income related to our 2002 and 2003 Stranded Cost recovery as authorized by the MPSC. Our recognition of this recovery decreased operating expense $57 million in 2004, and along with decreased depreciation, pension, and benefit costs contributed to the reduction in other operating expenses. The decrease in depreciation expense reflects our ability to defer depreciation expense on the excess of capital expenditures over our depreciation base as authorized by the Customer Choice Act. The decrease in pension expense reflects fewer current year retirees choosing to receive a single lump sum distribution, and increased plan earnings from higher average plan assets. The reduction in benefit expense is due to the subsidy provided under Part D of the Medicare Prescription Drug, Improvement and Modernization Act. For the year 2003, net other operating expenses, other income and non-commodity revenue decreased operating income versus 2002. The decrease related to increased pension and other benefit costs, a scheduled refueling outage at Palisades, and higher transmission costs. In addition, depreciation and amortization expense increased, reflecting higher levels of plant in service, and higher amortization of securitized assets. Higher non-commodity revenue associated with other income offset slightly the increased operating expenses. REGULATORY RETURN ON CAPITAL EXPENDITURES: As allowed by Section 10d(4) of the Customer Choice Act, on January 1, 2004, we began recording the 2004 portion of the return on certain capital expenditures incurred during the rate freeze period of June 2000 through December 2003. This increased income by $41 million in 2004. Based on an interpretation of the Customer Choice Act by the MPSC in a rate order involving Detroit Edison, in November 2004 we recorded an additional $72 million return on Clean Air Act costs incurred during the period of June 2000 through December 2003. CE-8 GAIN ON ASSET SALES: The reduction in operating income from asset sales for 2003 versus 2002 reflected 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: For the year 2004, general taxes increased primarily due to increases in property tax expense and the absence of a MSBT credit received in 2003. The 2003 MSBT credit was associated with the construction of our corporate headquarters on a qualifying Brownfield site. For the year 2003, this MSBT credit decreased general taxes versus 2002. FIXED CHARGES: Fixed charges increased for the year 2004 versus 2003 due to higher average debt levels, offset partially by a 46 basis point reduction in the average rate of interest. Additionally, to recognize a recently issued interpretation of the Customer Choice Act by the MPSC, we expensed $31 million of capitalized interest in November related to Clean Air Act costs incurred during the period of June 2000 through December 2003. For the year 2003, fixed charges increased versus 2002 due to higher average debt levels and higher average interest rates. INCOME TAXES: For the year 2004, income taxes increased due to increased earnings from the electric utility versus 2003. The increase in income taxes from the tax treatment of items related to plant, property and equipment as required by past MPSC orders was offset by Part D of the Medicare Prescription Drug, Improvement and Modernization Act which provides a subsidy that is exempt from federal taxation. For the year 2003, income tax expense decreased versus 2002 primarily due to lower earnings by the electric utility. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING, NET OF TAX EXPENSE: The measurement date for all of Consumers' plans is November 30 for 2004, and December 31 for 2003 and 2002. We believe accelerating the measurement date on our benefit plans by one month is preferable as it improves control procedures and allows more time to review the completeness and accuracy of the actuarial measurements. As a result of the measurement date change, we recorded a $1 million, net of tax, cumulative effect adjustment as a decrease to earnings. For additional details, see Note 5, Retirement Benefits. GAS UTILITY RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------- 2004 2003 CHANGE 2003 2002 CHANGE ---- ---- ------ ---- ---- ------ (IN MILLIONS) Net income......................................... $71 $38 $ 33 $38 $46 $ (8) === === ==== === === ==== Reasons for the change: Gas deliveries..................................... $ (7) $ (1) Gas rate increase.................................. 28 39 Gas wholesale and retail services, other gas revenue and other income......................... 8 2 Operation and maintenance.......................... 11 (34) General taxes...................................... (4) 3 Depreciation....................................... 16 (10) Fixed charges...................................... (14) (5) Income taxes....................................... (5) (2) ---- ---- Total change....................................... $ 33 $ (8) ==== ====
GAS DELIVERIES: For the year 2004, gas deliveries, including transportation to end-use customers, decreased 15.5 bcf or 4.6 percent due to milder weather versus 2003. Most significantly, temperatures in the first quarter of the year were 12.1 percent warmer than in the same period in 2003. For the year 2003, gas deliveries, including miscellaneous transportation, increased due to colder weather during the first quarter of 2003 versus 2002. Increased deliveries to the residential and commercial sectors resulted in a $6 million increase in gas revenue. This revenue increase was offset by a $7 million reduction to gas revenue associated with our analysis of gas losses related to the gas transmission and distribution system. CE-9 GAS RATE INCREASE: In December 2003, the MPSC issued an interim gas rate order authorizing a $19 million annual increase to gas tariff rates. In October 2004, the MPSC issued a final order authorizing an increase of $58 million in each of the next two years. As a result of these orders, gas revenues increased $28 million for the year 2004 versus 2003. 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, gas revenue increased $39 million for the year 2003 versus 2002. GAS WHOLESALE AND RETAIL SERVICES, OTHER GAS REVENUE AND OTHER INCOME: In 2004, gas wholesale and retail services and other gas revenue increased primarily due to the absence of certain 2003 reductions to revenue. In 2003, gas revenue was reduced primarily due to an $11 million 2002-2003 GCR disallowance. For the year 2003, gas wholesale and retail services and other gas revenue increased versus 2002. This increase was primarily due to increased gas title tracking services and miscellaneous revenue in 2003. The increased revenue was offset partially by a disallowance for the 2002-2003 GCR year. OPERATION AND MAINTENANCE: For the year 2004 versus 2003, operation and maintenance expenses decreased versus 2003 primarily due to reduced pension and benefit expense of $23 million. The decrease in pension expense reflects fewer current year retirees choosing to receive a single lump sum distribution, and increased plan earnings from higher average plan assets. The reduction in benefit expense is due to the subsidy provided under Part D of the Medicare Prescription Drug, Improvement and Modernization Act. These reductions were offset partially by additional expenditures on safety, reliability, and customer service. For the year 2003, operation and maintenance expenses increased versus 2002 due to increases in pension and other benefit costs of $27 million and additional expenditures on safety, reliability, and customer service. GENERAL TAXES: For the year 2004, general taxes increased due to the absence of a MSBT credit received in 2003. The 2003 MSBT credit received from the State of Michigan was associated with the construction of our corporate headquarters on a qualifying Brownfield site. For the year 2003, this MSBT credit decreased general taxes versus 2002. DEPRECIATION: For the year 2004 versus 2003, depreciation expense decreased primarily due to reduced rates authorized by the MPSC's December 2003 interim rate order and the MPSC's October 2004 order, as modified by its December 2004 order granting rehearing. For the year 2003, depreciation expense increased because of increased plant in service versus 2002. FIXED CHARGES: Fixed charges increased for the year 2004 versus 2003 due to higher average debt levels, offset partially by a 46 basis point reduction in the average rate of interest. For the year 2003, fixed charges increased versus 2002 due to higher average debt levels and higher average interest rates. INCOME TAXES: For the year 2004, income taxes increased due to increased earnings from the gas utility versus 2003. The increase in income taxes was offset partially by reductions from the tax treatment of items related to plant, property and equipment as required by past MPSC orders, and by Part D of the Medicare Prescription Drug, Improvement and Modernization Act which provides a subsidy that is exempt from federal taxation. For the year 2003 versus 2002, income tax expense increased primarily due to the tax treatment of items related to plant, property and equipment as required by past MPSC orders. CRITICAL ACCOUNTING POLICIES The following accounting policies are important to an understanding of our results of operations and financial condition and should be considered an integral part of our MD&A: - use of estimates and assumptions in accounting for contingencies and equity method investments, - accounting for the effects of industry regulation, - accounting for financial and derivative instruments and market risk information, CE-10 - accounting for pension and OPEB, - 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 of loss is probable and the amount of loss can be reasonably estimated. 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. The cost that we incur under the MCV Partnership PPA exceeds the recovery amount allowed by the MPSC. As a result, we estimate that cash underrecoveries of capacity and fixed energy payments will aggregate $150 million from 2005 through 2007. After September 15, 2007, we expect to claim relief under the regulatory out provision in the PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amounts collected from our 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 investment, and - eliminate our underrecoveries of capacity and fixed energy payments. The MCV Partnership has indicated that it may take issue with our exercise of the regulatory out clause after September 2007. We believe that the clause is valid and fully effective, but cannot assure that it will prevail in the event of a dispute. 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 investment in the MCV Partnership. Further, under the PPA, variable energy payments to the MCV Partnership are based on the cost of coal burned at our coal plants and our 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 and the price the MCV Partnership can charge us for energy has not, the MCV Partnership's financial performance has been impacted negatively. Even with the approved RCP, if gas prices continue at present levels or increase, the economics of operating the MCV Facility may be adverse enough to require us to recognize an impairment. In January 2005, the MPSC issued an order approving the RCP, with modifications. The RCP allows us to recover the same amount of capacity and fixed energy charges from customers as approved in prior MPSC orders. However, we are able to dispatch the MCV Facility on the basis of natural gas market prices, which will reduce CE-11 the MCV Facility's annual production of electricity and, as a result, reduce the MCV Facility's consumption of natural gas by an estimated 30 to 40 bcf annually. This decrease in the quantity of high-priced natural gas consumed by the MCV Facility will benefit our ownership interest in the MCV Partnership. The substantial MCV Facility fuel cost savings will be used first to offset fully the cost of replacement power. Second, $5 million annually will be used to fund a renewable energy program. Remaining savings will be split between the MCV Partnership and Consumers. Consumers' direct savings will be shared 50 percent with its customers in 2005 and 70 percent in 2006 and beyond. Consumers' direct savings from the RCP, after a portion is allocated to customers, will be used to offset our capacity and fixed energy underrecoveries expense. Since the MPSC has excluded these underrecoveries from the rate making process, we anticipate that our savings from the RCP will not affect our return on equity used in our base rate filings. In January 2005, Consumers and the MCV Partnership's general partners accepted the terms of the order and implemented the RCP. The underlying agreement for the RCP between Consumers and the MCV Partnership extends through the term of the PPA. However, either party may terminate that agreement under certain conditions. In February 2005, a group of intervenors in the RCP case filed an application for rehearing of the MPSC order. The Attorney General also filed a claim of appeal with the Michigan Court of Appeals. We cannot predict the outcome of these appeals. For additional details on the MCV Partnership, see Note 2, Contingencies, "Other Electric Contingencies -- The Midland Cogeneration Venture." 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, we may record as regulatory assets items that a non-regulated entity normally would expense if the actions of the regulator indicate such expenses will be recovered in future rates. Conversely, we may record as regulatory liabilities items that non-regulated entities may normally recognize as revenues 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, 2004, we had $1.696 billion recorded as regulatory assets and $1.574 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 classified as available-for-sale are reported at fair value determined from quoted market prices. Debt and equity securities classified as held-to-maturity are reported at cost. Unrealized gains or losses resulting from changes in fair value of certain available-for-sale debt and equity securities are reported, net of tax, in equity as part of accumulated other comprehensive income. Unrealized gains or losses are excluded from earnings unless the related changes in fair value are determined to be other than temporary. Unrealized gains or losses on our nuclear decommissioning investments are reflected as regulatory liabilities on our Consolidated Balance Sheets. Realized gains or losses would not affect our earnings or cash flows. DERIVATIVE INSTRUMENTS: We use the criteria in SFAS No. 133 to determine if certain contracts must be accounted for as derivative instruments. This criteria is complex and significant judgment is often required in applying the criteria to specific contracts. 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 is then adjusted quarterly to reflect any change in the market value of the contract, a practice known as marking the contract to market. Changes in fair value (that is, gains or losses) are reported either in earnings or accumulated CE-12 other comprehensive income, depending on whether the derivative qualifies for cash flow hedge accounting treatment. The types of contracts we typically classify as derivative instruments are interest rate swaps, electric call options, gas supply call and put options, gas fuel futures and swaps, gas fuel options, and certain gas fuel contracts. The majority of our contracts are not subject to derivative accounting under SFAS No. 133 because they qualify for the normal purchases and sales exception, or because there is not an active market for the commodity. 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 and the significant 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. Similarly, our coal purchase contracts are not accounted for as derivatives due to the lack of an active market for the coal that we purchase. If active markets for these commodities develop in the future, we may be required to account for these contracts as derivatives, and the resulting mark-to-market impact on earnings could be material to our financial statements. The MISO is scheduled to begin the Midwest Energy Market on April 1, 2005, which will include day-ahead and real-time energy market information and centralized dispatch for market participants. At this time, we believe that the commencement of this market will not constitute the development of an active energy market in the state of Michigan. However, after having adequate experience with the Midwest Energy Market, we will reevaluate whether or not the activity level within this market leads to the conclusion that an active energy market exists. For additional information, see "Electric Business Uncertainties -- Competition and Regulatory Restructuring -- Transmission Market Developments" within this MD&A. The MCV Partnership uses natural gas fuel contracts to buy gas as fuel for generation, and to manage gas fuel costs. The MCV Partnership believes that certain of its long-term gas contracts qualify as normal purchases under SFAS No. 133, and therefore, these contracts are not recognized at fair value on the balance sheet. Due to the implementation of the RCP in January 2005, the MCV Partnership has determined that a significant portion of its gas fuel contracts no longer qualify as normal purchases because the contracted gas will not be consumed as fuel for electric production. Accordingly, these contracts will be treated as derivatives and will be marked-to-market through earnings each quarter, which could increase earnings volatility. Based on market prices for natural gas as of January 31, 2005, the accounting for the MCV Partnership's long-term gas contracts, including those affected by the implementation of the RCP, could result in an estimated $100 million (pretax before minority interest) gain recorded to earnings in the first quarter of 2005. This estimated gain will reverse in subsequent quarters as the contracts settle. For further details on the RCP, see "Critical Accounting Policies -- Use of Estimates and Assumptions -- MCV Underrecoveries" within this MD&A. If there are further changes in the level of planned electric production or gas consumption, the MCV Partnership may be required to account for additional long-term gas contracts as derivatives, which could add to earnings volatility. To determine the fair value of our derivative contracts, we use a combination of quoted market prices, prices obtained from external sources, such as brokers, and mathematical valuation models. Valuation models require various inputs, including forward prices, strike prices, volatilities, interest rates, and maturity dates. Changes in forward prices or volatilities could change significantly the calculated fair value of certain contracts. At December 31, 2004, we assumed a market-based interest rate of 2.75 percent and monthly volatility rates ranging between 60 percent and 73 percent to calculate the fair value of our gas options. At December 31, 2004, we assumed market-based interest rates ranging between 2.40 percent and 4.48 percent (depending on the term of the contract) and monthly volatility rates ranging between 25 percent and 68 percent to calculate the fair value of the gas fuel derivative contracts held by the MCV Partnership. 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. In connection with the market valuation of our derivative contracts, we maintain reserves, if necessary, for credit risks based on the financial condition of counterparties. CE-13 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 derivative contracts to manage these risks, including swaps, options, futures, 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 through established credit policies that include performing financial credit reviews of 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 and our current exposures, we do not anticipate a material adverse effect on our financial position or earnings as a result of counterparty nonperformance. The following risk sensitivities indicate the potential loss in fair value, cash flows, or future earnings from our derivative contracts and other financial instruments based upon a hypothetical 10 percent adverse change in market rates or prices. Changes in excess of the amounts shown in the sensitivity analyses could occur if market rates or prices exceed the 10 percent shift used for the analyses. 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 2004 2003 - ----------------- ----- ----- (IN MILLIONS) Variable-rate financing -- before tax annual earnings exposure.................................................. $ 2 $ 1 Fixed-rate financing -- potential loss in fair value(a)..... 138 154
- ------------------------ (a) Fair value exposure could only be realized if we repurchased all of our fixed-rate financing. Commodity Price Risk: For purposes other than trading, we enter into electric call options and gas supply call and put options. Electric call options are purchased 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. Purchased electric call options give us the right, but not the obligation, to purchase electricity at predetermined fixed prices. Our gas supply call and put options are used to purchase reasonably priced gas supply. Purchases of gas supply call options give us the right, but not the obligation, to purchase gas supply at predetermined fixed prices. Gas supply put options sold give third-party suppliers the right, but not the obligation, to sell gas supply to us at predetermined fixed prices. At December 31, 2004, we held gas supply call options and had sold gas supply put options. The MCV Partnership uses natural gas fuel contracts to buy gas as fuel for generation and to manage gas fuel costs. Some of these contracts are treated as derivative instruments. The MCV Partnership also enters into natural gas futures contracts, option contracts, and over-the-counter swap transactions in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are being used principally to secure anticipated natural gas requirements necessary for projected electric and steam sales, and to lock in sales prices of natural gas previously obtained in order to optimize the MCV Partnership's existing gas supply, storage, and transportation arrangements. CE-14 Commodity Price Risk Sensitivity Analysis (assuming a 10 percent adverse change in market prices):
AS OF DECEMBER 31 2004 2003 - ----------------- ----- ----- (IN MILLIONS) Potential reduction in fair value: Gas supply option contracts............................... $ 1 $ 1 Derivative contracts associated with Consumers' investment in the MCV Partnership: Gas fuel contracts..................................... 17 N/A Gas fuel futures and swaps............................. 41 N/A
We did not perform a sensitivity analysis for the derivative contracts held by the MCV Partnership as of December 31, 2003, because the MCV Partnership was not consolidated into our financial statements until 2004, as discussed in Note 13, Implementation of New Accounting Standards. Investment Securities Price Risk: Our investments in debt and equity securities are exposed to changes in interest rates and price fluctuations in equity markets. The following table shows the potential effect of adverse changes in interest rates and fluctuations in equity prices on our available-for-sale investments. Investment Securities Price Risk Sensitivity Analysis:
AS OF DECEMBER 31 2004 2003 - ----------------- ----- ----- (IN MILLIONS) Potential reduction in fair value: Available-for-sale investments(a): Equity Securities(b)................................... $ 5 $ 3 Debt Securities(c)..................................... -- --
- ------------------------ (a) Primarily SERP investments and investments in CMS Energy common stock. (b) Assumes a 10 percent adverse change in market prices. (c) Assumes a 50 basis point increase in the yield to maturity of the 10-year Treasury Note which approximates a 10 percent change in market yields. We maintain trust funds, as required by the NRC, which may only be used to fund certain costs of nuclear plant decommissioning. As of December 31, 2004 and 2003, these funds were invested primarily in equity securities, fixed-rate, fixed-income debt securities, and cash and cash equivalents, and are recorded at fair value on our Consolidated Balance Sheets. Those investments are exposed to price fluctuations in equity markets and changes in interest rates. Because the accounting for nuclear plant decommissioning recognizes that costs are recovered through our electric rates, fluctuations in equity prices or interest rates do not affect consolidated earnings or cash flows. 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 certain employees hired after June 30, 2003. We use SFAS No. 87 to account for pension costs. 401(k): In our effort to reduce costs, the employer's match for the 401(k) plan was suspended effective September 1, 2002. The employer's match for the 401(k) plan resumed on January 1, 2005. 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. CE-15 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 significantly change the liability and associated expenses recognized in any given year. The following table provides an estimate of our pension cost, OPEB cost, and cash contributions for the next three years:
EXPECTED COSTS ---------------------------------------- PENSION COST OPEB COST CONTRIBUTIONS ------------ --------- ------------- (IN MILLIONS) 2005..................................................... $49 $39 $ 62 2006..................................................... 68 35 78 2007..................................................... 79 32 110
Actual future pension cost 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 cost for 2005 by $3 million. Lowering the discount rate by 0.25 percent (from 6.00 percent to 5.75 percent) would increase estimated pension cost for 2005 by $4 million. For additional details on postretirement benefits, see Note 5, Retirement Benefits. ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS SFAS No. 143 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 regulatory assets and liabilities instead of a cumulative effect of a change in accounting principle. 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 in which the ARO is incurred, such as for assets with indeterminate lives, the liability is recognized when a reasonable estimate of fair value can be made. Generally, gas transmission and electric and gas distribution assets have indeterminate lives. Retirement cash flows cannot be determined and there is a low probability of a retirement date. Therefore, no liability has been recorded for these assets. Also, 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 largely utilize third-party cost estimates. For additional details on ARO, see Note 6, Asset Retirement Obligations. CE-16 ACCOUNTING FOR NUCLEAR DECOMMISSIONING COSTS The MPSC and the FERC regulate the recovery of costs to decommission our Big Rock and Palisades nuclear plants. We have established external trust funds to finance the decommissioning of both plants. We record the trust fund balances as a non-current asset on our Consolidated Balance Sheets. 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. 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. The funds provided by the trusts, additional customer surcharges, and potential funds from the DOE litigation are all required to cover fully the decommissioning costs. 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. Based on current projections, the current level of funds provided by the trusts is not adequate to fund fully the decommissioning of Big Rock or Palisades. This is due in part to the DOE's failure to accept the spent nuclear fuel on schedule and lower returns on the trust funds. We are attempting to recover our additional costs for storing spent nuclear fuel through litigation. We are also seeking additional relief from the MPSC. For additional details on nuclear decommissioning, see Note 2, Contingencies, "Other Electric Contingencies -- Nuclear Plant Decommissioning" and "Nuclear Matters." RELATED PARTY TRANSACTIONS We enter into a number of significant transactions with related parties. These transactions include: - issuance of trust preferred securities with Consumers' affiliated companies, - purchase and sale of electricity from and to Enterprises, - purchase of gas transportation from CMS Bay Area Pipeline, L.L.C., - payment of parent company overhead costs to CMS Energy, and - investment in CMS Energy Common Stock. Transactions involving CMS Energy and its affiliates generally are based on regulated prices, market prices, or competitive bidding. Transactions involving the power supply purchases from certain affiliates of Enterprises are based upon avoided costs under PURPA and competitive bidding. The payment of parent company overhead costs is based on the use of accepted industry allocation methodologies. For additional details on related party transactions, see Note 1, Corporate Structure and Accounting Policies, "Related Party Transactions", and Note 2, Contingencies, "Other Electric Contingencies -- The Midland Cogeneration Venture." CE-17 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. 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 nonstandard payment terms or other forms of assurances, including margin calls, in connection with maintenance of ongoing deliveries of gas and electricity. Our current financial plan includes controlling our operating expenses and capital expenditures and evaluating market conditions for financing opportunities. We believe our current level of cash and access to borrowing capacity in the capital markets, along with anticipated cash flows from operating and investing activities, will be sufficient to meet our liquidity needs through 2006. CASH POSITION, INVESTING, AND FINANCING Our operating, investing, and financing activities meet consolidated cash needs. At December 31, 2004, $192 million consolidated cash was on hand, which includes $21 million of restricted cash and $126 million from the effect of Revised FASB Interpretation No. 46 consolidation. For additional details on cash equivalents and restricted cash, see Note 1, Corporate Structure and Accounting Policies. For additional details on FASB Interpretation No. 46, see Note 13, Implementation of New Accounting Standards. SUMMARY OF CASH FLOWS:
2004 2003 2002 ---- ---- ---- (IN MILLIONS) Net cash provided by (used in): Operating activities...................................... $ 640 $ 5 $ 760 Investing activities...................................... (562) (528) (325) ----- ----- ----- Net cash provided by (used in) operating and investing activities.................................................. 78 (523) 435 Financing activities...................................... (127) 325 (204) ----- ----- ----- Net Increase (Decrease) in Cash and Cash Equivalents........ $ (49) $(198) $ 231 ===== ===== =====
OPERATING ACTIVITIES: 2004: Net cash provided by operating activities increased $635 million in 2004. The absence, in 2004, of $501 million in pension contributions made in 2003, the reduced effect of rising gas prices on inventory, and other timing differences represent the majority of the increase. These increases more than offset an increase in accounts receivable and accrued revenue resulting from higher gas prices. 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. INVESTING ACTIVITIES: 2004: Net cash used in investing activities increased $34 million in 2004 primarily due to an increase in capital expenditures of $22 million. The increase in capital expenditures resulted from the consolidation of the MCV Partnership and the FMLP. 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. CE-18 FINANCING ACTIVITIES: 2004: Net cash used in financing activities increased $452 million in 2004 primarily due to a decrease in net proceeds from borrowings of $699 million. This decrease was offset by a $250 million stockholder's contribution from the parent. 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. SUBSEQUENT FINANCING ACTIVITIES: In January 2005, we issued $250 million of 5.15 percent FMBs due 2017. We used the net proceeds of $247 million to pay off our $60 million long-term bank loan, to redeem our $73 million 8.36 percent subordinated deferrable interest notes, and to redeem our $124 million 8.20 percent subordinated deferrable interest notes. The subordinated deferrable interest notes are classified as Long-term debt -- related parties on our accompanying Consolidated Balance Sheets. OBLIGATIONS AND COMMITMENTS CONTRACTUAL OBLIGATIONS: The following table summarizes our contractual cash obligations for each of the periods presented. The table shows the timing and effect that such obligations are expected to have on our liquidity and cash flow in future periods. The table excludes all amounts classified as current liabilities on our Consolidated Balance Sheets, other than the current portion of long-term debt and capital and finance leases. The majority of current liabilities will be paid in cash in 2005. CONTRACTUAL OBLIGATIONS AS OF DECEMBER 31, 2004
PAYMENTS DUE ---------------------------------------------------------- TOTAL 2005 2006 2007 2008 2009 BEYOND ----- ---- ---- ---- ---- ---- ------ (IN MILLIONS) Long-term debt................... $ 4,118 $ 118 $ 478 $ 59 $ 504 $ 443 $2,516 Long-term debt -- related parties....................... 506 180 -- -- -- -- 326 Interest payments on long-term debt.......................... 2,180 241 232 203 188 165 1,151 Capital and finance leases....... 344 29 28 28 27 27 205 Interest payments on capital and finance leases................ 224 30 28 27 25 23 91 Operating leases................. 80 13 12 10 10 7 28 Purchase obligations............. 7,726 1,918 1,063 707 587 526 2,925 Purchase obligations -- related parties....................... 1,514 68 68 68 68 67 1,175 Long-term service agreements..... 207 16 17 11 11 12 140 ------- ------ ------ ------ ------ ------ ------ Total contractual obligations................. $16,899 $2,613 $1,926 $1,113 $1,420 $1,270 $8,557 ======= ====== ====== ====== ====== ====== ======
Long-Term Debt: The amounts in the table above represent the principal amounts due on outstanding debt obligations, current and long-term, as of December 31, 2004. For additional details on long-term debt, see Note 3, Financings and Capitalization. Interest Payments on Long-term Debt: The amounts in the table above represent the currently scheduled interest payments on both variable and fixed rate long-term debt and long-term debt -- related parties, current and long-term. Variable interest payments are based on contractual rates in effect at December 31, 2004. Capital and Finance Leases: The amounts in the table above represent the minimum lease payments payable under our capital and finance leases. They are comprised mainly of the leased portion of the MCV Partnership facility, leased service vehicles, and leased office furniture. CE-19 Interest Payments on Capital and Finance Leases: The amounts in the table represent imputed interest in the capital leases and currently scheduled interest payments on the finance leases. Operating Leases: The amounts in the table above represent the minimum noncancelable lease payments under our leases of railroad cars, certain vehicles, and miscellaneous office buildings and equipment, which are accounted for as operating leases. Purchase Obligations: Long-term contracts for purchase of commodities and services are purchase obligations. These obligations include operating contracts used to assure adequate supply with generating facilities that meet PURPA requirements. The commodities and services include: - natural gas, - electricity, - coal and associated transportation, and - electric transmission. Our purchase obligations include long-term power purchase agreements with various generating plants, which require us to make monthly capacity payments based on the plants' availability or deliverability. These payments will approximate $14 million per month during 2005. 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, Contingencies, "Electric Rate Matters -- Power Supply Costs." Long-term Service Agreements: These obligations of the MCV Partnership represent the cost of the current MCV Facility maintenance service agreements and cost of spare parts. REVOLVING CREDIT FACILITIES: At December 31, 2004, we had $475 million available and the MCV Partnership had $48 million available in revolving credit facilities. The facilities are available for general corporate purposes, working capital, and letters of credit. For additional details on revolving credit facilities, see Note 3, Financings and Capitalization. OFF-BALANCE SHEET ARRANGEMENTS: We enter into guarantee arrangements in the normal course of business to facilitate commercial transactions with third parties. These arrangements include letters of credit, surety bonds and indemnifications. For additional details on guarantee arrangements, see Note 3, Financings and Capitalization, "FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," and in "Commercial Commitments" within this section. Sale of Accounts Receivable: Under a revolving accounts receivable sales program, we may sell up to $325 million of certain accounts receivable. For additional details, see Note 3, Financings and Capitalization. COMMERCIAL COMMITMENTS: Our commercial contingent 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 these obligations and believe it is unlikely that we CE-20 would be required to perform or otherwise incur any material losses associated with these guarantees. Our off-balance sheet commitments at December 31, 2004 will expire as follows: CONTINGENT COMMITMENTS
COMMITMENT EXPIRATION ---------------------------------------------------- 2010 AND TOTAL 2005 2006 2007 2008 2009 BEYOND ----- ---- ---- ---- ---- ---- -------- (IN MILLIONS) Off-balance sheet: Surety bonds and other indemnifications(a)..... $ 6 $-- $ -- $ -- $ -- $ -- $6 Letters of credit(b)........................... 25 17 1 -- -- -- 7
- ------------------------- (a) The surety bonds are continuous in nature. The need for the bonds is determined on an annual basis. (b) The $2 million letter of credit for workers compensation self insurance and $5 million of MDEQ letters of credit are renewed annually. DIVIDEND RESTRICTIONS: Under the provisions of our articles of incorporation, at December 31, 2004, we had $456 million of unrestricted retained earnings available to pay common stock dividends. However, covenants in our debt facilities cap common stock dividend payments at $300 million in a calendar year. In October 2004, the MPSC rescinded its December 2003 interim gas rate order, which included a $190 million annual dividend cap. For the year ended December 31, 2004, we paid $190 million in common stock dividends to CMS Energy. CAPITAL EXPENDITURES: We estimate that we will make the following capital expenditures, including new lease commitments, by expenditure type and by business segments during 2005 through 2007. We prepare these estimates for planning purposes and may revise them.
YEARS ENDING DECEMBER 31, -------------------- 2005 2006 2007 ---- ---- ---- (IN MILLIONS) Construction................................................ $508 $678 $634 Nuclear fuel................................................ 18 34 23 Other capital leases........................................ 9 18 18 ---- ---- ---- $535 $730 $675 ==== ==== ==== Electric utility operations(a)(b)........................... $370 $525 $490 Gas utility operations...................................... 165 205 185 ---- ---- ---- $535 $730 $675 ==== ==== ====
- ------------------------- (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: In 2004, we experienced cooler than normal summer weather. As a result, our electric deliveries in 2004, including deliveries to customers who chose to buy generation service from alternative electric suppliers, increased less than one-half of one percent over the levels experienced in 2003. In 2005, we project electric deliveries to grow almost three percent. This short-term outlook for 2005 assumes a stronger economy than in 2004 and normal weather conditions throughout the year. CE-21 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 fluctuations in weather conditions and changes in economic conditions, including utilization and expansion of manufacturing facilities. 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/or Clear Skies legislation compliance, - compliance with legislative proposals that would require reductions in emissions of greenhouse gases, 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, - recovery of our Section 10d(4) Regulatory Assets, - effects of lost electric supply load to alternative electric suppliers, and - status as an electric transmission customer instead of an electric transmission owner and the impact of the evolving RTO infrastructure. Regulatory - financial and operating effects of regulatory requirements imposed by the MISO, the FERC, state and federal regulators, or others, seeking to improve reliability of national and state transmission systems, - inadequate regulatory response to applications for requested rate increases, - responses from regulators regarding the storage and ultimate disposal of spent nuclear fuel, - recovery of nuclear decommissioning costs. For additional details, see "Accounting for Nuclear Decommissioning Costs" within this MD&A, and - potential for the Midwest Energy Market to develop into an active energy market in the state of Michigan and the potential derivative accounting impact. For additional details, see "Accounting for Financial and Derivative Instruments and Market Risk Information" within this MD&A. Other - effects of commodity fuel prices such as natural gas, oil, and coal, - pending litigation filed by PURPA qualifying facilities, and - other pending litigation. For additional details about these trends or uncertainties, see Note 2, Contingencies. CE-22 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. Clean Air: 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 $802 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 8.06 percent. As of December 31, 2004, we have incurred $525 million in capital expenditures to comply with these regulations and anticipate that the remaining $277 million of capital expenditures will be made between 2005 and 2011. These expenditures include installing selective catalytic reduction technology at four of our coal-fired electric plants. In addition to modifying the coal-fired electric plants, we expect to utilize nitrogen oxide emissions allowances for years 2005 through 2009, most of which have been purchased. The cost of the allowances is estimated to average $8 million per year for 2005-2006. The need for allowances will decrease after year 2006 with the installation of emissions control technology. The cost of the allowances is accounted for as inventory. The allowance inventory is expensed as the coal-fired electric generating units emit nitrogen oxide. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seek modification permits from the EPA. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of "routine maintenance." If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric plants and potentially pay fines. Additionally, the viability of certain plants remaining in operation could be called into question. The EPA has proposed a Clean Air Interstate Rule that would require additional coal-fired electric plant emission controls for nitrogen oxides and sulfur dioxide. If implemented, this rule potentially would require expenditures equivalent to those efforts in progress to reduce nitrogen oxide emissions as required under the Title I provisions of the Clean Air Act. The rule proposes a two-phase program to reduce emissions of sulfur dioxide by 70 percent and nitrogen oxides by 65 percent by 2015. Additionally, the EPA also proposed two alternative sets of rules to reduce emissions of mercury from coal-fired electric plants and nickel from oil-fired electric plants. Until the proposed environmental rules are finalized, an accurate cost of compliance cannot be determined. Our switch to western coal as a primary fuel source has resulted in reduced plant emissions and increased our flexibility in meeting future regulatory compliance requirements. Excess sulfur dioxide allowances optimize our overall cost of regulatory compliance by delaying capital expenditures and minimizing regulatory uncertainty. Additionally, the excess sulfur dioxide allowances can be used to trade for nitrogen oxide allowances supplementing our nitrogen oxide allowance bank. Western coal has reduced our overall cost of fuel and reduced the economic impact from the recent increases in eastern coal prices. Several legislative proposals have been introduced in the United States Congress that would require reductions in emissions of greenhouse gases, however, none have yet been enacted. We cannot predict whether any federal mandatory greenhouse gas emission reduction rules ultimately will be enacted, or the specific requirements of any such rules. To the extent that greenhouse gas emission reduction rules come into effect, such mandatory emissions reduction requirements could have far-reaching and significant implications for the energy sectors. We cannot estimate the potential effect of federal or state level greenhouse gas policy on our future consolidated results of CE-23 operations, cash flows, or financial position due to the speculative nature of the policies at this time. However, we stay abreast of and engage in the greenhouse gas policy developments and will continue to assess and respond to their potential implications on our business operations. Water: In March 2004, the EPA issued rules that govern generating plant cooling water intake systems. The new rules require significant reduction in fish killed by operating equipment. Some of our facilities will be required to comply with the new rules by 2006. We are currently studying the rules to determine the most cost-effective solutions for compliance. For additional details on electric environmental matters, see Note 2, Contingencies, "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. The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. As of March 2005, alternative electric suppliers are providing 900 MW of generation supply to ROA customers. This amount represents 12 percent of our distribution load and an increase of 23 percent compared to March 2004. Based on current trends, we predict total load loss by the end of 2005 to be in the range of 1,000 MW to 1,200 MW. However, no assurance can be made that the actual load loss will fall within that range. In July 2004, as a result of legislative hearings, several bills were introduced into the Michigan Senate that could change Michigan's Customer Choice Act. The proposals include: - requiring that all rate classes of regulated utilities be based on cost of service, - establishing a defined Stranded Cost calculation method, - allowing customers who stay with or switch to alternative electric suppliers after December 31, 2005 to return to utility services, and requiring them to pay current market rates upon return, - establishing reliability standards that all electric suppliers must follow, - requiring utilities and alternative electric suppliers to maintain a 15 percent power reserve margin, - creating a service charge to fund the Low Income and Energy Efficiency Fund, - giving kindergarten through twelfth-grade schools a discount of 10 percent to 20 percent on electric rates, and - authorizing a service charge payable by all customers for meeting Clean Air Act requirements. This legislation was not enacted before the end of the 2003-2004 legislative session. We anticipate that some or all of the bills may be reintroduced in the 2005-2006 legislative session. We cannot predict the outcome of these legislative proceedings. Implementation Costs: Applications for recovery of $7 million of implementation costs for 2002 and $1 million for 2003 are pending MPSC approval. In September 2004, the ALJ issued a Proposal for Decision recommending full recovery of these costs. We are also pursuing authorization at the FERC for the MISO to reimburse us for approximately $8 million of Alliance RTO development costs. Included in this amount is $5 million pending approval by the MPSC as part of our 2002 implementation costs application. The FERC has denied our request for reimbursement and we are appealing the FERC ruling at the United States Court of Appeals for the District of Columbia. Although we believe these implementation costs are fully recoverable in accordance with the Customer Choice Act, we cannot predict the amount, if any, the MPSC or the FERC will approve as recoverable. Section 10d(4) Regulatory Assets: Section 10d(4) of the Customer Choice Act allows us to recover certain regulatory assets through deferred recovery of annual capital expenditures in excess of depreciation levels and certain other expenses incurred prior to and throughout the rate freeze and rate cap periods, including the cost of CE-24 money. In October 2004, we filed an application with the MPSC seeking recovery of $628 million of Section 10d(4) Regulatory Assets for the period June 2000 through December 2005 consisting of: - capital expenditures in excess of depreciation, - Clean Air Act costs, - other expenses related to changes in law or governmental action incurred during the rate freeze and rate cap periods, and - the associated cost of money through the period of collection. Of the $628 million, $152 million relates to the cost of money. In March 2005, the MPSC Staff filed testimony recommending the MSPC approve recovery of approximately $323 million. We cannot predict the amount, if any, the MPSC will approve as recoverable. Rate Caps: The Customer Choice Act imposes certain limitations on electric rates that could result in our inability to collect our full cost of conducting business from electric customers. Rate caps are effective 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 period. In particular, if we need to purchase power supply from wholesale suppliers while retail rates are capped, the rate restrictions may preclude full recovery of purchased power and associated transmission costs. Power Supply Costs: 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 capacity and energy contracts for the physical delivery of electricity primarily in the summer months and to a lesser degree in the winter months. We are currently planning for a reserve margin of approximately 11 percent for summer 2005, or supply resources equal to 111 percent of projected summer peak load. Of the 2005 supply resources target of 111 percent, we expect to meet approximately 102 percent from our electric generating plants and long-term power purchase contracts, and approximately 9 percent from short-term contracts, options for physical deliveries, and other agreements. We have purchased capacity and energy contracts partially covering the estimated reserve margin requirements for 2005 through 2007. As a result, we have recognized an asset of $12 million for unexpired capacity and energy contracts as of December 31, 2004. PSCR: The PSCR process assures recovery of all reasonable and prudent power supply costs actually incurred by us. In September 2004, we submitted our 2005 PSCR filing to the MPSC. The proposed PSCR charge would allow us to recover a portion of our increased power supply costs from commercial and industrial customers and, subject to the overall rate caps, from other customers. We self-implemented the proposed 2005 PSCR charge in January 2005. The revenues from the PSCR charges are subject to reconciliation at the end of the year after actual costs have been reviewed for reasonableness and prudence. We cannot predict the outcome of these PSCR proceedings. Special Contracts: We entered into multi-year electric supply contracts with certain industrial and commercial customers. The contracts provide electricity at specially negotiated prices that are at a discount from tariff prices, but above our incremental cost of service. As of February 2005, special contracts for approximately 630 MW of load are in place, most of which are in effect through 2005. We cannot predict the amount of electric load from these customers that will continue with our electric service after their contracts expire. Transmission Costs: In May 2002, we sold our electric transmission system for $290 million to MTH. We are in arbitration with MTH regarding property tax items used in establishing the selling price of our electric transmission system. An unfavorable outcome could result in a reduction of sale proceeds previously recognized by approximately $2 million to $3 million. CE-25 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 rulemaking could affect significantly: - transmission cost trends, - delivered power costs to us, and - delivered power costs to our retail electric customers. In November 2004, the FERC ruled on MISO and PJM RTO "through and out" rates. Through and out rates are applied to transmission transactions when a transmission customer purchases electricity that travels through multiple transmission pricing zones. Effective December 1, 2004, regional through and out rates for transactions between the PJM RTO and the MISO were eliminated by the FERC. In that November 2004 order, the FERC conditionally accepted, for a period beginning December 1, 2004 and ending January 31, 2008, a "license plate" pricing structure. License plate pricing provides for access to the combined regional transmission systems of the PJM RTO and the MISO at a single rate, although the rate may vary based on where the customer's load is located. The order also adopts a transitional charge from December 1, 2004 through March 31, 2006, intended to mitigate abrupt cost shifts between transmission owners and customers as a result of the pricing structure change. The manner in which these transitional charges are calculated and implemented is currently the subject of multiple disputes pending at the FERC. Based on the compliance filings with the FERC made by the MISO and PJM RTO transmission owners, the new transitional charges will not have a significant impact on our electric results of operations. However, we cannot predict the outcome of the disputes concerning these transitional charges pending at the FERC. Transmission Market Developments: The MISO is scheduled to begin the Midwest Energy Market on April 1, 2005. At that time, the MISO will implement a day-ahead and real-time energy market and centralized dispatch for the MISO's market participants. These changes are anticipated to ensure that load requirements in the region are met reliably and efficiently, to better manage congestion on the grid, and to produce consumer savings through the centralized dispatch of generation throughout the region. The MISO is expected to provide other functions, including long-term regional planning and market monitoring. In addition, we are evaluating whether or not there may be impacts on electric reliability associated with changes in the composition of transmission markets. For example, Commonwealth Edison Company joined the PJM RTO in May 2004 and American Electric Power Service Corporation joined the PJM RTO in October 2004. These integrations may be creating different patterns of power flow within the Midwest area and could affect adversely our ability to provide reliable service to our customers. We are presently evaluating what financial impacts, if any, these market developments are having on our operations. August 14, 2003 Blackout: The NERC and the U.S. and Canadian Power System Outage Task Force have released electric operations recommendations resulting from their investigation into the August 14, 2003 blackout. Few of the recommendations apply directly to us, since we are not a transmission owner. However, the recommendations could result in increased transmission costs to us and require upgrades to our distribution system. We cannot quantify the financial impact of these recommendations at this time. For additional details and material changes relating to the restructuring of the electric utility industry and electric rate matters, see Note 2, Contingencies, "Electric Restructuring Matters," and "Electric Rate Matters." ELECTRIC RATE CASE: In December 2004, we filed an application with the MPSC to increase our retail electric base rates. The electric rate case filing requests an annual increase in revenues of approximately $320 million. The primary reasons for the request are increased system maintenance and improvement costs, Clean Air Act related expenditures, and employee pension costs. A final order from the MPSC on our electric rate case is expected in late 2005. If approved as requested, the rate increase would go into effect in January 2006 and would apply to all retail electric customers. We cannot predict the amount or timing of the rate increase, if any, which the MPSC will approve. CE-26 BURIAL OF OVERHEAD POWER LINES: In September 2004, the Michigan Court of Appeals upheld a lower court decision that requires Detroit Edison to obey a municipal ordinance enacted by the City of Taylor, Michigan. The ordinance requires Detroit Edison to bury a section of its overhead power lines at its own expense. Detroit Edison has filed an appeal with the Michigan Supreme Court. Unless overturned by the Michigan Supreme Court, the decision could encourage other municipalities to adopt similar ordinances, as has occurred or is being discussed in a few municipalities in Consumers' service territory. If incurred, we would seek recovery of these costs from our customers, subject to MPSC approval. This case has potentially broad ramifications for the electric utility industry in Michigan; however, at this time, we cannot predict the outcome of this matter. OTHER ELECTRIC BUSINESS UNCERTAINTIES NUCLEAR MATTERS: Big Rock: Dismantlement of plant systems is essentially complete and demolition of the remaining plant structures has begun. The restoration project is on schedule to return approximately 530 acres of the site, including the area formerly occupied by the nuclear plant, to a natural setting for unrestricted use in mid-2006. An additional 30 acres, the area where seven transportable dry casks loaded with spent nuclear fuel and an eighth cask loaded with high-level radioactive waste material are stored, will be returned to a natural state by the end of 2012 if the DOE begins removing the spent nuclear fuel by 2010. Palisades: In August 2004, the NRC completed its mid-cycle plant performance assessment of Palisades. The assessment for Palisades covered the first half of 2004. The NRC determined that Palisades was operated in a manner that preserved public health and safety and fully met all cornerstone objectives. As of December 2004, all inspection findings were classified as having very low safety significance and all performance indicators show performance at a level requiring no additional oversight. Based on the plant's performance, only regularly scheduled inspections are planned through March 2006. The amount of spent nuclear fuel at Palisades exceeds the plant's temporary onsite storage pool capacity. We are using dry casks for temporary onsite storage. As of December 31, 2004, we have loaded 22 dry casks with spent nuclear fuel. For additional information on disposal of spent nuclear fuel, see Note 2, Contingencies, "Other Electric Contingencies -- Nuclear Matters." In September 2004, we announced that we will seek a license renewal for the Palisades plant. The plant's current license from the NRC expires in 2011. NMC, which operates the facility, will apply for a 20-year license renewal for the plant on behalf of Consumers. The Palisades renewal application is scheduled to be filed by the end of the first quarter of 2005. We have authorized the purchase of a replacement reactor vessel closure head. The replacement head is being manufactured and scheduled to be installed in 2007. Palisades, like many other nuclear plants, has experienced cracking in reactor head nozzle penetrations. Repairs to two nozzles were made in 2004. The replacement head nozzles will be manufactured from materials less susceptible to cracking and should minimize inspection and repair costs after replacement. 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 fuel 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. CE-27 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: - fluctuations in weather patterns, - use by independent power producers, - competition in sales and delivery, - Michigan economic conditions, - gas consumption per customer, and - increases in gas commodity prices. In February 2004, we filed an application with the MPSC for a Certificate of Public Convenience and Necessity to construct a 25-mile gas transmission pipeline in northern Oakland County. The project is necessary to meet estimated peak load beginning in the winter of 2005 through 2006. In December 2004, the MPSC approved a settlement agreement authorizing us to construct and operate the pipeline. Construction is expected to begin late spring of 2005. In October 2004, we filed an application with the MPSC for a Certificate of Public Convenience and Necessity to construct a 10.8-mile gas transmission pipeline in northwestern Wayne County. The project is necessary to meet the projected capacity demands beginning in the winter of 2007. If we are unable to construct the pipeline, we will need to pursue more costly alternatives or curtail serving the system's load growth in that area. 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 revenues or income from gas operations. The trends and uncertainties include: Regulatory - inadequate regulatory response to applications for requested rate increases, - response to increases in gas costs, including adverse regulatory response and reduced gas use by customers, and - proposed distribution pipeline integrity rules and mandates. Environmental - potential environmental remediation costs at a number of sites, including sites formerly housing manufactured gas plant facilities. Other - transmission pipeline integrity mandates, maintenance and remediation costs, and - other pending litigation. GAS TITLE TRACKING FEES AND SERVICES: On February 14, 2005, the FERC issued its latest order involving Consumers' Gas Title Transfer Tracking Fees and Services. In doing so, the FERC agreed with us that such orders only apply to a title transfer tracking fee charged and collected in connection with the Consumers' FERC blanket transportation service. Because of the newly stated limits on what fees are subject to refund, we believe that if any such refunds are ultimately required, they will not be material. CE-28 GAS COST RECOVERY: The GCR process is designed to allow us to recover all of our purchased natural gas costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs for prudency in an annual reconciliation proceeding. The following table summarizes our GCR reconciliation filings with the MPSC. For additional details, see Note 2, Contingencies, "Gas Rate Matters--Gas Cost Recovery." GAS COST RECOVERY RECONCILIATION
NET OVER- GCR YEAR DATE FILED ORDER DATE RECOVERY STATUS - -------- ---------- ---------- --------- ------ 2001-2002 June 2002 May 2004 $ 3 million $2 million has been refunded, $1 million is included in our 2003-2004 GCR reconciliation filing 2002-2003 June 2003 March 2004 $ 5 million Net over-recovery includes interest accrued through March 2003 and an $11 million disallowance settlement agreement 2003-2004 June 2004 February 2005 $31 million Filing includes the $1 million and the $5 million GCR net over-recovery above
Net over-recovery amounts included in the table above include refunds that we received from our suppliers that are required to be refunded to our customers. GCR Year 2003-2004: In February 2005, the MPSC approved a settlement agreement that resulted in a credit to our GCR customers for a $28 million over-recovery, plus $3 million interest, using a roll-in refund methodology. The roll-in methodology incorporates a GCR over/under-recovery in the next GCR plan year. GCR Plan for Year 2004-2005: In December 2003, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2004 through March 2005. In June 2004, the MPSC issued a final Order in our GCR plan approving a settlement. The settlement included a quarterly mechanism for setting a GCR ceiling price. The current ceiling price is $6.57 per mcf. Actual gas costs and revenues will be subject to an annual reconciliation proceeding. GCR Plan for Year 2005-2006: In December 2004, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2005 through March 2006. Our request proposes using a GCR factor consisting of: - a base GCR factor of $6.98 per mcf, plus - a quarterly GCR ceiling price adjustment contingent upon future events. The GCR factor can be adjusted monthly, provided it remains at or below the current ceiling price. The quarterly adjustment mechanism allows an increase in the GCR ceiling price to reflect a portion of cost increases if the average NYMEX price for a specified period is greater than that used in calculating the base GCR factor. Actual gas costs and revenues will be subject to an annual reconciliation proceeding. 2003 GAS RATE CASE: In March 2003, we filed an application with the MPSC for a gas rate increase in the annual amount of $156 million. In December 2003, the MPSC granted an interim rate increase in the amount of $19 million annually. The MPSC also ordered an annual $34 million reduction in our annual depreciation expense and related taxes. On October 14, 2004, the MPSC issued its Opinion and Order on final rate relief. In the order, the MPSC authorized us to place into effect surcharges that would increase annual gas revenues by $58 million. Further, the MPSC rescinded the $19 million annual interim rate increase. The final rate relief was contingent upon our agreement to: - achieve a common equity level of at least $2.3 billion by year-end 2005 and propose a plan to improve the common equity level thereafter until our target capital structure is reached, CE-29 - make certain safety-related operation and maintenance, pension, retiree health-care, employee health-care, and storage working capital expenditures for which the surcharge is granted, - refund surcharge revenues when our rate of return on common equity exceeds its authorized 11.4 percent rate, - prepare and file annual reports that address certain issues identified in the order, and - file a general rate case on or before the date that the surcharge expires (which is two years after the surcharge goes into effect). On October 15, 2004, we agreed to these commitments. 2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas utility plant depreciation case originally filed in June 2001. On December 18, 2003, the MPSC ordered an annual $34 million reduction in our depreciation expense and related taxes in an interim rate order issued in our 2003 gas rate case. In October and December 2004, the MPSC issued Opinions and Orders in our gas depreciation case. The October 2004 order requires us to file an application for new depreciation accrual rates for our natural gas utility plant on, or no earlier than three months prior to, the date we file our next natural gas general rate case. The MPSC also directed us to undertake a study to determine why our removal costs are in excess of those of other regulated Michigan natural gas utilities and file a report with the MPSC Staff on or before December 31, 2005. In February 2005, we requested a delay in the filing date for the next depreciation case until after the MPSC considers the removal cost study, and after the MPSC issues an order in a pending case relating to asset retirement obligation accounting. 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. We expect to fund most of these costs through insurance proceeds and through the MPSC approved rates charged to our customers. 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. For additional details, see Note 2, Contingencies, "Gas Contingencies -- Gas Environmental Matters." OTHER OUTLOOK MCV PARTNERSHIP PROPERTY TAXES: In January 2004, the Michigan Tax Tribunal issued its decision in the MCV Partnership's tax appeal against the City of Midland for tax years 1997 through 2000. The MCV Partnership estimates that the decision will result in a refund to the MCV Partnership of approximately $35 million in taxes plus $10 million of interest. The Michigan Tax Tribunal decision has been appealed to the Michigan Court of Appeals by the City of Midland and the MCV Partnership has filed a cross-appeal at the Michigan Court of Appeals. The MCV Partnership also has a pending case with the Michigan Tax Tribunal for tax years 2001 through 2004. The MCV Partnership cannot predict the outcome of these proceedings; therefore, the above refund (net of approximately $16 million of deferred expenses) has not been recognized in 2004 earnings. COLLECTIVE BARGAINING AGREEMENTS: Approximately 46 percent of our employees are represented by the Utility Workers of America Union. The Union represents Consumers' operating, maintenance, and construction employees and our call center employees. The collective bargaining agreement with the Union for our operating, maintenance, and construction employees will expire on June 1, 2005 and negotiations for a new agreement is underway currently. The collective bargaining agreement with the Union for our call center employees will expire on August 1, 2005. LITIGATION AND REGULATORY INVESTIGATION: CMS Energy is the subject of various investigations as a result of round-trip trading transactions by CMS MST, including an investigation by the DOJ. Additionally, CMS Energy and Consumers are named as parties in various litigation matters including a shareholder derivative CE-30 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, Contingencies. NEW ACCOUNTING STANDARDS For a discussion of new pronouncements, see Note 13, Implementation of New Accounting Standards. NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE SFAS NO. 123R, SHARE-BASED PAYMENT: The Statement requires companies to expense the grant date fair value of employee stock options and similar awards. The Statement also clarifies and expands SFAS No. 123's guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods. In addition, this Statement amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits related to the excess of the tax deductible amount over the compensation cost recognized be classified as a financing cash inflow rather than as a reduction of taxes paid in operating activities. This Statement is effective for us as of the beginning of third quarter 2005. We adopted the fair value method of accounting for share-based awards effective December 2002, and therefore, expect this statement to have an insignificant impact on our results of operations when it becomes effective. CE-31 CONSUMERS ENERGY COMPANY MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Consumers' management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of management, including its CEO and CFO, Consumers conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, Consumers' management concluded that its internal control over financial reporting was effective as of December 31, 2004. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Consumers' management's assessment of the effectiveness of Consumers' internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, who audited the consolidated financial statements of Consumers included in this Form 10-K. Ernst & Young LLP's attestation report on Consumers' management's assessment of internal control over financial reporting follows this report. CE-32 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholder of Consumers Energy Company We have audited management's assessment, included in MANAGEMENT'S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING, that Consumers Energy Company (a Michigan Corporation and wholly-owned subsidiary of CMS Energy Corporation) and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Consumers Energy Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We did not examine the effectiveness of internal control over financial reporting of Midland Cogeneration Venture Limited Partnership, a 49% owned variable interest entity which has been consolidated pursuant to Revised Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities", whose financial statements reflect total assets and revenues constituting 15% and 14%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2004. The effectiveness of Midland Cogeneration Venture Limited Partnership's internal control over financial reporting was audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the effectiveness of Midland Cogeneration Venture Limited Partnership's internal control over financial reporting, is based solely on the report of the other auditors. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, based on our audit and the report of the other auditors, management's assessment that Consumers Energy Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, based on our audit and the report of the other auditors, Consumers Energy Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Consumers Energy Company and subsidiaries as of December 31, 2004 and 2003, 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, 2004 and our report dated March 7, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Detroit, Michigan March 7, 2005 CE-33 MCV MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING MCV's management is responsible for establishing and maintaining an adequate system of internal control over financial reporting of MCV. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. MCV's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of MCV; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of MCV are being made only in accordance with authorizations of management and the Management Committee of MCV; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of MCV's assets that could have a material effect on the financial statements. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. MCV management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in "Internal Control -- Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that MCV's system of internal control over financial reporting was effective as of December 31, 2004. MCV management's assessment of the effectiveness of MCV's internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. CE-34 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, -------------------------- 2004 2003 2002 ---- ---- ---- (IN MILLIONS) OPERATING REVENUE........................................... $4,711 $4,435 $4,169 EARNINGS FROM EQUITY METHOD INVESTEES....................... 1 42 53 OPERATING EXPENSES Fuel for electric generation.............................. 720 320 320 Purchased and interchange power........................... 224 310 296 Purchased power -- related parties........................ 67 519 564 Cost of gas sold.......................................... 1,468 1,221 831 Cost of gas sold -- related parties....................... 1 28 131 Other operating expenses.................................. 717 739 660 Maintenance............................................... 227 199 190 Depreciation, depletion, and amortization................. 391 377 348 General taxes............................................. 223 181 193 ------ ------ ------ 4,038 3,894 3,533 ------ ------ ------ OPERATING INCOME............................................ 674 583 689 OTHER INCOME (DEDUCTIONS) Accretion expense......................................... (3) (7) (6) Interest and dividends.................................... 11 8 5 Interest and dividends from affiliates.................... -- 2 3 Gain on asset sales, net.................................. 1 1 39 Regulatory return on capital expenditures................. 113 -- -- Other income.............................................. 16 10 6 Other expense............................................. (7) (19) (25) ------ ------ ------ 131 (5) 22 ------ ------ ------ INTEREST CHARGES Interest on long-term debt................................ 284 196 153 Interest on long-term debt -- related parties............. 44 45 -- Other interest............................................ 13 13 27 Capitalized interest...................................... 25 (9) (12) ------ ------ ------ 366 245 168 ------ ------ ------ INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS........... 439 333 543 MINORITY INTERESTS.......................................... 7 -- -- ------ ------ ------ INCOME BEFORE INCOME TAXES.................................. 432 333 543 INCOME TAX EXPENSE.......................................... 152 137 180 ------ ------ ------ INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLE................................................. 280 196 363 CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING, NET OF $- TAX BENEFIT IN 2004 AND $10 TAX EXPENSE 2002 DERIVATIVE INSTRUMENTS.................................... -- -- 18 RETIREMENT BENEFITS....................................... (1) -- -- ------ ------ ------ NET INCOME.................................................. 279 196 381 PREFERRED STOCK DIVIDENDS................................... 2 2 2 PREFERRED SECURITIES DISTRIBUTIONS.......................... -- -- 44 ------ ------ ------ NET INCOME AVAILABLE TO COMMON STOCKHOLDER.................. $ 277 $ 194 $ 335 ------ ------ ------
The accompanying notes are an integral part of these statements. CE-35 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ---- ---- ---- (IN MILLIONS) CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 279 $ 196 $ 381 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion, and amortization (includes nuclear decommissioning of $6 per year)............. 391 377 348 Regulatory return on capital expenditures............ (113) -- -- Capital lease and other amortization................. 29 28 15 Bad debt expense..................................... 20 21 17 Gain on sale of assets............................... (1) (1) (39) Loss on CMS Energy stock............................. -- 12 12 Cumulative effect of changes in accounting........... 1 -- (18) Distributions from related parties in excess of (less than) earnings...................................... -- 3 (38) Pension contribution................................. -- (501) (47) Changes in assets and liabilities: Increase in accounts receivable and accrued revenue......................................... (112) (33) (115) Decrease (increase) in inventories................ (126) (256) 90 Increase (decrease) in accounts payable........... 44 (61) (39) Increase in accrued expenses...................... 63 13 9 Deferred income taxes and investment tax credit... 137 195 277 Decrease (increase) in other current and non-current assets.............................. (44) 37 (98) Increase (decrease) in other current and non-current liabilities......................... 72 (25) 5 ------- ----- ----- Net cash provided by operating activities....... 640 5 760 ------- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease)................................................. (508) (486) (559) Cost to retire property................................... (73) (72) (66) Restricted cash on hand................................... (3) -- (14) Investments in Electric Restructuring Implementation Plan................................................... (7) (8) (8) Investments in nuclear decommissioning trust funds........ (6) (6) (6) Proceeds from nuclear decommissioning trust funds......... 36 34 30 Proceeds from short-term investments...................... 1,048 -- -- Purchase of short-term investments........................ (1,052) -- -- Maturity of MCV restricted investment securities held-to-maturity....................................... 675 -- -- Purchase of MCV restricted investment securities held-to-maturity....................................... (674) -- -- Cash proceeds from sale of assets......................... 2 10 298 ------- ----- ----- Net cash used in investing activities........... (562) (528) (325) ------- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long term debt.................. 1,055 1,625 600 Retirement of long-term debt.............................. (963) (755) (574) Payment of common stock dividends......................... (190) (218) (231) Preferred securities distributions........................ -- -- (44) Redemption of preferred securities........................ -- -- (30) Payment of capital and finance lease obligations.......... (44) (13) (15) Stockholder's contribution, net........................... 250 -- 50 Payment of preferred stock dividends...................... (2) (2) (2) Increase (decrease) in notes payable, net................. (200) (257) 41 Other financing........................................... (33) (55) 1 ------- ----- ----- Net cash provided by (used in) financing activities................................... (127) 325 (204) ------- ----- -----
CE-36
YEARS ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ---- ---- ---- (IN MILLIONS) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (49) (198) 231 CASH AND CASH EQUIVALENTS FROM EFFECT OF REVISED FASB INTERPRETATION NO. 46 CONSOLIDATION....................... 174 -- -- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 46 244 13 ------- ----- ----- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 171 $ 46 $ 244 ======= ===== ===== OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE: CASH TRANSACTIONS Interest paid (net of amounts capitalized)................ $ 324 $ 227 $ 147 Income taxes paid (net of refunds, $50, $91, and $205, respectively).......................................... (27) (56) (78) OPEB cash contribution.................................... 62 71 73 NON-CASH TRANSACTIONS Other assets placed under capital lease................... 3 19 62
The accompanying notes are an integral part of these statements. CE-37 CONSUMERS ENERGY COMPANY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------ 2004 2003 ---- ---- (IN MILLIONS) ASSETS PLANT AND PROPERTY (AT COST) Electric.................................................. $ 7,967 $ 7,600 Gas....................................................... 2,995 2,875 Other..................................................... 2,523 15 ------- ------- 13,485 10,490 Less accumulated depreciation, depletion, and amortization........................................... 5,665 4,417 ------- ------- 7,820 6,073 Construction work-in-progress............................. 353 375 ------- ------- 8,173 6,448 ------- ------- INVESTMENTS Stock of affiliates....................................... 25 20 First Midland Limited Partnership......................... -- 224 Midland Cogeneration Venture Limited Partnership.......... -- 419 Other..................................................... 19 18 ------- ------- 44 681 ------- ------- CURRENT ASSETS Cash and cash equivalents at cost, which approximates market................................................. 171 46 Short-term investments at cost, which approximates market................................................. 4 -- Restricted cash........................................... 21 18 Accounts receivable, notes receivable, and accrued revenue, less allowances of $10 in 2004 and $8 in 2003................................................... 374 257 Accounts receivable -- related parties.................... 18 4 Inventories at average cost Gas in underground storage............................. 855 739 Materials and supplies................................. 67 70 Generating plant fuel stock............................ 66 41 Deferred property taxes................................... 165 143 Regulatory assets -- postretirement benefits.............. 19 19 Derivative instruments.................................... 96 2 Other..................................................... 95 78 ------- ------- 1,951 1,417 ------- ------- NON-CURRENT ASSETS Regulatory Assets Securitized costs...................................... 604 648 Additional minimum pension............................. 372 -- Postretirement benefits................................ 139 162 Abandoned Midland project.............................. 10 10 Other.................................................. 552 266 Nuclear decommissioning trust funds....................... 575 575 Prepaid pension costs..................................... -- 364 Other..................................................... 391 174 ------- ------- 2,643 2,199 ------- ------- TOTAL ASSETS................................................ $12,811 $10,745 ======= =======
CE-38
DECEMBER 31, ------------------ 2004 2003 ---- ---- (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........................................ 932 682 Accumulated other comprehensive income................. 31 17 Retained earnings since December 31, 1992.............. 608 521 ------- ------- 2,412 2,061 Preferred stock........................................... 44 44 Long-term debt............................................ 4,000 3,583 Long-term debt -- related parties......................... 326 506 Non-current portion of capital leases and finance lease obligations............................................ 315 58 ------- ------- 7,097 6,252 ------- ------- MINORITY INTERESTS.......................................... 657 -- ------- ------- CURRENT LIABILITIES Current portion of long-term debt, capital leases and finance leases......................................... 147 38 Current portion of long-term debt -- related parties...... 180 -- Note payable -- related parties........................... -- 200 Accounts payable.......................................... 267 200 Accounts payable -- related parties....................... 14 75 Accrued interest.......................................... 83 58 Accrued taxes............................................. 254 209 Current portion of purchase power contracts............... -- 27 Deferred income taxes..................................... 20 33 Other..................................................... 238 127 ------- ------- 1,203 967 ------- ------- NON-CURRENT LIABILITIES Deferred income taxes..................................... 1,350 1,233 Regulatory Liabilities Regulatory liabilities for cost of removal................ 1,044 983 Income taxes, net......................................... 357 312 Other regulatory liabilities.............................. 173 172 Postretirement benefits................................... 207 190 Asset retirement obligations.............................. 436 358 Deferred investment tax credit............................ 79 85 Other..................................................... 208 193 ------- ------- 3,854 3,526 ------- ------- Commitments and Contingencies (Notes 2, 3, 4, 7, and 9) TOTAL STOCKHOLDER'S INVESTMENT AND LIABILITIES.............. $12,811 $10,745 ======= =======
The accompanying notes are an integral part of these statements. CE-39 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, -------------------------- 2004 2003 2002 ---- ---- ---- (IN MILLIONS) COMMON STOCK At beginning and end of period(a)......................... $ 841 $ 841 $ 841 ------ ------ ------ OTHER PAID-IN CAPITAL At beginning of period.................................... 682 682 632 Stockholder's contribution................................ 250 -- 150 Return of stockholder's contribution...................... -- -- (100) ------ ------ ------ At end of period.......................................... 932 682 682 ------ ------ ------ ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Minimum Pension Liability At beginning of period................................. -- (185) -- Minimum pension liability adjustments(b)............... (1) 185 (185) ------ ------ ------ At end of period..................................... (1) -- (185) ------ ------ ------ Investments At beginning of period................................. 9 1 16 Unrealized gain (loss) on investments(b)............... 3 8 (16) Reclassification adjustments included in net income(b)............................................. -- -- 1 ------ ------ ------ At end of period..................................... 12 9 1 ------ ------ ------ Derivative Instruments At beginning of period................................. 8 5 (12) Unrealized gain on derivative instruments(b)........... 23 13 10 Realized gain (loss) on derivative instruments(b)...... (11) (10) 7 ------ ------ ------ At end of period..................................... 20 8 5 ------ ------ ------ Total Accumulated Other Comprehensive Income (Loss)......... 31 17 (179) ------ ------ ------ RETAINED EARNINGS At beginning of period.................................... 521 545 441 Net income(b)............................................. 279 196 381 Cash dividends declared -- Common Stock................... (190) (218) (231) Cash dividends declared -- Preferred Stock................ (2) (2) (2) Preferred securities distributions........................ -- -- (44) ------ ------ ------ At end of period.......................................... 608 521 545 ------ ------ ------ TOTAL COMMON STOCKHOLDER'S EQUITY........................... $2,412 $2,061 $1,889 ====== ====== ======
- ------------------------- (a) Number of shares of common stock outstanding was 84,108,789 for all periods presented. CE-40 (b) Disclosure of Other Comprehensive Income:
2004 2003 2002 ---- ---- ---- (IN MILLIONS) Minimum pension liability adjustments, net of tax (tax benefit) of $(1), $100, and $(100), respectively.......... $ (1) $185 $(185) Investments Unrealized gain (loss) on investments, net of tax (tax benefit) of $2, $4, and $(9), respectively............. 3 8 (16) Reclassification adjustments included in net income, net of tax of $-, $-, and $1, respectively................. -- -- 1 Derivative Instruments Unrealized gain on derivative instruments, net of tax of $12, $7, and $6, respectively.......................... 23 13 10 Realized gain (loss) on derivative instruments, net of tax (tax benefit) of $(6), $(5), and $4, respectively...... (11) (10) 7 Net income.................................................. 279 196 381 ---- ---- ----- Total Comprehensive Income.................................. $293 $392 $ 198 ==== ==== =====
The accompanying notes are an integral part of these statements. CE-41 (This page intentionally left blank) CE-42 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1: CORPORATE STRUCTURE AND ACCOUNTING POLICIES CORPORATE STRUCTURE: 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. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include Consumers, and all other entities in which we have a controlling financial interest or are the primary beneficiary, in accordance with Revised FASB Interpretation No. 46. The primary beneficiary of a variable interest entity is the party that absorbs or receives a majority of the entity's expected losses or expected residual returns or both as a result of holding variable interests, which are ownership, contractual, or other economic interests. In 2004, we consolidated the MCV Partnership and the FMLP in accordance with Revised FASB Interpretation No. 46. For additional details, see Note 13, Implementation of New Accounting Standards. These entities are reported as equity method investments in our consolidated financial statements for all periods prior to January 1, 2004. 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 are not the primary beneficiary. Intercompany transactions and balances have been eliminated. USE OF ESTIMATES: We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. 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 consolidated 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, Contingencies. REVENUE RECOGNITION POLICY: We recognize revenues from deliveries of electricity and natural gas, and the storage of natural gas when services are provided. Sales taxes are recorded as liabilities and are not included in revenues. 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. 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, 2004, our restricted cash on hand was $21 million. Restricted cash dedicated for repayment of Securitization bonds is classified as a current asset as the payments on the related Securitization bonds occur within one year. FINANCIAL INSTRUMENTS: We account for investments in debt and equity securities using SFAS No. 115. Debt and equity securities classified as available-for-sale are reported at fair value determined from quoted market prices. Debt and equity securities classified as held-to-maturity are reported at cost. Unrealized gains or losses resulting from changes in fair value of certain available-for-sale debt and equity securities are reported, net of tax, in equity as part of accumulated other comprehensive income. Unrealized gains or losses are excluded from earnings unless the related changes in fair value are determined to be other than temporary. Unrealized gains or losses on our nuclear decommissioning investments are reflected as regulatory liabilities on our Consolidated Balance Sheets. Realized gains or losses would not affect our earnings or cash flows. For additional details regarding financial instruments, see Note 4, Financial and Derivative Instruments. CE-43 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GAS INVENTORY: We use the weighted average cost method for valuing working gas and recoverable cushion gas in underground storage facilities GENERATING PLANT FUEL STOCK INVENTORY: We use the weighted average cost method for valuing coal inventory and classify these costs as generating plant fuel stock on our Consolidated Balance Sheets. The MCV Partnership's natural gas inventory is also included in this category, stated at the lower of cost or market and valued using the last-in, first-out ("LIFO") method. 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 its estimated undiscounted future 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 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 using straight-line rates approved by the MPSC. The composite depreciation rates for our properties are:
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- Electric utility property................................... 3.2% 3.1% 3.1% Gas utility property........................................ 3.7% 4.6% 4.5% Other property.............................................. 8.4% 8.1% 7.2%
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 certain 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, 2004, we have recorded a liability to the DOE of $141 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, Contingencies, "Other Electric Contingencies -- Nuclear Matters." OTHER INCOME AND OTHER EXPENSE: The following tables show the components of Other income and Other expense:
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Other income Electric restructuring return............................. $ 6 $ 8 $ 4 Return on stranded costs.................................. 7 -- -- Return on security costs.................................. 2 -- -- All other................................................. 1 2 2 --- --- --- Total other income.......................................... $16 $10 $ 6 === === ===
CE-44 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Other expense Loss on SERP investment................................... $ (1) $ (1) $ (3) Loss on CMS Energy stock.................................. -- (12) (12) Civic and political expenditures.......................... (2) (2) (3) Donations................................................. (1) -- -- All other................................................. (3) (4) (7) ---- ---- ---- Total other expense......................................... $ (7) $(19) $(25) ==== ==== ====
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. The cost of removal, less salvage, is recorded as a regulatory liability. For additional details, see Note 6, 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, 2004 and 2003, was as follows:
ESTIMATED DEPRECIABLE YEARS ENDED DECEMBER 31 LIFE IN YEARS(e) 2004 2003 - ----------------------- ---------------- ---- ---- (IN MILLIONS) Electric: Generation................................................ 13-105 $3,433 $3,332 Distribution.............................................. 12-75 4,069 3,799 Other..................................................... 7-50 384 388 Capital leases(a)......................................... 81 81 Gas: Underground storage facilities(b)......................... 30-65 255 232 Transmission.............................................. 15-75 367 342 Distribution.............................................. 40-75 2,057 1,976 Other..................................................... 7-50 290 300 Capital leases(a)......................................... 26 25 Other: MCV Facility.............................................. 5-35 2,481 -- Non-utility property...................................... 7-71 15 15 Construction work-in-progress............................. 353 375 Other..................................................... 27 -- Less accumulated depreciation, depletion, and amortization(c)........................................... 5,665 4,417 ------ ------ Net property, plant, and equipment(d)....................... $8,173 $6,448 ====== ======
- ------------------------- (a) Capital leases presented in this table are gross amounts. Accumulated amortization of capital leases was $49 million at December 31, 2004 and $38 million at December 31, 2003. (b) Includes unrecoverable base natural gas in underground storage of $26 million at December 31, 2004 and $23 million at December 31, 2003, which is not subject to depreciation. (c) As of December 31, 2004, accumulated depreciation, depletion, and amortization is comprised of $4.601 billion from public utility plant, $1.063 billion related to the consolidation of the MCV Facility, and $1 million from our non-utility plant assets. As of December 31, 2003, accumulated depreciation, depletion, CE-45 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and amortization included $4.416 billion from our public utility plant and $1 million related to non-utility plant assets. (d) Included in net property, plant and equipment are intangible assets primarily related to software development costs, consents, leasehold improvements, and rights of way. The estimated amortization life for software development costs is seven years. The estimated amortization life for leasehold improvements is over the life of the lease. Other intangible amortization lives range from 50 to 105 years. Intangible assets at December 31, 2004 and 2003 were as follows:
GROSS ACCUMULATED INTANGIBLE YEAR ENDED DECEMBER 31, 2004 COST AMORTIZATION ASSET, NET ---------------------------- ----- ------------ ---------- (IN MILLIONS) Software development....................................... $179 $117 $ 62 Rights of way.............................................. 93 28 65 Leasehold improvements..................................... 20 13 7 Franchises and consents.................................... 19 9 10 Other intangibles.......................................... 18 14 4 ---- ---- ---- Totals..................................................... $329 $181 $148 ==== ==== ====

GROSS ACCUMULATED INTANGIBLE YEAR ENDED DECEMBER 31, 2003 COST AMORTIZATION ASSET, NET ---------------------------- ----- ------------ ---------- (IN MILLIONS) Software development....................................... $178 $107 $ 71 Rights of way.............................................. 89 25 64 Leasehold improvements..................................... 32 30 2 Franchises and consents.................................... 19 8 11 Other intangibles.......................................... 18 14 4 ---- ---- ---- Totals..................................................... $336 $184 $152 ==== ==== ====
Pre-tax amortization expense related to these intangible assets was $19 million for the year ended December 31, 2004, $19 million for the year ended December 31, 2003, and $17 million for the year ended December 31, 2002. Intangible assets amortization is forecasted to range from $8 million to $19 million per year over the next five years. (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 45-50 facilities..................... Nuclear...................... 17-25 Transmission................... 60 Hydroelectric................ 55-71 Distribution................... 50 Other........................ 32 Other.......................... 50 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. CE-46 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) RELATED PARTY TRANSACTIONS: We received income from related parties as follows:
TYPE OF INCOME RELATED PARTY 2004 2003 2002 - -------------- ------------- ---- ---- ---- (IN MILLIONS) Gas sales, storage, transportation and other services(a).......................................... MCV Partnership $-- $17 $27 Consumers' affiliated Income from our investments in related party trusts(b)............................................ Trust Preferred 1 2 -- Securities companies Dividend income(b)..................................... CMS Energy parent -- -- 3 company
We recorded expense from related parties as follows:
TYPE OF COST RELATED PARTY 2004 2003 2002 - ------------ ------------- ---- ---- ---- (IN MILLIONS) Electric generating capacity and energy(a)......................... MCV Partnership $-- $455 $497 Electric generating capacity and energy............................ Affiliates of Enterprises 67 64 67 Interest expense on long-term debt(b)........................... Consumers' affiliated Trust Preferred Securities companies 44 45 -- Gas purchases....................... CMS ERM 1 27 127 Overhead expense(c)................. CMS Energy parent company -- 8 18 Gas transportation(d)............... Panhandle/Trunkline -- 1 22 Gas transportation.................. CMS Bay Area Pipeline, L.L.C. 4 4 4
- ------------------------- (a) In 2004, we consolidated the MCV Partnership and the FMLP into our consolidated financial statements in accordance with Revised FASB Interpretation No. 46. For additional details, see Note 13, Implementation of New Accounting Standards. (b) 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 13, Implementation of New Accounting Standards. (c) We base our related party transactions on regulated prices, market prices, or competitive bidding. In 2003, we paid overhead costs to CMS Energy based on an industry allocation methodology, such as the Massachusetts Formula. In 2004, we paid no overhead costs to CMS Energy. (d) Panhandle was sold in June 2003. We own 2.4 million shares of CMS Energy Common Stock with a fair value of $25 million at December 31, 2004. For additional details on our investment in CMS Energy Common Stock, see Note 4, Financial and Derivative Instruments. TRADE RECEIVABLES: We record our accounts receivable at fair value. Accounts deemed uncollectible are charged to operating expense. UNAMORTIZED DEBT PREMIUM, DISCOUNT, AND EXPENSE: We capitalize premiums, discounts, and expenses incurred in connection with the issuance of long-term debt and amortize those costs ratably over the terms of the debt issues. Any refinancing costs are charged to expenses as incurred. For the regulated portions of our businesses, if we refinance debt, we capitalize any remaining unamortized premiums, discounts, and expenses and amortize them ratably over the terms of the newly issued debt. CE-47 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. We reflect the following regulatory assets and liabilities, which include both current and non-current amounts, on our 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 the amount that we expect to recover in rates over the next eight years.
DECEMBER 31 2004 2003 - ----------- ---- ---- (IN MILLIONS) Securitized costs (Note 3).................................. $ 604 $ 648 Postretirement benefits (Note 5)............................ 530 181 Electric Restructuring Implementation Plan (Note 2)......... 88 91 Manufactured gas plant sites (Note 2)....................... 65 67 Abandoned Midland project................................... 10 10 Unamortized debt costs...................................... 71 51 Asset retirement obligation (Note 6)........................ 83 49 Stranded costs (Note 2)..................................... 63 -- Section 10d(4) regulatory asset (Note 2).................... 141 -- Other....................................................... 41 8 ------ ------ Total regulatory assets(a).................................. $1,696 $1,105 ====== ====== Cost of removal (Note 6).................................... $1,044 $ 983 Income taxes (Note 7)....................................... 357 312 Asset retirement obligation (Note 6)........................ 168 168 Other....................................................... 5 4 ------ ------ Total regulatory liabilities(a)............................. $1,574 $1,467 ====== ======
- ------------------------- (a) At December 31, 2004, we classified $19 million of regulatory assets as current regulatory assets and we classified $1.677 billion of regulatory assets as non-current regulatory assets. At December 31, 2003, we classified $19 million of regulatory assets as current regulatory assets and we classified $1.086 billion of regulatory assets as non-current regulatory assets. At December 31, 2004 and December 31, 2003, all of our regulatory liabilities represented non-current regulatory liabilities. 2: CONTINGENCIES 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 implemented the recommendations of the Special Committee. CMS Energy is cooperating with an investigation by the DOJ concerning round-trip trading. CMS Energy is unable to predict the outcome of this matter and what effect, if any, this investigation will have on its business. In March 2004, the SEC approved a cease-and-desist order settling an administrative action against CMS Energy CE-48 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) related to round-trip trading. The order did not assess a fine and CMS Energy neither admitted nor denied the order's findings. The settlement resolved the SEC investigation involving CMS Energy and CMS MST. 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. These cases were later consolidated by the court. The plaintiffs generally seek unspecified damages based on allegations that the defendants violated United States securities laws and regulations by making allegedly false and misleading statements about 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 the individual defendants filed motions to dismiss on June 21, 2004. The judge issued an opinion and order dated January 7, 2005, granting the motion to dismiss for Consumers and three of the individual defendants, but denying the motions to dismiss for CMS Energy and the 13 remaining individual defendants. CMS Energy and the individual defendants 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 were filed in July 2002 in United States District Court for the Eastern District of Michigan and were later consolidated by the court. 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. The judge issued an opinion and order dated December 27, 2004, conditionally granting plaintiffs' motion for class certification. A trial date has not been set, but is expected to be no earlier than late in 2005. 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: The EPA and the state regulations require us to make significant capital expenditures estimated to be $802 million. As of December 31, 2004, we have incurred $525 million in capital expenditures to comply with the EPA regulations and anticipate that the remaining $277 million of capital expenditures will be made between 2005 and 2011. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seek modification permits from the EPA. We have received and responded to information requests from the EPA on this subject. We believe that we have properly interpreted the requirements of "routine maintenance." If our interpretation is found to be incorrect, we may be required to install additional pollution controls at some or all of our coal-fired electric plants and potentially pay fines. Additionally, the viability of certain plants remaining in operation could be called into question. In addition to modifying the coal-fired electric plants, we expect to utilize nitrogen oxide emissions allowances for years 2005 through 2009, most of which have been purchased. The cost of the allowances is estimated to average $8 million per year for 2005-2006. The need for allowances will decrease after year 2006 with the installation of emissions control technology. CE-49 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2004, 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. In February 2004, the Ingham County Circuit Court judge deferred to the primary jurisdiction of the MPSC, dismissing the circuit court case without prejudice. In February 2005, the MPSC issued an order in the 2004 PSCR plan case concluding that we have been correctly administering the energy charge calculation methodology. The eight plaintiff qualifying facilities have appealed the dismissal of the circuit court case to the Michigan Court of Appeals. We cannot predict the outcome of this appeal. ELECTRIC RESTRUCTURING MATTERS ELECTRIC ROA: 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 alternative electric suppliers. As of March 2005, alternative electric suppliers are providing 900 MW of generation supply to ROA customers. This amount represents 12 percent of our distribution load and an increase of 23 percent compared to March 2004. ELECTRIC RESTRUCTURING PROCEEDINGS: Below is a discussion of our electric restructuring proceedings. CE-50 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following chart summarizes our electric restructuring filings with the MPSC:
YEAR(S) YEARS PROCEEDING FILED COVERED REQUESTED AMOUNT STATUS - ---------- ------- ------- ---------------- ------ Stranded Costs 2002-2004 2000-2003 $137 million(a) The MPSC ruled that we experienced zero Stranded Costs for 2000 through 2001. The MPSC approved recovery of $63 million in Stranded Costs for 2002 through 2003. Implementation Costs 1999-2004 1997-2003 $91 million(b) The MPSC allowed $68 million for the years 1997-2001, plus $20 million for the cost of money through 2003. Implementation cost filings for 2002 and 2003 in the amount of $8 million, which includes the cost of money through 2003, are pending MPSC approval. Section 10d(4) 2004 2000-2005 $628 million Filed with the MPSC in October Regulatory Assets 2004.
- ------------------------- (a) Amount includes the cost of money through the year in which we expected to receive recovery from the MPSC and assumes recovery of Clean Air Act costs through the Section 10d(4) Regulatory Asset case. (b) Amount includes the cost of money through the year prior to the year filed. Section 10d(4) Regulatory Assets: Section 10d(4) of the Customer Choice Act allows us to recover certain regulatory assets through deferred recovery of annual capital expenditures in excess of depreciation levels and certain other expenses incurred prior to and throughout the rate freeze and rate cap periods, including the cost of money. The section also allows deferred recovery of expenses incurred during the rate freeze and rate cap periods that result from changes in taxes, laws, or other state or federal governmental actions. In October 2004, we filed an application with the MPSC seeking recovery of $628 million of Section 10d(4) Regulatory Assets for the period June 2000 through December 2005 consisting of: - capital expenditures in excess of depreciation, - Clean Air Act costs, - other expenses related to changes in law or governmental action incurred during the rate freeze and rate cap periods, and - the associated cost of money through the period of collection. Of the $628 million, $152 million relates to the cost of money. As allowed by the Customer Choice Act, in January 2004, we began accruing and deferring for recovery the 2004 portion of our Section 10d(4) Regulatory Assets. In November 2004, the MPSC issued an order in Detroit Edison's general electric rate case which concluded that Detroit Edison's return of and on Clean Air Act costs incurred from June 2000 through December 2003 are recoverable under Section 10d(4). Based on the precedent set by this order, we recorded an additional regulatory asset in November 2004 for our return of and on Clean Air Act expenditures incurred from 2000 through 2003. Unless we receive an order from the MPSC to the contrary, we will continue to record additional accruals. However, certain aspects of Detroit Edison's electric rate case are different from our Section 10d(4) Regulatory Asset filing. In March 2005, the MPSC Staff filed testimony recommending the MPSC approve recovery of approximately $323 million. We cannot predict the amount, if any, CE-51 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the MPSC will approve as recoverable. At December 31, 2004, total Section 10d(4) Regulatory Assets totaled $141 million. TRANSMISSION SALE: In May 2002, we sold our electric transmission system to MTH, a non-affiliated limited partnership whose general partner is a subsidiary of Trans-Elect, Inc. We are in arbitration with MTH regarding property tax items used in establishing the selling price of our electric transmission system. An unfavorable outcome could result in a reduction of sale proceeds previously recognized of approximately $2 million to $3 million. ELECTRIC RATE MATTERS ELECTRIC RATE CASE: In December 2004, we filed an application with the MPSC to increase our retail electric base rates. The electric rate case filing requests an annual increase in revenues of approximately $320 million. The primary reasons for the request are increased system maintenance and improvement costs, Clean Air Act related expenditures, and employee pension costs. A final order from the MPSC on our electric rate case is expected in late 2005. If approved as requested, the rate increase would go into effect in January 2006 and would apply to all retail electric customers. We cannot predict the amount or timing of the rate increase, if any, which the MPSC will approve. POWER SUPPLY COSTS: 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 capacity and energy contracts for the physical delivery of electricity primarily in the summer months and to a lesser degree in the winter months. We have purchased capacity and energy contracts partially covering the estimated reserve margin requirements for 2005 through 2007. As a result, we have recognized an asset of $12 million for unexpired capacity and energy contracts as of December 31, 2004. The total premium costs of electric capacity and energy contracts for 2004 were approximately $12 million. PSCR: The PSCR process assures recovery of all reasonable and prudent power supply costs actually incurred by us. In September 2004, we submitted our 2005 PSCR filing to the MPSC. The proposed PSCR charge would allow us to recover a portion of our increased power supply costs from commercial and industrial customers and, subject to the overall rate caps, from other customers. We self-implemented the proposed 2005 PSCR charge in January 2005. We estimate the increased recovery of power supply costs from commercial and industrial customers to be approximately $49 million in 2005. The revenues from the PSCR charges are subject to reconciliation at the end of the year after actual costs have been reviewed for reasonableness and prudence. We cannot predict the outcome of these PSCR proceedings. OTHER ELECTRIC CONTINGENCIES 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 a 49 percent partnership interest in the MCV Partnership, and a 35 percent lessor interest in the MCV Facility. In 2004, we consolidated the MCV Partnership and the FMLP into our consolidated financial statements in accordance with Revised FASB Interpretation No. 46. For additional details, see Note 13, Implementation of New Accounting Standards. Our consolidated retained earnings include undistributed earnings from the MCV Partnership of $237 million at December 31, 2004 and $245 million at December 31, 2003. CE-52 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The cost that we incur under the MCV Partnership PPA exceeds the recovery amount allowed by the MPSC. We expense all cash underrecoveries directly to income. We estimate cash underrecoveries of capacity and fixed energy payments as follows:
2005 2006 2007 ---- ---- ---- ~~Estimated cash underrecoveries.............................. $56 $55 $39 === === ===~~
After September 15, 2007, we expect to claim relief under 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 MCV Partnership has indicated that it may take issue with our exercise of the regulatory out clause after September 2007. We believe that the clause is valid and fully effective, but cannot assure that it will prevail in the event of a dispute. The MPSC's future actions on the capacity and fixed energy payments recoverable from customers subsequent to September 15, 2007 may affect negatively the earnings of the MCV Partnership and the value of our investment in the MCV Partnership. Further, under the PPA, variable energy payments to the MCV Partnership are based on the cost of coal burned at our coal plants and our 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 and the price the MCV Partnership can charge us for energy has not, the MCV Partnership's financial performance has been impacted negatively. Even with the approved RCP, if gas prices continue at present levels or increase, the economics of operating the MCV Facility may be adverse enough to require us to recognize an impairment. In January 2005, the MPSC issued an order approving the RCP, with modifications. The RCP allows us to recover the same amount of capacity and fixed energy charges from customers as approved in prior MPSC orders. However, we are able to dispatch the MCV Facility on the basis of natural gas market prices, which will reduce the MCV Facility's annual production of electricity and, as a result, reduce the MCV Facility's consumption of natural gas by an estimated 30 to 40 bcf annually. This decrease in the quantity of high-priced natural gas consumed by the MCV Facility will benefit our ownership interest in the MCV Partnership. The substantial MCV Facility fuel cost savings will be used first to offset fully the cost of replacement power. Second, $5 million annually will be used to fund a renewable energy program. Remaining savings will be split between the MCV Partnership and Consumers. Consumers' direct savings will be shared 50 percent with its customers in 2005 and 70 percent in 2006 and beyond. Consumers' direct savings from the RCP, after a portion is allocated to customers, will be used to offset our capacity and fixed energy underrecoveries expense. Since the MPSC has excluded these underrecoveries from the rate making process, we anticipate that our savings from the RCP will not affect our return on equity used in our base rate filings. In January 2005, Consumers and the MCV Partnership's general partners accepted the terms of the order and implemented the RCP. The underlying agreement for the RCP between Consumers and the MCV Partnership extends through the term of the PPA. However, either party may terminate that agreement under certain conditions. In February 2005, a group of intervenors in the RCP case filed an application for rehearing of the MPSC order. The Attorney General also filed a claim of appeal with the Michigan Court of Appeals. We cannot predict the outcome of these appeals. MCV PARTNERSHIP PROPERTY TAXES: In January 2004, the Michigan Tax Tribunal issued its decision in the MCV Partnership's tax appeal against the City of Midland for tax years 1997 through 2000. The MCV Partnership estimates that the decision will result in a refund to the MCV Partnership of approximately $35 million in taxes plus $10 million of interest. The Michigan Tax Tribunal decision has been appealed to the Michigan Court of Appeals by the City of Midland and the MCV Partnership has filed a cross-appeal at the Michigan Court of Appeals. The MCV Partnership also has a pending case with the Michigan Tax Tribunal for tax years 2001 through 2004. The MCV Partnership cannot predict the outcome of these proceedings; therefore, CE-53 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the above refund (net of approximately $16 million of deferred expenses) has not been recognized in 2004 earnings. NUCLEAR PLANT DECOMMISSIONING: Decommissioning funding practices approved by the MPSC require us to file a report on the adequacy of funds for decommissioning at three-year intervals. We prepared and filed updated cost estimates for Big Rock and Palisades on March 31, 2004. Excluding additional costs for spent nuclear fuel storage, due to the DOE's failure to accept this spent nuclear fuel on schedule, these reports show a decommissioning cost of $361 million for Big Rock and $868 million for Palisades. Since Big Rock is currently in the process of being decommissioned, the estimated cost includes historical expenditures in nominal dollars and future costs in 2003 dollars, with all Palisades costs given in 2003 dollars. In 1999, the MPSC orders for Big Rock and Palisades provided for fully funding the decommissioning trust funds for both sites. In December 2000, funding of the Big Rock trust fund stopped because the MPSC-authorized decommissioning surcharge collection period expired. The MPSC order set the annual decommissioning surcharge for Palisades at $6 million through 2007. Amounts collected from electric retail customers and deposited in trusts, including trust earnings, are credited to a regulatory liability and asset retirement obligation. Big Rock: Excluding the additional nuclear fuel storage costs due to the DOE's failure to accept this spent fuel on schedule, we are currently projecting that the level of funds provided by the trust for Big Rock will fall short of the amount needed to complete the decommissioning by $26 million. At this time, we plan to provide the additional amounts needed from our corporate funds and, subsequent to the completion of radiological decommissioning work, seek recovery of such expenditures at the MPSC. We cannot predict how the MPSC will rule on our request. The following table shows our Big Rock decommissioning activities:
YEAR-TO-DATE CUMULATIVE DECEMBER 31, 2004 TOTAL-TO-DATE ----------------- ------------- (IN MILLIONS) Decommissioning expenditures(a)............................. $35 $298 Withdrawals from trust funds................................ 36 279 === ====
- ------------------------- (a) Includes site restoration expenditures. These activities had no material impact on net income. At December 31, 2004, we have an investment in nuclear decommissioning trust funds of $52 million for Big Rock. In addition, at December 31, 2004, we have charged $8 million to our FERC jurisdictional depreciation reserve for the decommissioning of Big Rock. Palisades: Excluding additional nuclear fuel storage costs due to the DOE's failure to accept this spent fuel on schedule, we concluded that the existing surcharge for Palisades needed to be increased to $25 million annually, beginning January 1, 2006, and continue through 2011, our current license expiration date. In June 2004, we filed an application with the MPSC seeking approval to increase the surcharge for recovery of decommissioning costs related to Palisades beginning in 2006. In September 2004, we announced that we will seek a 20-year license renewal for Palisades. In January 2005, we filed a settlement agreement with the MPSC that was agreed to by four of the six parties. The settlement agreement provides for the continuation of the existing $6 million annual decommissioning surcharge through 2011 and for the next periodic review to be filed in March 2007. We are seeking MPSC approval of the settlement, under a contested settlement proceeding, but cannot predict the outcome. At December 31, 2004, we have an investment in the MPSC nuclear decommissioning trust funds of $513 million for Palisades. In addition, at December 31, 2004, 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 6, Asset Retirement Obligations. CE-54 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NUCLEAR MATTERS: 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. Over 60 utilities have initiated litigation in the United States Court of Claims; we filed our complaint in December 2002. In July 2004, the DOE filed an amended answer and motion to dismiss the complaint. In October 2004, we filed a response to the DOE's motion and our motion for summary judgment on liability. Oral argument has been held, and the motions are now before the Court for a decision. If our litigation against the DOE is successful, we anticipate future recoveries from the DOE. We plan to use recoveries 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. We expect that the DOE will submit an application to the NRC sometime in 2005 for a license to begin construction of the repository. The application and review process is estimated to take several years. 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 $27 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 $10.761 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 under which 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. GAS CONTINGENCIES GAS ENVIRONMENTAL MATTERS: We expect to incur 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 CE-55 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. We base the estimates on discounted 2003 costs using a discount rate of three percent. The discount rate represents a 10-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 MPSC-approved rates. As of December 31, 2004, we have recorded a liability of $38 million, net of $44 million of expenditures incurred to date, and a regulatory asset of $65 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. GAS RATE MATTERS GAS COST RECOVERY: The GCR process is designed to allow us to recover all of our purchased natural gas costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs for prudency in an annual reconciliation proceeding. The following table summarizes our GCR reconciliation filings with the MPSC. Additional details related to these proceedings follow the table. Gas Cost Recovery Reconciliation
NET OVER GCR YEAR DATE FILED ORDER DATE RECOVERY STATUS - -------- ---------- ---------- -------- ------ 2001-2002 June 2002 May 2004 $ 3 million $2 million has been refunded, $1 million is included in our 2003-2004 GCR reconciliation filing 2002-2003 June 2003 March 2004 $ 5 million Net over-recovery includes interest accrued through March 2003, and an $11 million disallowance settlement agreement 2003-2004 June 2004 February 2005 $31 million Filing includes the $1 million and the $5 million GCR net over-recovery above
Net over-recovery amounts included in the table above include refunds that we received from our suppliers which are required to be refunded to our customers. GCR Year 2003-2004: In February 2005, the MPSC approved a settlement agreement that resulted in a credit to our GCR customers for a $28 million over-recovery, plus $3 million interest, using a roll-in refund methodology. The roll-in methodology incorporates a GCR over/under-recovery in the next GCR plan year. GCR Plan for Year 2004-2005: In December 2003, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2004 through March 2005. In June 2004, the MPSC issued a final CE-56 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Order in our GCR plan approving a settlement. The settlement included a quarterly mechanism for setting a GCR ceiling price. The current ceiling price is $6.57 per mcf. Actual gas costs and revenues will be subject to an annual reconciliation proceeding. GCR Plan for Year 2005-2006: In December 2004, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2005 through March 2006. Our request proposes using a GCR factor consisting of: - a base GCR factor of $6.98 per mcf, plus - a quarterly GCR ceiling price adjustment contingent upon future events. The GCR factor can be adjusted monthly, provided it remains at or below the current ceiling price. The quarterly adjustment mechanism allows an increase in the GCR ceiling price to reflect a portion of cost increases if the average NYMEX price for a specified period is greater than that used in calculating the base GCR factor. Actual gas costs and revenues will be subject to an annual reconciliation proceeding. 2003 GAS RATE CASE: In March 2003, we filed an application with the MPSC for a gas rate increase in the annual amount of $156 million. In December 2003, the MPSC granted an interim rate increase in the amount of $19 million annually. The MPSC also ordered an annual $34 million reduction in our annual depreciation expense and related taxes. On October 14, 2004, the MPSC issued its Opinion and Order on final rate relief. In the order, the MPSC authorized us to place into effect surcharges that would increase annual gas revenues by $58 million. Further, the MPSC rescinded the $19 million annual interim rate increase. The final rate relief was contingent upon our agreement to: - achieve a common equity level of at least $2.3 billion by year-end 2005 and propose a plan to improve the common equity level thereafter until our target capital structure is reached, - make certain safety-related operation and maintenance, pension, retiree health-care, employee health-care, and storage working capital expenditures for which the surcharge is granted, - refund surcharge revenues when our rate of return on common equity exceeds its authorized 11.4 percent rate, - prepare and file annual reports that address certain issues identified in the order, and - file a general rate case on or before the date that the surcharge expires (which is two years after the surcharge goes into effect). On October 15, 2004, we agreed to these commitments. 2001 GAS DEPRECIATION CASE: In December 2003, we filed an update to our gas utility plant depreciation case originally filed in June 2001. On December 18, 2003, the MPSC ordered an annual $34 million reduction in our depreciation expense and related taxes in an interim rate order issued in our 2003 gas rate case. In October and December 2004, the MPSC issued Opinions and Orders in our gas depreciation case. The October 2004 order requires us to file an application for new depreciation accrual rates for our natural gas utility plant on, or no earlier than three months prior to, the date we file our next natural gas general rate case. The MPSC also directed us to undertake a study to determine why our removal costs are in excess of those of other regulated Michigan natural gas utilities and file a report with the MPSC Staff on or before December 31, 2005. In February 2005, we requested a delay in the filing date for the next depreciation case until after the MPSC considers the removal cost study, and after the MPSC issues an order in a pending case relating to asset retirement obligation accounting. CE-57 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OTHER MATTERS COLLECTIVE BARGAINING AGREEMENTS: Approximately 46 percent of our employees are represented by the Utility Workers of America Union. The Union represents Consumers' operating, maintenance, and construction employees and our call center employees. The collective bargaining agreement with the Union for our operating, maintenance, and construction employees will expire on June 1, 2005 and negotiations for a new agreement is underway currently. The collective bargaining agreement with the Union for our call center employees will expire on August 1, 2005. OTHER CONTINGENCIES In addition to the matters disclosed within this Note, we are party 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 within this Note. Resolution of these contingencies is not expected to have a material adverse impact on our financial position, liquidity, or results of operations. CE-58 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3: FINANCINGS AND CAPITALIZATION Long-term debt as of December 31 follows:
INTEREST RATE (%) MATURITY 2004 2003 ----------------- -------- ---- ---- (IN MILLIONS) First mortgage bonds............................ 4.250 2008 $ 250 $ 250 4.800 2009 200 200 4.400 2009 150 -- 4.000 2010 250 250 5.000 2012 300 -- 5.375 2013 375 375 6.000 2014 200 200 5.000 2015 225 -- 5.500 2016 350 -- 7.375 2023 -- 208 ------ ------ 2,300 1,483 ------ ------ Senior notes.................................... 6.000 2005 -- 300 6.500 2005 -- 141 6.250 2006 332 332 6.375 2008 159 159 6.875 2018 180 180 6.500 2028 141 142 ------ ------ 812 1,254 ------ ------ Securitization bonds............................ 5.188(a) 2005-2015 398 426 ------ ------ FMLP Debt(b): Subordinated secured notes................... 11.750 2005 70 -- Subordinated secured notes................... 13.250 2006 75 -- Tax-exempt subordinated secured notes........ 6.875 2009 137 -- Tax-exempt subordinated secured notes........ 6.750 2009 14 -- ------ ------ 296 -- ------ ------ Nuclear fuel disposal liability................. (c) 141 139 Tax-exempt pollution control revenue bonds...... Various 2010-2018 126 126 Long-term bank debt(d).......................... Variable 2006 60 200 Other........................................... 1 4 ------ ------ 328 469 ------ ------ Total principal amounts outstanding............... 4,134 3,632 Current amounts................................. (118) (28) Net unamortized discount........................ (16) (21) ------ ------ Total Long-term debt.............................. $4,000 $3,583 ====== ======
- ------------------------- (a) Represents the weighted average interest rate at December 31, 2004 (5.097 percent at December 31, 2003). (b) We consolidate the FMLP in accordance with Revised FASB Interpretation No. 46. The FMLP debt is essentially project debt secured by certain assets of the MCV Partnership and the FMLP. The debt is non-recourse to other assets of Consumers. (c) Maturity date uncertain. (d) Paid off in January 2005. CE-59 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FINANCINGS: The following is a summary of significant long-term debt issuances and retirements during 2004:
INTEREST ISSUE/RETIREMENT PRINCIPAL RATE (%) DATE MATURITY DATE --------- -------- ---------------- ------------- (IN MILLIONS) DEBT ISSUANCES FMB.............................. $ 150 4.400 August 2004 August 2009 FMB.............................. 300 5.000 August 2004 February 2012 FMB.............................. 350 5.500 August 2004 August 2016 FMB.............................. 225 5.000 December 2004 March 2015 ------------- Total debt issuances.......... $1,025 ============= DEBT RETIREMENTS FMLP debt........................ $ 115 11.750 July 2004 July 2004 Long-term bank debt.............. 140 Variable August 2004 March 2009 Senior notes..................... 141 6.500 September 2004 June 2018 Senior notes..................... 300 6.000 September 2004 March 2005 FMB.............................. 208 7.375 December 2004 September 2023 ------------- Total debt retirements........ $ 904 =============
Issuance costs associated with the issuances of FMBs totaled $7 million and are being amortized ratably over the lives of the related debt. Call premiums associated with the debt retirements totaled $20 million and are being amortized ratably over the lives of the newly issued debt. SUBSEQUENT FINANCING ACTIVITIES: In January 2005, we issued $250 million of 5.15 percent FMBs due 2017. We used the net proceeds of $247 million to pay off our $60 million long-term bank loan, to redeem our $73 million 8.36 percent subordinated deferrable interest notes, and to redeem our $124 million 8.20 percent subordinated deferrable interest notes. The subordinated deferrable interest notes are classified as Long-term debt -- related parties on our accompanying Consolidated Balance Sheets. FIRST MORTGAGE BONDS: We secure our FMBs 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. SECURITIZATION BONDS: Securitization bonds are collateralized by certain regulatory assets. The bondholders have no recourse to our other assets. Through our rate structure, we bill customers for securitization surcharges to fund the payment of principal, interest, and other related expenses on the Securitization bonds. Securitization surcharges totaled $50 million annually in 2003 and 2004. LONG-TERM DEBT -- RELATED PARTIES: We formed various statutory wholly-owned business trusts for the sole purpose of issuing preferred securities and lending the gross proceeds to ourselves. The sole assets of the trusts consist of the debentures described below. These debentures have terms similar to those of the mandatorily redeemable preferred securities the trusts issued. We determined that we do not hold the controlling financial interest in our trust preferred security structures. Accordingly, those entities were deconsolidated as of December 31, 2003 and are reflected in Long-term debt -- related parties. The trust preferred securities were previously included in mezzanine equity. CE-60 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following is a summary of Long-term debt -- related parties as of December 31:
INTEREST DEBENTURE AND RELATED PARTY RATE (%) MATURITY 2004 2003 - --------------------------- -------- -------- ---- ---- (IN MILLIONS) Subordinated deferrable interest notes, Consumers Power Company Financing I(a)......................... 8.36 2015 $ 73 $ 73 Subordinated deferrable interest notes, Consumers Energy Company Financing II(a)....................... 8.20 2027 124 124 Subordinated debentures, Consumers Energy Company Financing III(b)..................................... 9.25 2029 180 180 Subordinated debentures, Consumers Energy Company Financing IV......................................... 9.00 2031 129 129 ----- ---- Total principal amounts outstanding.................... 506 506 Current amounts...................................... (180) -- ----- ---- Total Long-term debt -- related parties................ $ 326 $506 ===== ====
- ------------------------- (a) Redeemed in February 2005. (b) Redeemed in January 2005 with available cash. In the event of default, holders of the trust preferred securities would 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. DEBT MATURITIES: At December 31, 2004, the aggregate annual maturities for long-term debt for the next five years are:
PAYMENTS DUE ------------------------------------ 2005 2006 2007 2008 2009 ---- ---- ---- ---- ---- (IN MILLIONS) ~~Long-term debt.............................................. $118 $478 $59 $504 $443~~
REGULATORY AUTHORIZATION FOR FINANCINGS: We have FERC authorization to issue or guarantee up to $1.1 billion of short-term securities and up to $1.1 billion of short-term FMBs as collateral for such short-term securities. We have FERC authorization to issue up to $1 billion of long-term securities for refinancing or refunding purposes, $1.5 billion of long-term securities for general corporate purposes, and $2.5 billion of long-term FMBs to be issued solely as collateral for other long-term securities. REVOLVING CREDIT FACILITIES: The following secured revolving credit facilities with banks are available as of December 31, 2004:
OUTSTANDING AMOUNT OF AMOUNT LETTERS-OF- AMOUNT COMPANY EXPIRATION DATE FACILITY BORROWED CREDIT AVAILABLE - ------- --------------- --------- -------- ----------- --------- (IN MILLIONS) Consumers(a)......................... $500 $ -- $25 $475 The MCV Partnership.................. August 27, 2005 50 -- 2 48
- ------------------------- (a) This facility expires in August 2005 and may be extended annually at Consumers' option to July 31, 2007. The interest rate on borrowings under this facility is LIBOR plus 125 basis points. Annual fees for letters-of- CE-61 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) credit are 125 basis points on the amount outstanding. A quarterly fee of 22.5 basis points is payable on the average daily unused balance. 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. We sold $304 million of receivables at December 31, 2004 and we sold $297 million of receivables at December 31, 2003. These sold amounts are excluded from accounts receivable on our Consolidated Balance Sheets. We continue to service the receivables sold to the special purpose entity. 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 under our accounts receivable sales program are shown in the following table:
YEARS ENDED DECEMBER 31 2004 2003 - ----------------------- ---- ---- (IN MILLIONS) Net cash flow as a result of accounts receivable financing................................................. $ 7 $ (28) Collections from customers.................................. $4,541 $4,361
DIVIDEND RESTRICTIONS: Under the provisions of our articles of incorporation, at December 31, 2004, we had $456 million of unrestricted retained earnings available to pay common stock dividends. However, covenants in our debt facilities cap common stock dividend payments at $300 million in a calendar year. In October 2004, the MPSC rescinded its December 2003 interim gas rate order, which included a $190 million annual dividend cap. For the year ended December 31, 2004, we paid $190 million in common stock dividends to CMS Energy. PREFERRED STOCK: Our Preferred Stock outstanding follows:
OPTIONAL NUMBER OF SHARES REDEMPTION ---------------- DECEMBER 31 SERIES PRICE 2004 2003 2004 2003 - ----------- ------ ---------- ---- ---- ---- ---- (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 ===== =====
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 inception 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-62 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table describes our guarantees at December 31, 2004:
ISSUE EXPIRATION MAXIMUM CARRYING RECOURSE GUARANTEE DESCRIPTION DATE DATE OBLIGATION AMOUNT PROVISION(A) - --------------------- ----- ---------- ---------- -------- ------------ (IN MILLIONS) Standby letters of credit................... Various Various $ 25 $ -- $ -- Surety bonds................................ Various Various 6 -- -- Nuclear insurance retrospective premiums.... Various Various 134 -- -- ===== =====
- ------------------------- (a) Recourse provision indicates the approximate recovery from third parties including assets held as collateral. The following table provides additional information regarding our guarantees:
GUARANTEE DESCRIPTION HOW GUARANTEE AROSE EVENTS THAT WOULD REQUIRE PERFORMANCE - --------------------- ------------------- ------------------------------------- Standby letters of credit Normal operations of coal Noncompliance with environmental power plants regulations and non-responsive to demands for corrective action Natural gas transportation Nonperformance Self-insurance requirement Nonperformance Nuclear plant closure Nonperformance Surety bonds Normal operating activity, Nonperformance permits and license Nuclear insurance Normal operations of nuclear Call by NEIL and Price-Anderson Act retrospective premiums plants 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 financial instruments based on quoted market prices or, in the absence of specific market prices, on quoted market prices of similar instruments or other valuation techniques. The cost and fair value of our long-term financial instruments are as follows:
2004 2003 --------------------------------------- ----------------------------------- UNREALIZED UNREALIZED DECEMBER 31 COST FAIR VALUE GAIN (LOSS) COST FAIR VALUE GAIN (LOSS) - ----------- ---- ---------- ----------- ---- ---------- ----------- (IN MILLIONS) Long-term debt(a)............... $4,118 $4,232 $(114) $3,611 $3,711 $(100) Long-term debt -- related parties(b).................... 506 518 (12) 506 518 (12) Available-for-sale securities: Common stock of CMS Energy(c)... 10 25 15 10 20 10 SERP: Equity securities............. 15 21 6 10 14 4 Debt securities(e)............ 9 9 -- 7 7 -- Nuclear decommissioning investments(d): Equity securities............. 136 262 126 143 260 117 Debt securities(e)............ 291 302 11 288 304 16
- ------------------------- (a) Includes current maturities of $118 million at December 31, 2004 and $28 million at December 31, 2003. Settlement of long-term debt is generally not expected until maturity. CE-63 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (b) Includes current maturities of $180 million at December 31, 2004. (c) At December 31, 2004, we held 2.4 million shares of CMS Energy Common Stock. (d) Nuclear decommissioning investments include cash and equivalents and accrued income totaling $11 million at December 31, 2004 and $11 million at December 31, 2003. Unrealized gains and losses on nuclear decommissioning investments are reflected as regulatory liabilities. (e) The fair value of available-for-sale debt securities by contractual maturity as of December 31, 2004 is as follows:
(IN MILLIONS) Due in one year or less..................................... $ 31 Due after one year through five years....................... 122 Due after five years through ten years...................... 120 Due after ten years......................................... 38 ---- Total..................................................... $311 ====
Our held-to-maturity investments consist of debt securities held by the MCV Partnership totaling $139 million as of December 31, 2004. These securities represent funds restricted primarily for future lease payments and are classified as Other assets on our Consolidated Balance Sheets. These investments have original maturity dates of approximately one year or less and, because of their short maturities, their carrying amounts approximate their fair values. 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, futures, 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 through established credit policies that include performing financial credit reviews of 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 and our current exposures, we do not anticipate a material adverse effect on our financial position or earnings as a result of counterparty nonperformance. Contracts used to manage market risks 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 is then adjusted quarterly to reflect any change in the market value of the contract, a practice known as marking the contract to market. Changes in fair value (that is, gains or losses) are reported either in earnings or accumulated other comprehensive income, depending on whether the derivative qualifies for cash flow hedge accounting treatment. For derivative instruments to qualify for hedge accounting, 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 recognized immediately in earnings. If a CE-64 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. The ineffective portion, if any, of all hedges is recognized in earnings. We use a combination of quoted market prices, prices obtained from external sources, such as brokers, and mathematical valuation models to determine the fair value of those contracts requiring derivative accounting. 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. In connection with the market valuation of our derivative contracts, we maintain reserves, if necessary, for credit risks based on the financial condition of counterparties. The majority of our contracts are not subject to derivative accounting under SFAS No. 133 because they qualify for the normal purchases and sales exception, or because there is not an active market for the commodity. 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 and the significant 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. Similarly, our coal purchase contracts are not accounted for as derivatives due to the lack of an active market for the coal that we purchase. If active markets for these commodities develop in the future, we may be required to account for these contracts as derivatives, and the resulting mark-to-market impact on earnings could be material to our financial statements. The MISO is scheduled to begin the Midwest Energy Market on April 1, 2005, which will include day-ahead and real-time energy market information and centralized dispatch for market participants. At this time, we believe that the commencement of this market will not constitute the development of an active energy market in the state of Michigan. However, after having adequate experience with the Midwest Energy Market, we will reevaluate whether or not the activity level within this market leads to the conclusion that an active energy market exists. Derivative accounting is required for certain contracts used to limit our exposure to commodity price risk. The following table reflects the fair value of all contracts requiring derivative accounting:
2004 2003 DECEMBER 31 ---------------------------- ---------------------------- - ----------- FAIR UNREALIZED FAIR UNREALIZED DERIVATIVE INSTRUMENTS COST VALUE GAIN (LOSS) COST VALUE GAIN (LOSS) - ---------------------- ---- ----- ----------- ---- ----- ----------- (IN MILLIONS) Gas contracts.................................. $ 2 $-- $(2) $ 3 $ 2 $(1) Derivative contracts associated with Consumers' investment in the MCV Partnership: Prior to consolidation(a).................... -- -- -- -- 15 15 After consolidation: Gas fuel contracts........................ -- 56 56 -- -- -- Gas fuel futures and swaps................ -- 64 64 -- -- -- === === === === === ===
- ------------------------- (a) The amount associated with derivative contracts held by the MCV Partnership as of December 31, 2003 represents our proportionate share of the unrealized gain on those contracts accounted for as cash flow hedges included in Accumulated other comprehensive income. Our proportionate share of the total fair value of all derivative instruments held by the MCV Partnership as of December 31, 2003 was $51 million, and is included in Investments -- Midland Cogeneration Venture Limited Partnership on our Consolidated Balance Sheets. The fair value of our derivative contracts is included in Derivative instruments, Other assets, or Other liabilities on our Consolidated Balance Sheets. CE-65 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GAS CONTRACTS: Our gas utility business uses fixed-priced weather-based gas supply call options and fixed-priced gas supply call and put options 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 as part of the GCR process. At December 31, 2004, we held fixed-priced weather- based gas supply call options and had sold fixed-priced gas supply put options. DERIVATIVE CONTRACTS ASSOCIATED WITH CONSUMERS' INVESTMENT IN THE MCV PARTNERSHIP: Gas Fuel Contracts: The MCV Partnership uses natural gas fuel contracts to buy gas as fuel for generation, and to manage gas fuel costs. The MCV Partnership believes that certain of its long-term natural gas contracts qualify as normal purchases under SFAS No. 133, and therefore, these contracts were not recognized at fair value on the balance sheet as of December 31, 2004. The MCV Partnership also held certain long-term gas contracts that did not qualify as normal purchases as of December 31, 2004, because these contracts contained volume optionality. Accordingly, these contracts were accounted for as derivatives, with changes in fair value recorded in earnings each quarter. The MCV Partnership expects future earnings volatility on these contracts, since gains and losses will be recorded each quarter. For the year ended December 31, 2004, we recorded a $19 million net loss associated with these gas contracts in Fuel for electric generation on our Consolidated Statements of Income. The fair value of these contracts will reverse over the remaining life of the contracts ranging from 2005 to 2007. Due to the implementation of the RCP in January 2005, the MCV Partnership has determined that a significant portion of its gas fuel contracts no longer qualify as normal purchases because the contracted gas will not be consumed for electric production. Accordingly, these contracts will be treated as derivatives and will be marked-to-market through earnings each quarter, which could increase earnings volatility. Based on market prices for natural gas as of January 31, 2005, the accounting for the MCV Partnership's long-term gas contracts, including those affected by the implementation of the RCP, could result in an estimated $100 million (pretax before minority interest) gain recorded to earnings in the first quarter of 2005. This estimated gain will reverse in subsequent quarters as the contracts settle. For further details on the RCP, see Note 2, Contingencies, "Other Electric Contingencies -- The Midland Cogeneration Venture." If there are further changes in the level of planned electric production or gas consumption, the MCV Partnership may be required to account for additional long-term gas contracts as derivatives, which could add to earnings volatility. Gas Fuel Futures and Swaps: The MCV Partnership enters into natural gas futures contracts, option contracts, and over-the-counter swap transactions in order to hedge against unfavorable changes in the market price of natural gas in future months when gas is expected to be needed. These financial instruments are used principally to secure anticipated natural gas requirements necessary for projected electric and steam sales, and to lock in sales prices of natural gas previously obtained in order to optimize the MCV Partnership's existing gas supply, storage, and transportation arrangements. At December 31, 2004, the MCV Partnership held gas fuel futures and swaps. The contracts that are used to secure anticipated natural gas requirements necessary for projected electric and steam sales qualify as cash flow hedges under SFAS No. 133. The MCV Partnership also engages in cost mitigation activities to offset the fixed charges the MCV Partnership incurs in operating the MCV 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 the MCV 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 the MCV Partnership and do not qualify as hedges. Therefore, the mark-to-market gains and losses from these cost mitigation activities are recorded in earnings each quarter. As of December 31, 2004, we have recorded a cumulative net gain of $21 million, net of tax, in Accumulated other comprehensive income relating to our proportionate share of the contracts held by the MCV CE-66 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Partnership that qualify as cash flow hedges. This balance represents natural gas futures, options, and swaps with maturities ranging from January 2005 to December 2009, of which $11 million of this gain is expected to be reclassified as an increase to earnings during the next 12 months. In addition, for the year ended December 31, 2004, we recorded a net gain of $37 million in earnings from hedging activities related to natural gas requirements for the MCV Facility operations and a net gain of $2 million in earnings from the MCV Partnership's cost mitigation activities. 5: 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, - a defined contribution 401(k) plan, - benefits to a select group of management under EISP, and - health care and life insurance benefits under OPEB. 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. 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) in 2003 as a result of the increase in the additional minimum pension liability. As a result of company contributions in 2003, 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 $30 million at December 31, 2004, and $22 million at December 31, 2003. The assets are classified as Other non-current assets. The Accumulated Benefit Obligation for SERP was $30 million at December 31, 2004 and $19 million at December 31, 2003. 401(k): Employer matching contributions to the 401(k) plan are invested in CMS Energy common stock. The amount charged to expense for this plan was $8 million in 2002. The employer's match for the 401(k) plan was suspended on September 1, 2002 and was resumed on January 1, 2005. CE-67 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The MCV Partnership sponsors a defined contribution retirement plan covering all employees. Under the terms of the plan, the MCV Partnership makes contributions of either 5 or 10 percent of an employee's eligible annual compensation dependent upon the employee's age. The MCV Partnership 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. Amounts contributed under these plans were $1 million in 2004. 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, 2004, the Accumulated Benefit Obligation of the EISP was $4 million. OPEB: Retiree health care costs at December 31, 2004 are based on the assumption that costs would increase 7.5 percent in 2004. The rate of increase is expected to be 10 percent for 2005. The rate of increase is expected to slow to an estimated 5 percent by 2010 and thereafter. The MCV Partnership sponsors defined cost postretirement health care plans that cover all full-time employees, except key management. Participants in the postretirement health care plans 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 accumulated benefit obligation of the MCV Partnership's postretirement plans was $5 million at December 31, 2004. The MCV Partnership's net periodic postretirement health care cost for 2004 was less than $1 million. The health care cost trend rate assumption 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......... $ 12 $ (10) Effect on postretirement benefit obligation................. $149 $(129) ==== =====
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. The measurement date for all of Consumers' plans is November 30 for 2004, and December 31 for 2003 and 2002. We believe accelerating the measurement date on our benefit plans by one month is preferable as it improves control procedures and allows more time to review the completeness and accuracy of the actuarial measurements. As a result of the measurement date change in 2004, we recorded a $1 million cumulative effect of change in accounting, net of tax benefit, as a decrease to earnings. We also increased the amount of accrued benefit cost on our Consolidated Balance Sheets by $2 million. The effect of the measurement date change was immaterial. The measurement date for the MCV Partnership's plan is December 31, 2004. CE-68 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 ----------------------- ----------------------- 2004 2003 2002 2004 2003 2002 ---- ---- ---- ---- ---- ---- Discount rate................................. 6.00% 6.25% 6.75% 6.00% 6.25% 6.75% Expected long-term rate of return on plan assets(a)................................... 8.75% 8.75% 8.75% Union....................................... 8.75% 8.75% 8.75% Non-Union................................... 6.00% 6.00% 6.00% Rate of compensation increase: Pension..................................... 3.50% 3.25% 3.50% 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 expert opinions 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 2004 2003 2002 2004 2003 2002 - ----------------------- ---- ---- ---- ---- ---- ---- IN MILLIONS Service cost......................................... $ 36 $ 39 $ 40 $ 18 $17 $ 16 Interest expense..................................... 77 75 86 54 61 63 Expected return on plan assets....................... (109) (80) (103) (45) (39) (40) Plan amendments...................................... -- -- 4 -- -- -- Settlement charge.................................... -- 48 -- -- -- -- Amortization of: Net loss........................................... 14 9 -- 11 18 8 Prior service cost................................. 6 7 8 (8) (6) (1) ----- ---- ----- ---- ---- ---- Net periodic pension and postretirement benefit cost............................................... $ 24 $ 98 $ 35 $ 30 $51 $ 46 ===== ==== ===== ==== ==== ====
CE-69 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Reconciliations: The following table reconciles the funding of our retirement benefits plans with our retirement benefits plans' liability:
PENSION PLAN SERP OPEB ---------------- ------------ --------------- YEARS ENDED DECEMBER 31 2004 2003 2004 2003 2004 2003 - ----------------------- ---- ---- ---- ---- ---- ---- (IN MILLIONS) Benefit obligation at beginning of period........ $1,189 $1,256 $ 22 $ 21 $ 812 $ 890 Service cost..................................... 35 38 1 1 18 17 Interest cost.................................... 74 74 3 1 54 61 Plan amendment................................... -- (19) -- -- -- (44) Employee Transfers............................... -- -- 12 -- -- -- Actuarial loss................................... 138 55 3 -- 168 (72) Benefits paid.................................... (108) (215) (1) (1) (39) (40) ------ ------ ---- ---- ------ ----- Benefit obligation at end of period(a)........... 1,328 1,189 40 22 1,013 812 ------ ------ ---- ---- ------ ----- Plan assets at fair value at beginning of period......................................... 1,067 607 -- -- 564 465 Actual return on plan assets..................... 81 115 -- -- 25 68 Company contribution............................. -- 560 -- -- 48 71 Actual benefits paid............................. (108) (215) -- -- (39) (40) ------ ------ ---- ---- ------ ----- Plan assets at fair value at end of period....... 1,040 1,067 -- -- 598 564 ------ ------ ---- ---- ------ ----- Benefit obligation in excess of plan assets...... (288) (122) (40) (22) (415) (248) Unrecognized net loss from experience different than assumed................................... 642 501 6 3 347 164 Unrecognized prior service cost (benefit)........ 23 29 -- -- (99) (107) ------ ------ ---- ---- ------ ----- Net Balance Sheet Asset (Liability).............. 377 408 (34) (19) (167) (191) Additional VEBA Contributions or Non-Trust Benefit Payments............................... 15 -- Additional minimum liability adjustment(b)....... (419) -- -- -- -- -- ------ ------ ---- ---- ------ ----- Total Net Balance Sheet Asset (Liability)........ $ (42) $ 408 $(34) $(19) $ (152) $(191) ====== ====== ==== ==== ====== =====
- ------------------------- (a) The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law in December 2003. The Act establishes a prescription drug benefit under Medicare (Medicare Part D), and a federal subsidy, which is tax-exempt, to sponsors of retiree health care benefit plans that provide a benefit that is actuarially equivalent to Medicare Part D. We believe our plan is actuarially equivalent to Medicare Part D and have incorporated, retroactively, the effects of the subsidy into our financial statements as of June 30, 2004, in accordance with FASB Staff Position, No. SFAS 106-2. We remeasured our obligation as of December 31, 2003 to incorporate the impact of the Act, which resulted in a reduction to the accumulated postretirement benefit obligation of $148 million. The remeasurement resulted in a reduction of OPEB cost of $23 million for 2004. The reduction of $23 million includes $7 million in capitalized OPEB costs. For additional details, see Note 13, Implementation of New Accounting Standards. (b) The Pension Plan's Accumulated Benefit Obligation of $1.082 billion exceeded the value of the Pension Plan assets and net balance sheet asset at December 31, 2004. As a result, we recorded an additional minimum liability of $419 million. Consistent with MPSC guidance, Consumers recognized the cost of their additional minimum liability as a regulatory asset. Accordingly, Consumers' additional minimum liability includes an intangible asset of $21 million, and a regulatory asset of $372 million. The Accumulated Benefit Obligation for the Pension Plan was $1.019 billion at December 31, 2003. CE-70 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Plan Assets: The following table recaps the categories of plan assets in our retirement benefits plans:
PENSION OPEB -------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Asset Category: Fixed Income.............................................. 34% 52%(b) 45% 51% Equity Securities......................................... 61% 44% 54% 48% CMS Energy Common Stock(a)............................. 5% 4% 1% 1% === === === ===
- ------------------------- (a) At November 30, 2004, there were 4,892,000 shares of CMS Energy Common Stock in the Pension Plan assets with a fair value of $50 million, and 493,000 shares in the OPEB plan assets, with a fair value of $5 million. 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. (b) The percentage of fixed income at December 31, 2003 is high because our December contribution of $329 million was deposited temporarily into fixed income securities. We contributed $62 million to our OPEB plan in 2004. We plan to contribute $62 million to our OPEB plan in 2005. We did not contribute to our Pension Plan in 2004. We do not plan to contribute to our Pension Plan in 2005. 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 a 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-71 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Benefit Payments: The expected benefit payments for each of the next five years and the five-year period thereafter are as follows:
PENSION SERP OPEB(a) ------- ---- ------- (IN MILLIONS) 2005........................................................ $113 $ 2 $ 53 2006........................................................ 105 2 51 2007........................................................ 96 2 53 2008........................................................ 90 2 54 2009........................................................ 89 2 56 2010-2014................................................... 423 13 322 ==== === ====
- ------------------------- (a) OPEB benefit payments are net of employee contributions and expected Medicare Part D subsidy payments. 6: ASSET RETIREMENT OBLIGATIONS SFAS NO. 143: 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 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 regulatory assets and liabilities instead of a cumulative effect of a change in accounting principle. 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 increase by $22 million. If a reasonable estimate of fair value cannot be made in the period in which the ARO is incurred, such as for assets with indeterminate lives, the liability is to be recognized when a reasonable estimate of fair value can be made. Generally, gas transmission and electric and gas distribution assets have indeterminate lives. Retirement cash flows cannot be determined and there is a low probability of a retirement date. Therefore, no liability has been recorded for these assets. Also, 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 largely utilize third-party cost estimates. CE-72 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 ARO DESCRIPTION DATE LONG LIVED ASSETS TRUST FUND - --------------- ---------- ----------------- ---------- (IN MILLIONS) December 31, 2004 Palisades -- decommission plant site.............................. 1972 Palisades nuclear plant $523 Big Rock -- decommission plant site.............................. 1962 Big Rock nuclear plant 52 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 --

ARO ARO LIABILITY CASH FLOW LIABILITY ARO DESCRIPTION 1/1/03 INCURRED SETTLED ACCRETION REVISIONS 12/31/03 - --------------- ------------- -------- ------- --------- --------- --------- (IN MILLIONS) Palisades -- decommission............ $249 $-- $ -- $19 $-- $268 Big Rock -- decommission............. 61 -- (40) 13 -- 34 JHCampbell intake line............... -- -- -- -- -- -- Coal ash disposal areas.............. 51 -- (3) 5 -- 53 Wells at gas storage fields.......... 2 -- -- -- -- 2 Indoor gas services relocations...... 1 -- -- -- -- 1 ---- --- ---- --- --- ---- Total...................... $364 $-- $(43) $37 $-- $358 ==== === ==== === === ====

ARO ARO LIABILITY CASH FLOW LIABILITY ARO DESCRIPTION 12/31/03 INCURRED SETTLED ACCRETION REVISIONS 12/31/04 - --------------- ------------- -------- ------- --------- --------- --------- (IN MILLIONS) Palisades -- decommission............ $268 $-- $ -- $22 $60 $350 Big Rock -- decommission............. 34 -- (40) 14 22 30 JHCampbell intake line............... -- -- -- -- -- -- Coal ash disposal areas.............. 53 -- (4) 5 -- 54 Wells at gas storage fields.......... 2 -- (1) -- -- 1 Indoor gas services relocations...... 1 -- -- -- -- 1 ---- --- ---- --- --- ---- Total...................... $358 $-- $(45) $41 $82 $436 ==== === ==== === === ====
The Palisades and Big Rock cash flow revisions resulted from new decommissioning reports filed with the MPSC in March 2004. The Palisades ARO also reflects a cash flow revision for the probability of operating license renewal; the renewal would extend the plant's operating license by twenty years. For additional details, see Note 2, Contingencies, "Other Electric Contingencies -- Nuclear Plant Decommissioning." On October 14, 2004 the MPSC issued a generic proceeding to review SFAS No. 143, Accounting for Asset Retirement Obligations, FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing Requirements for Asset Retirement Obligations, and their accounting and ratemaking issues. Utilities are required to respond to the Order by March 15, 2005. We consider the proceeding a clarification of accounting and reporting issues that relate to all Michigan utilities; we anticipate no financial impact. CE-73 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7: 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 $4 million in 2004 and $46 million in 2003. 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, 2004, we had AMT credit carryforwards in the amount of $20 million that do not expire, and tax loss carryforwards in the amount of $69 million that expire in 2021 through 2023. In addition, at December 31, 2004, we had charitable contribution carryforwards in the amount of $13 million that expire in 2005 through 2008 and general business credit carryforwards in the amount of $4 million that primarily expire in 2005, for which a valuation allowance has been provided. The significant components of income tax expense (benefit) consisted of:
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Current federal income taxes................................ $ 26 $(58) $(97) Current federal income tax benefit of operating loss carryforwards............................................. (11) -- -- Deferred federal income taxes............................... 142 201 283 Deferred ITC, net........................................... (5) (6) (6) ---- ---- ---- Income tax expense.......................................... $152 $137 $180 ==== ==== ====
The principal components of our deferred tax assets (liabilities) recognized in the balance sheet are as follows:
DECEMBER 31 2004 2003 - ----------- ---- ---- (IN MILLIONS) Property.................................................... $ (863) $ (826) Consolidated investments.................................... (217) (226) Securitization costs........................................ (176) (186) Gas inventories............................................. (126) (100) Employee benefits........................................... (79) (90) SFAS No. 109 regulatory liability........................... 135 120 Nuclear decommissioning..................................... 63 59 Tax loss and credit carryforwards........................... 52 42 Valuation allowance......................................... (9) (8) Other, net.................................................. (150) (51) ------- ------- Net deferred tax liabilities................................ $(1,370) $(1,266) ======= ======= Deferred tax liabilities.................................... $(2,102) $(1,967) Deferred tax assets, net of valuation allowance............. 732 701 ------- ------- Net deferred tax liabilities................................ $(1,370) $(1,266) ======= =======
CE-74 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Income before cumulative effect of change in accounting principle................................................. $ 280 $ 196 $ 363 Income tax expense.......................................... 152 137 180 Preferred securities distributions (Note 3)................. -- -- (44) ----- ----- ----- Pretax income............................................... 432 333 499 Statutory federal income tax rate........................... X 35% X 35% X 35% ----- ----- ----- Expected income tax expense................................. 151 117 174 Increase (decrease) in taxes from: Property differences not previously deferred.............. 13 18 18 OPEB Medicare subsidy..................................... (5) -- -- Loss on investment in CMS Energy Common Stock............. -- 4 4 Sale of METC.............................................. -- -- (5) ITC amortization/adjustments.............................. (6) (6) (6) Valuation allowance provision............................. 1 8 -- Affiliated companies' dividends........................... -- -- (1) Other, net................................................ (2) (4) (4) ----- ----- ----- Actual income tax expense................................... $ 152 $ 137 $ 180 ===== ===== ===== Effective tax rate.......................................... 35.2% 41.1% 36.1% ===== ===== =====
8: EXECUTIVE INCENTIVE COMPENSATION We provide a Performance Incentive Stock Plan (the Plan) to key employees and non-employee Directors or consultants based on their contributions to the successful management of the company. On May 28, 2004, shareholders approved an amendment to the Plan, with an effective date of June 1, 2004. The amendment established a 5-year term for the Plan. The Plan includes the following type of awards: - phantom shares, - performance units, - restricted stock, - stock options, - stock appreciation rights, and - management stock purchases. Phantom shares are valued at the fair market price of common stock when granted. They give the holder the right to receive the appreciation value of common stock on one or more valuation dates, according to a specified vesting schedule determined at time of grant. These shares are subject to forfeiture if employment terminates before vesting. Performance units have an initial value established at the time of grant. Performance criteria are established at the time of grant and, depending upon the extent to which they are met, will determine the value of the payout, which may be in the form of cash, common stock, or a combination of both. These units are subject to forfeiture if employment terminates. CE-75 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Restricted shares of common stock are outstanding shares with full voting and dividend rights. These awards vest 100 percent after three years and are subject to achievement of specified levels of total shareholder return including a comparison to a peer group of companies. Some awards vest based solely on continued employment. These awards 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, defined as the excess of the market price of the stock at the date of exercise over the grant date price. All stock options and stock appreciation rights are valued at fair market price when granted. All options and rights may be exercised upon grant, and expire up to 10 years and one month from the date of grant. Management stock purchases are the election of select participants in the Officer's Incentive Compensation Plan to receive all or a portion of their incentive payments in the form of shares of restricted common stock or shares of restricted stock units. These participants may also receive awards of additional restricted common stock or restricted stock units provided the total value of these additional grants does not exceed $2.5 million for any fiscal year. Under the revised Plan, shares awarded or subject to options, phantom shares and performance units may not exceed 6 million shares from June 2004 through May 2009, nor may such grants or awards to any participant exceed 250,000 shares in any fiscal year. Shares for which payment or exercise is in cash, as well as shares or options that are forfeited, may be awarded or granted again under the Plan. Awards of up to 5,482,690 shares of CMS Energy Common Stock may be issued as of December 31, 2004. All grants awarded under this Plan in 2004 were in the form of restricted stock. 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 CMS ENERGY COMMON STOCK SHARES SHARES EXERCISE PRICE - ----------------------- --------- --------- ---------------- Outstanding at January 1, 2002.................. 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 Granted......................................... 395,641 -- -- Exercised or Issued............................. (66,537) (358,102) $ 6.65 Forfeited or Expired............................ (128,449) (151,218) $29.98 Outstanding at December 31, 2004................ 863,202 2,084,892 $18.30
At December 31, 2004, 316,312 of the 863,202 shares of CMS Energy restricted common stock outstanding are subject to performance objectives. Compensation expense for restricted stock was $2 million in 2004, $4 million in 2003, and less than $1 million in 2002. CE-76 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes our stock options outstanding at December 31, 2004:
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.................................. 808,188 8.70 years $ 6.35 $8.12-$8.12.................................. 213,850 7.67 years $ 8.12 $17.00-$25.39................................ 423,248 5.91 years $20.48 $27.25-$39.06................................ 551,689 4.60 years $34.09 $43.38-$43.38................................ 87,917 3.57 years $43.38 --------- ---------- ------ $6.35-$43.38................................. 2,084,892 6.72 years $18.30 ========= ========== ======
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 2004(a) 2003 2002(b) - ------------------ ------- ---- ------- ~~Fair value at grant date.................................... -- $3.04 $3.79, $1.40~~
- ------------------------- (a) There were no stock option grants during 2004. (b) For 2002, there were two stock option grants totaling 490,600 options. 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 2004(a) 2003 2002(b) - ----------------------- ------- ---- ------- CMS Energy Common Stock Options Risk-free interest rate................................... -- 3.23% 4.02%, 3.28% Expected stock price volatility........................... -- 53.10% 31.64%, 39.67% Expected dividend rate.................................... -- -- $.365, $.1825 Expected option life (years).............................. -- 4.7 4.5
- ------------------------- (a) There were no stock option grants during 2004. (b) For 2002, there were two stock option grants totaling 490,600 options. We recorded $3 million as stock-based employee compensation cost for 2003, and $1 million for 2002. All stock options vest at date of grant. 9: 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 fair value, or - renew the lease at fair rental value. CE-77 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Our capital leases are comprised mainly of leased service vehicles and office furniture. As of December 31, 2004, capital lease obligations totaled $58 million. 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. Capital lease expenses were $13 million in 2004, $17 million in 2003, and $20 million in 2002. In November 2003, we exercised our purchase option under the capital lease agreement for our main headquarters building in Jackson, Michigan. Operating lease charges were $13 million in 2004, $13 million in 2003, and $13 million in 2002. In order to obtain permanent financing for the MCV Facility, the MCV Partnership entered into a sale and lease back agreement with a lessor group, which includes the FMLP, for substantially all of the MCV Partnership's fixed assets. In accordance with SFAS No. 98, the MCV Partnership accounts for the transaction as a financing arrangement. As of December 31, 2004, finance lease obligations totaled $286 million, which represents the third-party portion of the MCV Partnership's finance lease obligation. Charges under the MCV Partnership's finance lease obligation were $105 million in 2004. For additional details on transactions with the MCV Partnership and the FMLP, see Note 2, Contingencies, "Other Electric Contingencies -- The Midland Cogeneration Venture." Minimum annual rental commitments under our non-cancelable leases at December 31, 2004 were:
CAPITAL FINANCE OPERATING LEASES LEASE LEASES -------------- ------------- --------- (IN MILLIONS) 2005..................................................... $13 $ 19 $13 2006..................................................... 13 18 12 2007..................................................... 12 18 10 2008..................................................... 10 19 10 2009..................................................... 8 20 7 2010 and thereafter...................................... 15 192 28 --- ---- --- Total minimum lease payments............................. 71 286 $80 === Less imputed interest.................................... 13 -- --- ---- Present value of net minimum lease payments.............. 58 286 Less current portion..................................... 10 19 --- ---- Non-current portion...................................... $48 $267 === ====
10: SUMMARIZED FINANCIAL INFORMATION OF SIGNIFICANT RELATED ENERGY SUPPLIER Under Revised FASB Interpretation No. 46, we are the primary beneficiary of the MCV Partnership. We consolidated their assets, liabilities, and financial activities into our financial statements as of and for the year ended December 31, 2004. As of December 31, 2004, the MCV Partnership had total assets of $1.980 billion and a net loss of $24 million for the year. For 2003 and 2002, the MCV Partnership was accounted for as an equity method investment and their summarized financial information is shown below. Our 49 percent investment in the MCV Partnership was $419 million at December 31, 2003 and our share of net income was $29 million for the year ended December 31, 2003 and $65 million for the year ended December 31, 2002. CE-78 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Under the PPA with the MCV Partnership discussed in Note 2, Contingencies, 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 for 2003 and 2002 follows: STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 2003 2002 - ----------------------- ---- ---- (IN MILLIONS) Operating revenue(a)........................................ $584 $597 Operating expenses.......................................... 416 409 ---- ---- Operating income............................................ 168 188 Other expense, net.......................................... 108 114 ---- ---- Income before cumulative effect of accounting change........ 60 74 Cumulative effect of change in method of accounting for derivative options contracts(b)........................... -- 58 ---- ---- Net Income.................................................. $ 60 $132 ==== ====
BALANCE SHEET
DECEMBER 31 2003 - ----------- ------------- (IN MILLIONS) Assets Current assets(c).......... $ 389 Plant, net................. 1,494 Other assets............... 187 ------ $2,070 ======

DECEMBER 31 2003 - ----------- ------------- (IN MILLIONS) Liabilities and Equity Current liabilities........ $ 250 Non-current liabilities(d).......... 1,021 Partners' equity(e)........ 799 ------ $2,070 ======
- ------------------------- (a) Revenue from Consumers totaled $514 million in 2003 and $557 million in 2002. (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. (d) The 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 the FMLP. The MCV Partnership's lease obligations, assets, and operating revenues secure the FMLP's debt. The following table summarizes obligation and payment information regarding the direct finance lease:
DECEMBER 31 2003 ----------- ---- (IN MILLIONS) Balance Sheet: MCV Partnership: Lease obligation....................................... $894 FMLP: Non-recourse debt...................................... 431 Lease payment to service non-recourse debt (including interest).............................................. 158 CMS Holdings: Share of interest portion of lease payment............. 37 Share of principle portion of lease payment............ 36
CE-79 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31 2003 2002 ----------- ----- ----- (IN MILLIONS) ~~Income Statement: FMLP: Earnings................................................ $32 $38~~
(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. 11: 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:
CONSTRUCTION NET ACCUMULATED WORK IN OWNERSHIP INVESTMENT DEPRECIATION PROGRESS SHARE ------------ ------------ ------------ DECEMBER 31 (PERCENT) 2004 2003 2004 2003 2004 2003 - ----------- --------- ---- ---- ---- ---- ---- ---- (IN MILLIONS) Campbell Unit 3............................. 93.3 $284 $299 $339 $328 $158 $113 Ludington................................... 51.0 79 84 91 87 -- (1) Distribution................................ Various 77 74 33 32 6 5
12: 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 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 expense, 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. 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, the MCV Partnership and the FMLP. CE-80 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table shows our financial information by reportable segment:
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Operating Revenues Electric.................................................. $ 2,586 $ 2,590 $2,648 Gas....................................................... 2,081 1,845 1,519 Other..................................................... 44 -- 2 ------- ------- ------ $ 4,711 $ 4,435 $4,169 ======= ======= ====== Earnings from Equity Method Investees Other(a).................................................. $ 1 $ 42 $ 53 ======= ======= ====== Depreciation, Depletion and Amortization Electric.................................................. $ 189 $ 247 $ 228 Gas....................................................... 112 128 118 Other..................................................... 90 2 2 ------- ------- ------ $ 391 $ 377 $ 348 ======= ======= ====== Interest Charges Electric.................................................. $ 204 $ 164 $ 111 Gas....................................................... 65 51 36 Other..................................................... 97 30 21 ------- ------- ------ $ 366 $ 245 $ 168 ======= ======= ====== Income Tax Expense Electric.................................................. $ 120 $ 90 $ 138 Gas....................................................... 40 35 33 Other(b).................................................. (8) 12 9 ------- ------- ------ $ 152 $ 137 $ 180 ======= ======= ====== Net Income Available to Common Stockholder Electric.................................................. $ 222 $ 167 $ 264 Gas....................................................... 71 38 46 Other..................................................... (16) (11) 25 ------- ------- ------ $ 277 $ 194 $ 335 ======= ======= ====== Investments in Equity Method Investees Electric.................................................. $ 3 $ 2 $ 2 Other(c).................................................. 16 659 643 ------- ------- ------ $ 19 $ 661 $ 645 ======= ======= ====== Total Assets Electric(d)............................................... $ 7,289 $ 6,831 $6,058 Gas(d).................................................... 3,187 2,983 2,586 Other..................................................... 2,335 931 954 ------- ------- ------ $12,811 $10,745 $9,598 ======= ======= ======
CE-81 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31 2004 2003 2002 - ----------------------- ---- ---- ---- (IN MILLIONS) Capital Expenditures(e) Electric.................................................. $ 360 $ 310 $ 437 Gas....................................................... 137 135 181 Other..................................................... 21 -- -- ------- ------- ------ $ 518 $ 445 $ 618 ======= ======= ======
- ------------------------- (a) 2002 excludes $28 million benefit due to the change in accounting for derivative instruments. (b) 2002 excludes $10 million tax expense 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 our 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. (e) Amounts include electric restructuring implementation plan, 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. 13: IMPLEMENTATION OF NEW ACCOUNTING STANDARDS FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES: The 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, known as the primary beneficiary, in a variable interest entity to consolidate the entity. In December 2003, the FASB issued Revised FASB Interpretation No. 46. For entities that had not previously adopted FASB Interpretation No. 46, Revised FASB Interpretation No. 46 provided an implementation deferral until the first quarter of 2004. As of and for the quarter ended March 31, 2004, we adopted Revised FASB Interpretation No. 46 for all entities. We determined that we are the primary beneficiary of both the MCV Partnership and the FMLP. We have a 49 percent partnership interest in the MCV Partnership and a 46.4 percent partnership interest in the FMLP. Consumers is the primary purchaser of power from the MCV Partnership through a long-term power purchase agreement. The FMLP holds a 75.5 percent lessor interest in the MCV Facility, which results in Consumers holding a 35 percent lessor interest in the MCV Facility. Collectively, these interests make us the primary beneficiary of these entities. As such, we consolidated their assets, liabilities, and activities into our financial statements as of and for the year ended December 31, 2004. These partnerships have third-party obligations totaling $582 million at December 31, 2004. Property, plant, and equipment serving as collateral for these obligations has a carrying value of $1.426 billion at December 31, 2004. The creditors of these partnerships do not have recourse to the general credit of Consumers. We determined that we are not the primary beneficiary of our trust preferred security structures. Accordingly, those entities were deconsolidated as of December 31, 2003. Company Obligated Trust Preferred Securities totaling $490 million that were previously included in mezzanine equity, were eliminated due to deconsolidation. At December 31, 2004, we reflected Long-term debt -- related parties of $326 million, current portion of Long-term debt -- related parties of $180 million, and an investment in related parties of $16 million. We are not required to restate prior periods for the impact of this accounting change. CE-82 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FASB STAFF POSITION, NO. SFAS 106-2, ACCOUNTING AND DISCLOSURE REQUIREMENTS RELATED TO THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT, AND MODERNIZATION ACT OF 2003: The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) was signed into law in December 2003. The Act establishes a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy, which is exempt from federal taxation, to sponsors of retiree health care benefit plans that provide a benefit that is actuarially equivalent to Medicare Part D. We believe our plan is actuarially equivalent to Medicare Part D and have incorporated retroactively the effects of the subsidy into our financial statements as of June 30, 2004, in accordance with FASB Staff Position, No. SFAS 106-2. We remeasured our obligation as of December 31, 2003 to incorporate the impact of the Act, which resulted in a reduction to the accumulated postretirement benefit obligation of $148 million. The remeasurement resulted in a total OPEB cost reduction of $23 million for 2004. Consumers capitalizes a portion of OPEB cost in accordance with regulatory accounting. As such, the remeasurement resulted in a net reduction of OPEB expense of $16 million for 2004. EITF ISSUE NO. 03-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENTS: The Issue addresses the definition of an other-than-temporary impairment of certain investments and provides additional disclosure requirements. The scope of EITF Issue No. 03-1 includes debt and equity securities accounted for under SFAS No. 115, debt and equity securities held by non-profit organizations under SFAS No. 124, and cost method investments under APB No. 18. We analyzed our in-scope investments under the guidance of this Issue and have provided additional disclosures. FSP 109-1, ACCOUNTING AND DISCLOSURE GUIDANCE FOR THE TAX DEDUCTION PROVIDED TO U.S. BASED MANUFACTURERS BY THE AMERICAN JOBS CREATION ACT OF 2004: The American Jobs Creation Act of 2004 provides for a deduction, starting in 2005, of a portion of the income from certain production activities, including the production of electricity. FSP 109-1 indicates that the deduction should be accounted for as a special deduction rather than a tax rate reduction under SFAS No. 109. We are currently studying this act for its impact on us; however, we do not anticipate a material amount of tax benefit from the domestic production activities deduction in the near future. NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE SFAS NO. 123R, SHARE-BASED PAYMENT: The Statement requires companies to expense the grant date fair value of employee stock options and similar awards. The Statement also clarifies and expands SFAS No. 123's guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods. In addition, this Statement amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits related to the excess of the tax deductible amount over the compensation cost recognized be classified as a financing cash inflow rather than as a reduction of taxes paid in operating activities. This Statement is effective for us as of the beginning of third quarter 2005. We adopted the fair value method of accounting for share-based awards effective December 2002, and therefore, expect this statement to have an insignificant impact on our results of operations when it becomes effective. CE-83 CONSUMERS ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14: QUARTERLY FINANCIAL AND COMMON STOCK INFORMATION (UNAUDITED)
2004 ------------------------------------------ QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - -------------- -------- ------- -------- ------- (IN MILLIONS) Operating revenue(a)....................................... $1,547 $923 $885 $1,356 Operating income(a)(d)..................................... 247 111 122 194 Income before cumulative effect of change in accounting Principle(d)............................................. 105 24 34 117 Cumulative effect of change in accounting(b)(c)............ (1) -- -- -- Net income(c)(d)........................................... 104 24 34 117 Preferred stock dividends.................................. -- 1 -- 1 Net income available to common stockholder(c)(d)........... 104 23 34 116
- ------------------------- (a) As of March 31, 2004, we determined that the MCV Partnership and the FMLP should be consolidated in accordance with revised FASB Interpretation No. 46. As such, we consolidated their financial activities into our financial statements as of and for the year ended December 31, 2004. For additional details, see Note 13, Implementation of New Accounting Standards. (b) Net of tax. (c) Quarterly data for March 31, 2004 differs from amounts previously reported as a result of accelerating the measurement date on our benefit plans by one month. For additional information, see Note 5, Retirement Benefits. (d) Quarterly data for March 31, 2004 differs from amounts previously reported due to the remeasurement of our post retirement benefit obligation in accordance with FASB Staff Position, No. SFAS 106-2. For additional information, see Note 13, Implementation of New Accounting Standards.
2003 ------------------------------------------ QUARTERS ENDED MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - -------------- -------- ------- -------- ------- (IN MILLIONS) Operating revenue.......................................... $1,442 $902 $879 $1,212 Operating income........................................... 233 139 115 96 Income (loss) before cumulative effect of change in accounting principle..................................... 110 52 44 (10) Net income (loss).......................................... 110 52 44 (10) Preferred stock dividends.................................. -- 1 -- 1 Preferred securities distributions......................... 11 11 11 (33) Net income available to common stockholder................. 99 40 33 22
CE-84 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholder of 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) as of December 31, 2004 and 2003, 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, 2004. 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 49% owned variable interest entity which has been consolidated in 2004 pursuant to Revised Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities" and accounted for under the equity method of accounting in 2003 and 2002, have been audited by other auditors whose report has 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 report. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report 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, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles. 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 Note 13 to the consolidated financial statements, in 2004, the Company adopted Revised Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities". In addition, as discussed in Note 5 to the consolidated financial statements, in 2004, the Company changed its measurement date for all Consumers Energy Company pension and postretirement benefit plans. As discussed in Notes 6 and 13 to the consolidated financial statements, in 2003, the Company adopted the provisions of Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" and of FASB Interpretation No. 46, "Consolidation of Variable Interest Entities". We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Consumers Energy Company's internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Detroit, Michigan March 7, 2005 CE-85 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Partners and the Management Committee of Midland Cogeneration Venture Limited Partnership: We have completed an integrated audit of Midland Cogeneration Venture Limited Partnership's 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. CONSOLIDATED FINANCIAL STATEMENTS In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, partners' equity and cash flows (not presented herein) present fairly, in all material respects, the financial position of Midland Cogeneration Limited Partnership (a Michigan limited partnership) and its subsidiaries (MCV) at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 the standards of the Public Company Accounting Oversight Board (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 of financial statements 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. 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. INTERNAL CONTROL OVER FINANCIAL REPORTING Also, in our opinion, management's assessment, included in Management's Report on Internal Control Over Financial Reporting, that MCV maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, MCV maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by COSO. MCV's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of MCV's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, CE-86 accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Detroit, Michigan February 25, 2005 CE-87 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. CMS ENERGY None. CONSUMERS None. ITEM 9A. CONTROLS AND PROCEDURES. CMS ENERGY CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES: Under the supervision and with the participation of management, including its CEO and CFO, CMS Energy conducted an evaluation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, CMS Energy's CEO and CFO have concluded that its disclosure controls and procedures are effective as of the end of the period covered by this annual report. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING: CMS Energy's management's assessment of internal control over financial reporting appears in ITEM 7. CMS ENERGY'S MANAGEMENT'S DISCUSSION AND ANALYSIS, and is incorporated by reference herein. CONSUMERS CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES: Under the supervision and with the participation of management, including its CEO and CFO, Consumers conducted an evaluation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, Consumers' CEO and CFO have concluded that its disclosure controls and procedures are effective as of the end of the period covered by this annual report. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING: Consumers' management's assessment of internal control over financial reporting appears in ITEM 7. CONSUMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS, and is incorporated by reference herein. ITEM 9B. OTHER INFORMATION. CMS ENERGY None. CONSUMERS None. 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 principal accountant fees and services relating to Consumers is included in CMS Energy's definitive proxy statement, which is incorporated by reference herein. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (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) Exhibits, including those incorporated by reference (see also Exhibit volume). CO-3 CMS ENERGY'S AND CONSUMERS' EXHIBITS
PREVIOUSLY FILED -------------------------- WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION - -------- --------- ---------- ----------- (3)(a) 1-9513 (99)(a) -- Restated Articles of Incorporation of CMS Energy (Form 8-K filed June 3, 2004) (3)(b) 1-9513 (3)(a) -- By-Laws of CMS Energy (Form 8-K filed October 6, 2004) (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)(b) -- By-Laws of Consumers (Form 8-K filed October 6, 2004) (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: 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) 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)(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) 333-111220 (4)(a)(i) -- 94th dated as of 11/7/03 (Consumers Form S-4 dated December 16, 2003) 333-120611 (4)(e)(xiii) -- 95th dated as of 8/3/04 (Consumers Form S-3 dated November 18, 2004) 1-5611 (4)(a) -- 96th dated as of 8/17/04 (Form 8-K filed August 20, 2004) 333-120611 (4)(e)(xv) -- 97th dated as of 9/1/04 (Consumers Form S-3 dated November 18, 2004) 1-5611 4.4 -- 98th dated as of 12/13/04 (Form 8-K filed December 13, 2004) (4)(a)(i) -- 99th dated as of 1/20/05 (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)(b)(i) -- 4th dated as of May 31, 2001 (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) -- Indentures Supplemental thereto: 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 dated as of 10/29/98 (3rd qtr. 1998 Form 10-Q) (4)(d) 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: 1-9513 (4)(d)(i) -- 7th dated as of 01/25/99 (1998 Form 10-K)
CO-4
PREVIOUSLY FILED -------------------------- WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION - -------- --------- ---------- ----------- 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) 1-9513 (4)(e)(ii) -- 14th dated as of 07/17/03 (2003 Form 10-K) (4)(d)(i) -- 15th dated as of 9/29/04 (4)(d)(ii) -- 16th dated as of 12/16/04 1-9513 4.2 -- 17th dated as of 12/13/04 (Form 8-K filed December 13, 2004) 1-9513 4.2 -- 18th dated as of 1/19/05 (Form 8-K filed January 20, 2005) (4)(e) 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)(f) 1-9513 (4)(i) -- Certificate of Designation of 4.50% Cumulative Convertible Preferred Stock dated as of December 2, 2003 (2003 Form 10-K) (4)(g) 1-9513 (4)(k) -- Registration Rights Agreement dated as of July 17, 2003 between CMS Energy and the Initial Purchasers, all as defined therein (2003 Form 10-K) (4)(h) 1-9513 (4)(l) -- Registration Rights Agreement dated as of December 5, 2003 between CMS Energy and the Initial Purchasers, all as defined therein (2003 Form 10-K) (4)(i) 1-5611 (4)(b) -- Registration Rights Agreement dated as of August 17, 2004 between Consumers and the Initial Purchasers, as defined therein (Form 8-K filed August 20, 2004) (4)(j) -- $300 million Fifth Amended and Restated Credit Agreement dated as of August 3, 2004 among CMS Energy, CMS Enterprises, the Banks, and the Administrative Agent and Collection Agent, all defined therein (4)(k) -- Reaffirmation of grant of a security interest, dated as of August 3, 2004 among CMS Energy, CMS Enterprises, and the Administrative Agent and Collateral Agent, as defined therein (4)(l) -- Cash Collateral Agreement dated as of August 3, 2004 made by CMS Energy to the Administrative Agent for the lenders and collateral Agent, 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) (10)(b) 1-5611 (10)(g) -- Consumers' Executive Stock Option and Stock Appreciation Rights Plan effective December 1, 1989 (1990 Form 10-K) (10)(c) 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)(d) 1-9513 (10)(d) -- CMS Energy's Salaried Employees Merit Program for 2003 effective January 1, 2003 (2003 Form 10-K) (10)(e) 1-9513 (10)(m) -- CMS Deferred Salary Savings Plan effective January 1, 1994 (1993 Form 10-K) (10)(f) -- Annual Officer Incentive Compensation Plan for CMS Energy Corporation and its Subsidiaries effective January 1, 2004 (10)(g) 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)
CO-5
PREVIOUSLY FILED -------------------------- WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION - -------- --------- ---------- ----------- (10)(h) 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)(i) 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)(j) 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)(k) 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)(l) 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)(m) 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) (10)(n) 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)(o) 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)(p) 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)(q) 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)
CO-6
PREVIOUSLY FILED -------------------------- WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION - -------- --------- ---------- ----------- (10)(r) 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)(s) 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)(t) 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)(u) 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)(v) 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)(w) -- Annual Management Incentive Compensation Plan for CMS Energy Corporation and its Subsidiaries effective January 1, 2004 (10)(x) -- Annual Employee Incentive Compensation Plan for CMS Energy Corporation and its Subsidiaries effective January 1, 2004 (10)(y) 1-9513 (10)(a) -- Acknowledgement of Resignation between Tamela W. Pallas and CMS Energy Corporation (2nd qtr 2002 Form 10-Q) (10)(z) 1-9513 (10)(b) -- Employment, Separation and General Release Agreement between William T. McCormick and CMS Energy Corporation (2nd qtr 2002 Form 10-Q) (10)(aa) 1-9513 (10)(c) -- Employment, Separation and General Release Agreement between Alan M. Wright and CMS Energy Corporation (2nd qtr 2002 Form 10-Q) (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 (18) -- Letter from Ernst & Young LLP to the Audit Committee of the Boards of Directors for CMS Energy and Consumers regarding the preferability of a change in accounting principle (21) 1-9513 -- Subsidiaries of CMS Energy (Form U-3A-2 filed February 28, 2005) (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
CO-7
PREVIOUSLY FILED -------------------------- WITH FILE AS EXHIBIT EXHIBITS NUMBER NUMBER DESCRIPTION - -------- --------- ---------- ----------- (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, 2002, 2003, and 2004 (99)(c) -- Representation regarding Emirates CMS Power Company financial statements for the years ended December 31, 2002, 2003 and 2004 (99)(d) -- Representation regarding SCP Investments(1) PTY. LTD. financial statements for the years ended June 30, 2003, 2004 and 2005
- ------------------------- * 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-8 INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE ---- Schedule II Valuation and Qualifying Accounts and Reserves 2004, 2003 and 2002: CMS Energy Corporation................................. CO-10 Consumers Energy Company............................... CO-11 Report of Independent Registered Public Accounting Firm CMS Energy Corporation................................. CMS-113 Consumers Energy Company............................... CE-85
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-9 CMS ENERGY CORPORATION Schedule II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
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: 2004...................................... $40 $19 $-- $21 $38 2003...................................... $23 $28 $ 4 $15 $40 2002...................................... $23 $22 $(3) $19 $23
CO-10 CONSUMERS ENERGY COMPANY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
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: 2004...................................... $8 $20 $-- $18 $10 2003...................................... $5 $21 $-- $18 $ 8 2002...................................... $4 $17 $-- $16 $ 5
CO-11 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 10th day of March 2005. CMS ENERGY CORPORATION By /s/ DAVID W. JOOS ------------------------------------ David W. Joos President 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 10th day of March 2005.
SIGNATURE TITLE --------- ----- (i) Principal executive officer: /s/ DAVID W. JOOS President and Chief Executive Officer --------------------------------------------------- David W. Joos (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: * Director --------------------------------------------------- Merribel S. Ayres * Director --------------------------------------------------- Earl D. Holton * Director --------------------------------------------------- David W. Joos * Director --------------------------------------------------- Michael T. Monahan * Director --------------------------------------------------- Joseph F. Paquette, Jr. * Director --------------------------------------------------- William U. Parfet
CO-12
SIGNATURE TITLE --------- ----- * Director --------------------------------------------------- Percy A. Pierre * Director --------------------------------------------------- S. Kinnie Smith, Jr. * Director --------------------------------------------------- Kenneth L. Way * Director --------------------------------------------------- Kenneth Whipple * Director --------------------------------------------------- John B. Yasinsky *By: /s/ THOMAS J. WEBB --------------------------------------------------- Thomas J. Webb, Attorney-in-Fact
CO-13 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 10th day of March 2005. CONSUMERS ENERGY COMPANY By /s/ DAVID W. JOOS ------------------------------------ David W. Joos 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 10th day of March 2005.
SIGNATURE TITLE --------- ----- (v) Principal executive officer: /s/ DAVID W. JOOS Chief Executive Officer --------------------------------------------------- David W. Joos (vi) Principal financial officer: /s/ THOMAS J. WEBB Executive Vice President and --------------------------------------------------- Chief Financial Officer Thomas J. Webb (vii) Controller or principal accounting officer: /s/ GLENN P. BARBA Vice President, Controller and --------------------------------------------------- Chief Accounting Officer Glenn P. Barba (viii) A majority of the Directors including those named above: * Director --------------------------------------------------- Merribel S. Ayres * Director --------------------------------------------------- Earl D. Holton * Director --------------------------------------------------- David W. Joos * Director --------------------------------------------------- Michael T. Monahan * Director --------------------------------------------------- Joseph F. Paquette, Jr. * Director --------------------------------------------------- William U. Parfet
CO-14
SIGNATURE TITLE --------- ----- * Director --------------------------------------------------- Percy A. Pierre * Director --------------------------------------------------- S. Kinnie Smith, Jr. * Director --------------------------------------------------- Kenneth L. Way * Director --------------------------------------------------- Kenneth Whipple * Director --------------------------------------------------- John B. Yasinsky *By: /s/ THOMAS J. WEBB --------------------------------------------------- Thomas J. Webb, Attorney-in-Fact
CO-15 CMS ENERGY'S AND CONSUMERS' EXHIBIT INDEX
EXHIBITS DESCRIPTION - -------- ----------- (4)(a)(i) -- 99th Supplemental Indenture dated as of 1/20/05, supplement to Indenture dated as of September 1, 1945, between Consumers and Chemical Bank (successor to Manufacturers Hanover Trust Company), as Trustee (4)(b)(i) -- 4th Supplemental Indenture dated as of May 31, 2001, supplement to Indenture dated as of January 1, 1996 between Consumers and The Bank of New York, as Trustee (4)(d)(i) -- 15th Supplemental Indenture dated as of 9/29/04, supplement to Indenture dated as of September 15, 1992 between CMS Energy and NBD Bank, as Trustee (4)(d)(ii) -- 16th Supplemental Indenture dated as of 12/16/04, supplement to Indenture dated as of September 15, 1992 between CMS Energy and NBD Bank, as Trustee (4)(j) -- $300 million Fifth Amended and Restated Credit Agreement dated as of August 3, 2004 among CMS Energy, CMS Enterprises, the Banks, and the Administrative Agent and Collection Agent, all defined therein (4)(k) -- Reaffirmation of grant of a security interest dated as of August 3, 2004 among CMS Energy, CMS Enterprises, and the Administrative Agent and Collateral Agent, as defined therein (4)(l) -- Cash Collateral Agreement dated as of August 3, 2004 made by CMS Energy to the Administrative Agent for the lenders and Collateral Agent, as defined therein (10)(f) -- Annual Officer Incentive Compensation Plan for CMS Energy Corporation and its Subsidiaries effective January 1, 2004 (10)(w) -- Annual Management Incentive Compensation Plan for CMS Energy Corporation and its Subsidiaries effective January 1, 2004 (10)(x) -- Annual Employee Incentive Compensation Plan for CMS Energy Corporation and its Subsidiaries effective January 1, 2004 (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 (18) -- Letter from Ernst & Young LLP to the Audit Committee of the Boards of Directors for CMS Energy and Consumers regarding the preferability of a change in accounting principle (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

EXHIBITS DESCRIPTION - -------- ----------- (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, 2002, 2003, and 2004 (99)(c) -- Representation regarding Emirates CMS Power Company financial statements for the years ended December 31, 2002, 2003 and 2004 (99)(d) -- Representation regarding SCP Investments (1) PTY. LTD. financial statements for the years ended June 30, 2003, 2004 and 2005
EX-4.(A)(I) 2 k91832exv4wxayxiy.txt 99TH SUPPLEMENTAL INDENTURE DATED AS OF 1/20/05 EXHIBIT 4(a)(i) NINETY-NINTH SUPPLEMENTAL INDENTURE PROVIDING AMONG OTHER THINGS FOR FIRST MORTGAGE BONDS, $250,000,000 5.15% SERIES DUE 2017 -------------- DATED AS OF JANUARY 20, 2005 -------------- CONSUMERS ENERGY COMPANY TO JPMORGAN CHASE BANK, N.A. TRUSTEE Counterpart _____ of 80 THIS NINETY-NINTH SUPPLEMENTAL INDENTURE, dated as of January 20, 2005 (herein sometimes referred to as "this Supplemental Indenture"), made and entered into by and between CONSUMERS ENERGY COMPANY, a corporation organized and existing under the laws of the State of Michigan, with its principal executive office and place of business at One Energy Plaza, in Jackson, Jackson County, Michigan 49201, formerly known as Consumers Power Company (hereinafter sometimes referred to as the "Company"), and JPMORGAN CHASE BANK, N.A., a national banking association organized under the laws of the United States of America, with its corporate trust offices at 4 New York Plaza, New York, New York 10004 (hereinafter sometimes referred to as the "Trustee"), as Trustee under the Indenture dated as of September 1, 1945 between Consumers Power Company, a Maine corporation (hereinafter sometimes referred to as the "Maine corporation"), and City Bank Farmers Trust Company (Citibank, N.A., successor, hereinafter sometimes referred to as the "Predecessor Trustee"), securing bonds issued and to be issued as provided therein (hereinafter sometimes referred to as the "Indenture"), WHEREAS at the close of business on January 30, 1959, City Bank Farmers Trust Company was converted into a national banking association under the title "First National City Trust Company"; and WHEREAS at the close of business on January 15, 1963, First National City Trust Company was merged into First National City Bank; and WHEREAS at the close of business on October 31, 1968, First National City Bank was merged into The City Bank of New York, National Association, the name of which was thereupon changed to First National City Bank; and WHEREAS effective March 1, 1976, the name of First National City Bank was changed to Citibank, N.A.; and WHEREAS effective July 16, 1984, Manufacturers Hanover Trust Company succeeded Citibank, N.A. as Trustee under the Indenture; and WHEREAS effective June 19, 1992, Chemical Bank succeeded by merger to Manufacturers Hanover Trust Company as Trustee under the Indenture; and WHEREAS effective July 15, 1996, The Chase Manhattan Bank (National Association) merged with and into Chemical Bank which thereafter was renamed The Chase Manhattan Bank; and WHEREAS effective November 11, 2001, The Chase Manhattan Bank merged with Morgan Guaranty Trust Company of New York and the surviving corporation was renamed JPMorgan Chase Bank; and WHEREAS effective November 13, 2004, the name of JPMorgan Chase Bank was changed to JPMorgan Chase Bank, N.A.; and WHEREAS the Indenture was executed and delivered for the purpose of securing such bonds as may from time to time be issued under and in accordance with the terms of the 1 Indenture, the aggregate principal amount of bonds to be secured thereby being limited to $5,000,000,000 at any one time outstanding (except as provided in Section 2.01 of the Indenture), and the Indenture describes and sets forth the property conveyed thereby and is filed in the Office of the Secretary of State of the State of Michigan and is of record in the Office of the Register of Deeds of each county in the State of Michigan in which this Supplemental Indenture is to be recorded; and WHEREAS the Indenture has been supplemented and amended by various indentures supplemental thereto, each of which is filed in the Office of the Secretary of State of the State of Michigan and is of record in the Office of the Register of Deeds of each county in the State of Michigan in which this Supplemental Indenture is to be recorded; and WHEREAS the Company and the Maine corporation entered into an Agreement of Merger and Consolidation, dated as of February 14, 1968, which provided for the Maine corporation to merge into the Company; and WHEREAS the effective date of such Agreement of Merger and Consolidation was June 6, 1968, upon which date the Maine corporation was merged into the Company and the name of the Company was changed from "Consumers Power Company of Michigan" to "Consumers Power Company"; and WHEREAS the Company and the Predecessor Trustee entered into a Sixteenth Supplemental Indenture, dated as of June 4, 1968, which provided, among other things, for the assumption of the Indenture by the Company; and WHEREAS said Sixteenth Supplemental Indenture became effective on the effective date of such Agreement of Merger and Consolidation; and WHEREAS the Company has succeeded to and has been substituted for the Maine corporation under the Indenture with the same effect as if it had been named therein as the mortgagor corporation; and WHEREAS effective March 11, 1997, the name of Consumers Power Company was changed to Consumers Energy Company; and WHEREAS, the Indenture provides for the issuance of bonds thereunder in one or more series, and the Company, by appropriate corporate action in conformity with the terms of the Indenture, has duly determined to create, and does hereby create, a new series of bonds under the Indenture designated 5.15% Series due 2017, each of which bonds shall also bear the descriptive title "First Mortgage Bonds" (hereinafter provided for and hereinafter sometimes referred to as the "2017 Bonds"), the bonds of which series are to be issued as registered bonds without coupons and are to bear interest at the rate per annum specified in the title thereof and are to mature February 15, 2017; and WHEREAS the Company and Barclays Capital Inc., J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, ABN AMRO Incorporated, Comerica Securities, Inc., Fifth Third Securities, Inc. and Huntington Capital Corp. (the "Underwriters") have entered into an Underwriting Agreement dated January 13, 2005 (the Underwriting 2 Agreement"), pursuant to which the Company agreed to sell and the Underwriters agreed to buy $250,000,000 in aggregate principal amount of 2017 Bonds (such 2017 Bonds, the "Bonds"); and WHEREAS, each of the registered bonds without coupons of 2017 Bonds and the Trustee's Authentication Certificate thereon are to be substantially in the following form, respectively, to wit: [FORM OF REGISTERED BOND OF THE 2017 BONDS] [FACE] THIS BOND IS A GLOBAL BOND REGISTERED IN THE NAME OF THE DEPOSITARY (REFERRED TO HEREIN) OR A NOMINEE THEREOF AND, UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR THE INDIVIDUAL BONDS REPRESENTED HEREBY, THIS GLOBAL BOND 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 OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS GLOBAL BOND IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK), A NEW YORK CORPORATION (THE "DEPOSITARY"), TO THE TRUSTEE FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. CONSUMERS ENERGY COMPANY FIRST MORTGAGE BOND 5.15% SERIES DUE 2017 CUSIP: 210518 CG 9 $250,000,000 ISIN: US 210518CG91 No.: CONSUMERS ENERGY COMPANY, a Michigan corporation (hereinafter called the "Company"), for value received, hereby promises to pay to Cede & Co., or registered 3 assigns, the principal sum of Two Hundred Fifty Million Dollars ($250,000,000) on February 15, 2017, and to pay to the registered holder hereof interest on said sum from the latest semi-annual interest payment date to which interest has been paid on the bonds of this series preceding the date hereof, unless the date hereof be an interest payment date to which interest is being paid, in which case from the date hereof, or unless the date hereof is prior to August 15, 2005 in which case from January 20, 2005 (or if this bond is dated between the record date for any interest payment date and such interest payment date, then from such interest payment date, provided, however, that if the Company shall default in payment of the interest due on such interest payment date, then from the next preceding semi-annual interest payment date to which interest has been paid on the bonds of this series, or if such interest payment date is August 15, 2005, from January 20, 2005), at the rate per annum, until the principal hereof shall have become due and payable, specified in the title of this bond, payable on February 15 and August 15 in each year. The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. This bond shall not be valid or become obligatory for any purpose unless and until it shall have been authenticated by the execution by the Trustee or its successor in trust under the Indenture of the certificate hereon. IN WITNESS WHEREOF, Consumers Energy Company has caused this bond to be executed in its name by its Chairman of the Board, its President or one of its Vice Presidents by his or her signature or a facsimile thereof, and its corporate seal or a facsimile thereof to be affixed hereto or imprinted hereon and attested by its Secretary or one of its Assistant Secretaries by his or her signature or a facsimile thereof. CONSUMERS ENERGY COMPANY Dated: By: ------------------------------- Printed: ------------------------- Title: --------------------------- Attest: ---------------------- TRUSTEE'S AUTHENTICATION CERTIFICATE This is one of the bonds, of the series designated therein, described in the within-mentioned Indenture. JPMORGAN CHASE BANK, N.A., Trustee By: ------------------------------- Authorized Officer 4 [REVERSE] CONSUMERS ENERGY COMPANY FIRST MORTGAGE BOND 5.15% SERIES DUE 2017 The interest payable on any February 15 or August 15 will, subject to certain exceptions provided in the Indenture hereinafter mentioned, be paid to the person in whose name this bond is registered at the close of business on the record date, which shall be the first calendar day of the month in which such interest payment date occurs, or, if such February 15 or August 15 shall be a legal holiday or a day on which banking institutions in the Borough of Manhattan, The City of New York, are authorized to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. The principal of and the premium, if any, and interest on this bond shall be payable at the office or agency of the Company in the Borough of Manhattan, The City of New York, designated for that purpose, in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts. This bond is one of the bonds of a series designated as First Mortgage Bonds, 5.15% Series due 2017 (sometimes herein referred to as the "2017 Bonds" or the "Bonds") issued and to be issued from time to time under and in accordance with and secured by an indenture dated as of September 1, 1945, given by the Company (or its predecessor, Consumers Power Company, a Maine corporation) to City Bank Farmers Trust Company (JPMorgan Chase Bank, N.A., successor) (hereinafter sometimes referred to as the "Trustee"), together with indentures supplemental thereto, heretofore or hereafter executed, to which indenture and indentures supplemental thereto (hereinafter referred to collectively as the "Indenture") reference is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security and the rights, duties and immunities thereunder of the Trustee and the rights of the holders of said bonds and of the Trustee and of the Company in respect of such security, and the limitations on such rights. By the terms of the Indenture, the bonds to be secured thereby are issuable in series which may vary as to date, amount, date of maturity, rate of interest and in other respects as provided in the Indenture. The 2017 Bonds are redeemable upon notice given by mailing the same, postage prepaid, not less than thirty days nor more than sixty days prior to the date fixed for redemption to each registered holder of a bond to be redeemed (in whole or in part) at the last address of such holder appearing on the registry books. Any or all of the bonds of this series may be redeemed by the Company, at any time and from time to time prior to maturity, at a redemption price equal to the greater of (1) 100% of the principal amount of the Bonds and (2) the sum of the present values of the Remaining Scheduled Payments (as defined below) of principal and interest on the Bonds discounted to the redemption date semiannually (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined below), plus 20 basis points, plus in either case accrued interest on the Bonds to the date of redemption. "Treasury Rate" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue (as 5 defined below), assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price (as defined below) for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker (as defined below) as having a maturity comparable to the remaining term of the Bonds to be redeemed that would be used, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Bonds. "Independent Investment Banker" means either Barclays Capital Inc., J.P. Morgan Securities Inc. or Merrill Lynch, Pierce, Fenner & Smith Incorporated or, if such firms are unwilling or unable to select the Comparable Treasury Issues, an independent banking institution of national standing selected by the Company. "Comparable Treasury Price" means, with respect to any redemption date, (1) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "H.15(519)" or (2) if such release (or any successor release) is not published or does not contain such prices on such business day, (a) the average of the Reference Treasury Dealer Quotations (as defined below) for such redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (b) if the Company obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer (as defined below) and any redemption date, the average, as determined by the Company, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means (1) each of Barclays Capital Inc., J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall replace that former dealer with another Primary Treasury Dealer and (2) up to four other Primary Treasury Dealers selected by the Company. "Remaining Scheduled Payments" means, with respect to each Bond to be redeemed, the remaining scheduled payments of the principal thereof and interest thereon that would be due after the related redemption date but for such redemption; provided, however, that, if that redemption date is prior to an interest payment date with respect to such Bond, the amount of the next succeeding scheduled interest payment thereon will be reduced by the amount of interest accrued thereon to that redemption date. 6 In case of certain defaults as specified in the Indenture, the principal of this bond may be declared or may become due and payable on the conditions, at the time, in the manner and with the effect provided in the Indenture. The holders of certain specified percentages of the bonds at the time outstanding, including in certain cases specified percentages of bonds of particular series, may in certain cases, to the extent and as provided in the Indenture, waive certain defaults thereunder and the consequences of such defaults. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than seventy-five per centum in principal amount of the bonds (exclusive of bonds disqualified by reason of the Company's interest therein) at the time outstanding, including, if more than one series of bonds shall be at the time outstanding, not less than sixty per centum in principal amount of each series affected, to effect, by an indenture supplemental to the Indenture, modifications or alterations of the Indenture and of the rights and obligations of the Company and the rights of the holders of the bonds and coupons; provided, however, that no such modification or alteration shall be made without the written approval or consent of the holder hereof which will (a) extend the maturity of this bond or reduce the rate or extend the time of payment of interest hereon or reduce the amount of the principal hereof or reduce any premium payable on the redemption hereof, (b) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of the Indenture, or (c) reduce the percentage of the principal amount of the bonds upon the approval or consent of the holders of which modifications or alterations may be made as aforesaid. The Company reserves the right, without any consent, vote or other action by holders of the 2017 Bonds or any other series created after the Sixty-eighth Supplemental Indenture to amend the Indenture to reduce the percentage of the principal amount of bonds the holders of which are required to approve any supplemental indenture (other than any supplemental indenture which is subject to the proviso contained in the immediately preceding sentence) (a) from not less than seventy-five per centum (including sixty per centum of each series affected) to not less than a majority in principal amount of the bonds at the time outstanding or (b) in case fewer than all series are affected, not less than a majority in principal amount of the bonds of all affected series, voting together. No recourse shall be had for the payment of the principal of or premium, if any, or interest on this bond, or for any claim based hereon, or otherwise in respect hereof or of the Indenture, to or against any incorporator, stockholder, director or officer, past, present or future, as such, of the Company, or of any predecessor or successor company, either directly or through the Company, or such predecessor or successor company, or otherwise, under any constitution or statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability of incorporators, stockholders, directors and officers, as such, being waived and released by the holder and owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Indenture. [END OF FORM OF REGISTERED BOND OF THE 2017 BONDS] - - - - - - - - - - - - - - - 7 AND WHEREAS all acts and things necessary to make the 2017 Bonds ( referred to herein as the "Bonds"), when duly executed by the Company and authenticated by the Trustee or its agent and issued as prescribed in the Indenture, as heretofore supplemented and amended, this Supplemental Indenture, the valid, binding and legal obligations of the Company, and to constitute the Indenture, as supplemented and amended as aforesaid, as well as by this Supplemental Indenture, a valid, binding and legal instrument for the security thereof, have been done and performed, and the creation, execution and delivery of this Supplemental Indenture and the creation, execution and issuance of bonds subject to the terms hereof and of the Indenture, as so supplemented and amended, have in all respects been duly authorized; NOW, THEREFORE, in consideration of the premises, of the acceptance and purchase by the holders thereof of the bonds issued and to be issued under the Indenture, as supplemented and amended as above set forth, duly paid by the Trustee to the Company, and of other good and valuable considerations, the receipt whereof is hereby acknowledged, and for the purpose of securing the due and punctual payment of the principal of and premium, if any, and interest on all bonds now outstanding under the Indenture and the $250,000,000 principal amount of the 2017 Bonds, and all other bonds which shall be issued under the Indenture, as supplemented and amended from time to time, and for the purpose of securing the faithful performance and observance of all covenants and conditions therein, and in any indenture supplemental thereto, set forth, the Company has given, granted, bargained, sold, released, transferred, assigned, hypothecated, pledged, mortgaged, confirmed, set over, warranted, alienated and conveyed and by these presents does give, grant, bargain, sell, release, transfer, assign, hypothecate, pledge, mortgage, confirm, set over, warrant, alienate and convey unto JPMorgan Chase Bank, N.A., as Trustee, as provided in the Indenture, and its successor or successors in the trust thereby and hereby created and to its or their assigns forever, all the right, title and interest of the Company in and to all the property, described in Section 11 hereof, together (subject to the provisions of Article X of the Indenture) with the tolls, rents, revenues, issues, earnings, income, products and profits thereof, excepting, however, the property, interests and rights specifically excepted from the lien of the Indenture as set forth in the Indenture; TOGETHER WITH all and singular the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the premises, property, franchises and rights, or any thereof, referred to in the foregoing granting clause, with the reversion and reversions, remainder and remainders and (subject to the provisions of Article X of the Indenture) the tolls, rents, revenues, issues, earnings, income, products and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid premises, property, franchises and rights and every part and parcel thereof; SUBJECT, HOWEVER, with respect to such premises, property, franchises and rights, to excepted encumbrances as said term is defined in Section 1.02 of the Indenture, and subject also to all defects and limitations of title and to all encumbrances existing at the time of acquisition. 8 TO HAVE AND TO HOLD all said premises, property, franchises and rights hereby conveyed, assigned, pledged or mortgaged, or intended so to be, unto the Trustee, its successor or successors in trust and their assigns forever; BUT IN TRUST, NEVERTHELESS, with power of sale for the equal and proportionate benefit and security of the holders of all bonds now or hereafter authenticated and delivered under and secured by the Indenture and interest coupons appurtenant thereto, pursuant to the provisions of the Indenture and of any supplemental indenture, and for the enforcement of the payment of said bonds and coupons when payable and the performance of and compliance with the covenants and conditions of the Indenture and of any supplemental indenture, without any preference, distinction or priority as to lien or otherwise of any bond or bonds over others by reason of the difference in time of the actual authentication, delivery, issue, sale or negotiation thereof or for any other reason whatsoever, except as otherwise expressly provided in the Indenture; and so that each and every bond now or hereafter authenticated and delivered thereunder shall have the same lien, and so that the principal of and premium, if any, and interest on every such bond shall, subject to the terms thereof, be equally and proportionately secured, as if it had been made, executed, authenticated, delivered, sold and negotiated simultaneously with the execution and delivery thereof; AND IT IS EXPRESSLY DECLARED by the Company that all bonds authenticated and delivered under and secured by the Indenture, as supplemented and amended as above set forth, are to be issued, authenticated and delivered, and all said premises, property, franchises and rights hereby and by the Indenture and indentures supplemental thereto conveyed, assigned, pledged or mortgaged, or intended so to be, are to be dealt with and disposed of under, upon and subject to the terms, conditions, stipulations, covenants, agreements, trusts, uses and purposes expressed in the Indenture, as supplemented and amended as above set forth, and the parties hereto mutually agree as follows: SECTION 1. There is hereby created one series of bonds (the "2017 Bonds") designated as hereinabove provided, which shall also bear the descriptive title "First Mortgage Bond", and the form thereof shall be substantially as hereinbefore set forth. The 2017 Bonds shall be issued in the aggregate principal amount of $250,000,000, shall mature on February 15, 2017 and shall be issued only as registered bonds without coupons in denominations of $1,000 and any multiple thereof. The serial numbers of the 2017 Bonds shall be such as may be approved by any officer of the Company, the execution thereof by any such officer either manually or by facsimile signature to be conclusive evidence of such approval. The 2017 Bonds shall bear interest at the rate per annum, until the principal thereof shall have become due and payable, specified in the title thereto, payable semi-annually on February 15 and August 15 in each year. The principal of and the premium, if any, and the interest on said bonds shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts, at the office or agency of the Company in the City of New York, designated for that purpose. 9 SECTION 2. 2.01 Form of Bonds. The 2017 Bonds shall be issued initially in the form of one or more permanent Global Bonds in definitive, fully registered form without interest coupons with the global securities legend (each, a "Global Bond"), which shall be deposited on behalf of the purchasers of the Bonds represented thereby with the Trustee, at its corporate trust office, as securities custodian (or with such other securities custodian as the Depository (as defined below) may direct), and registered in the name of the Depository or a nominee of the Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Global Bonds may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depository or its nominee as hereinafter provided. The Depositary for the Global Bonds shall be The Depository Trust Company, a New York corporation, or its duly appointed successor (the "Depository"). This Section 2.01 shall apply only to a Global Bond deposited with or on behalf of the Depository. The Company shall execute and the Trustee shall, in the case of each of the 2017 Bonds in accordance with this Section 2.01, authenticate and deliver initially one or more Global Bonds that (a) shall be registered in the name of the Depository or the nominee of the Depository and (b) shall be delivered by the Trustee to the Depository or pursuant to the Depository's instructions or held by the Trustee as securities custodian. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Supplemental Indenture with respect to any Global Bond held on their behalf by the Depository or by the Trustee as the securities custodian or under such Global Bond, and the Company, the Trustee and any agent of the Company or the Trustee shall be entitled to treat the Depository as the absolute owner of such Global Bond for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices of such Depository governing the exercise of the rights of a holder of a beneficial interest in any Global Bond. Except as provided in this Section 2.01, Section 2.02 or Section 2.03, owners of beneficial interests in Global Bonds shall not be entitled to receive physical delivery of certificated Bonds. 2.02 Transfer and Exchange. (a) Transfer and Exchange of Global Bonds. (i) The transfer and exchange of Global Bonds or beneficial interests therein shall be effected through the Depository, in accordance with this Supplemental Indenture (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Depository therefor. (ii) Notwithstanding any other provision of this Supplemental Indenture (other than the provisions set forth in Section 2.03), a Global Bond may not be transferred as a whole except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository 10 or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. (b) Cancellation or Adjustment of Global Bond. At such time as all beneficial interests in a Global Bond have either been exchanged for certificated Bonds, redeemed, purchased or canceled, such Global Bond shall be canceled by the Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Bond is exchanged for certificated Bonds, redeemed, purchased or canceled, the principal amount of Bonds represented by such Global Bond shall be reduced and an adjustment shall be made on the books and records of the securities custodian with respect to such Global Bond. (c) Obligations with Respect to Transfers and Exchanges of Bonds. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate certificated Bonds and Global Bonds at the security registrar's request. (ii) No service charge shall be made for registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, assessments or similar governmental charge payable in connection therewith. (iii) Prior to the due presentation for registration of transfer of any Bond, the Company, the Trustee, the paying agent or the security registrar may deem and treat the person in whose name a Bond is registered as the absolute owner of such Bond for the purpose of receiving payment of principal of and interest on such Bond and for all other purposes whatsoever, whether or not such Bond is overdue, and none of the Company, the Trustee, the paying agent or the security registrar shall be affected by notice to the contrary. (iv) All Bonds issued upon any transfer or exchange pursuant to the terms of the Indenture shall evidence the same debt and shall be entitled to the same benefits under the Indenture as the Bonds surrendered upon such transfer or exchange. (d) No Obligation of Trustee. (i) The Trustee (whether in its capacity as Trustee or otherwise) shall have no responsibility or obligation to any beneficial owner of a Global Bond, Agent Member or other person with respect to the accuracy of the records of the Depository or its nominee or of any Agent Member, with respect to any ownership interest in the Bonds or with respect to the delivery to any Agent Member, beneficial owner or other person (other than the Depository) of any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Bonds. All notices and communications to be given to the holders and all payments to be made to holders under the Bonds shall be given or made only to or upon the order of the registered holders (which shall be the Depository or its nominee in the case of a Global Bond). The rights of beneficial owners in any Global Bond shall be exercised only 11 through the Depository subject to the applicable rules and procedures of the Depository. The Trustee may rely and shall be fully protected in relying upon information furnished by the Depository with respect to its Agent Members and any beneficial owners. (ii) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Supplemental Indenture or under applicable law with respect to any transfer of any interest in any Bond (including any transfers between or among Agent Members or beneficial owners in any Global Bond) 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 the Indenture. 2.03 Certificated Bonds. (a) A Global Bond deposited with the Depository or with the Trustee as securities custodian pursuant to Section 2.01 shall be transferred to the beneficial owners thereof in the form of certificated Bonds in an aggregate principal amount equal to the principal amount of such Global Bond, in exchange for such Global Bond, only if such transfer complies with this Section 2.03 and the conditions set forth in Article II of the Indenture. (b) Any Global Bond that is transferable to the beneficial owners thereof pursuant to this Section 2.03 shall be surrendered by the Depository to the Trustee at its corporate trust office to be so transferred, in whole or from time to time in part, without charge, and the Trustee shall authenticate and deliver, upon such transfer of each portion of such Global Bond, an equal aggregate principal amount of certificated Bonds of authorized denominations. Any portion of a Global Bond transferred pursuant to this Section 2.03 shall be executed, authenticated and delivered only in denominations of $1,000 principal amount and any integral multiple thereof and registered in such names as the Depository shall direct. (c) Subject to the provisions of Section 2.03(b), the registered holder of a Global Bond shall be entitled to grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a holder is entitled to take under the Indenture or the Bonds. SECTION 3. The 2017 Bonds are redeemable upon notice given by mailing the same, postage prepaid, not less than thirty days nor more than sixty days prior to the date fixed for redemption to each registered holder of a bond to be redeemed (in whole or in part) at the last address of such holder appearing on the registry books. Any or all of the bonds of this series may be redeemed by the Company, at any time and from time to time prior to maturity, at a redemption price equal to the greater of (1) 100% of the principal amount of the Bonds and (2) the sum of the present values of the Remaining Scheduled Payments (as defined below) of principal and interest on the Bonds discounted to the redemption date semiannually (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined below), plus 20 basis points, plus accrued interest on the Bonds to the date of redemption. "Treasury Rate" means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue (as 12 defined below), assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price (as defined below) for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker (as defined below) as having a maturity comparable to the remaining term of the Bonds to be redeemed that would be used, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Bonds. "Independent Investment Banker" means either Barclays Capital Inc., J.P. Morgan Securities Inc. or Merrill Lynch, Pierce, Fenner & Smith Incorporated or, if such firms are unwilling or unable to select the Comparable Treasury Issues, an independent banking institution of national standing selected by the Company. "Comparable Treasury Price" means, with respect to any redemption date, (1) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "H.15(519)" or (2) if such release (or any successor release) is not published or does not contain such prices on such business day, (a) the average of the Reference Treasury Dealer Quotations (as defined below) for such redemption date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or (b) if the Company obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer (as defined below) and any redemption date, the average, as determined by the Company, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means (1) each of Barclays Capital Inc., J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall replace that former dealer with another Primary Treasury Dealer and (2) up to four other Primary Treasury Dealers selected by the Company. "Remaining Scheduled Payments" means, with respect to each Bond to be redeemed, the remaining scheduled payments of the principal thereof and interest thereon that would be due after the related redemption date but for such redemption; provided, however, that, if that redemption date is prior to an interest payment date with respect to such Bond, the amount of the next succeeding scheduled interest payment thereon will be reduced by the amount of interest accrued thereon to that redemption date. 13 SECTION 4. The 2017 Bonds are not redeemable by the operation of the maintenance and replacement provisions of the Indenture or with the proceeds of released property or in any other manner except as set forth in Section 3 hereof. SECTION 5. The Company reserves the right, without any consent, vote or other action by the holders of the 2017 Bonds or of any subsequent series of bonds issued under the Indenture, to make such amendments to the Indenture, as supplemented, as shall be necessary in order to amend Section 17.02 to read as follows: SECTION 17.02. With the consent of the holders of not less than a majority in principal amount of the bonds at the time outstanding or their attorneys-in-fact duly authorized, or, if fewer than all series are affected, not less than a majority in principal amount of the bonds at the time outstanding of each series the rights of the holders of which are affected, voting together, the Company, when authorized by a resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or modifying the rights and obligations of the Company and the rights of the holders of any of the bonds and coupons; provided, however, that no such supplemental indenture shall (1) extend the maturity of any of the bonds or reduce the rate or extend the time of payment of interest thereon, or reduce the amount of the principal thereof, or reduce any premium payable on the redemption thereof, without the consent of the holder of each bond so affected, or (2) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of this Indenture, without the consent of the holders of all the bonds then outstanding, or (3) reduce the aforesaid percentage of the principal amount of bonds the holders of which are required to approve any such supplemental indenture, without the consent of the holders of all the bonds then outstanding. For the purposes of this Section, bonds shall be deemed to be affected by a supplemental indenture if such supplemental indenture adversely affects or diminishes the rights of holders thereof against the Company or against its property. The Trustee may in its discretion determine whether or not, in accordance with the foregoing, bonds of any particular series would be affected by any supplemental indenture and any such determination shall be conclusive upon the holders of bonds of such series and all other series. Subject to the provisions of Sections 16.02 and 16.03 hereof, the Trustee shall not be liable for any determination made in good faith in connection herewith. Upon the written request of the Company, accompanied by a resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of bondholders as aforesaid (the instrument or instruments evidencing such consent to be dated within one year of such request), the Trustee shall join with the Company in the execution of such supplemental indenture unless 14 such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion but shall not be obligated to enter into such supplemental indenture. It shall not be necessary for the consent of the bondholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. The Company and the Trustee, if they so elect, and either before or after such consent has been obtained, may require the holder of any bond consenting to the execution of any such supplemental indenture to submit his bond to the Trustee or to ask such bank, banker or trust company as may be designated by the Trustee for the purpose, for the notation thereon of the fact that the holder of such bond has consented to the execution of such supplemental indenture, and in such case such notation, in form satisfactory to the Trustee, shall be made upon all bonds so submitted, and such bonds bearing such notation shall forthwith be returned to the persons entitled thereto. Prior to the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Company shall publish a notice, setting forth in general terms the substance of such supplemental indenture, at least once in one daily newspaper of general circulation in each city in which the principal of any of the bonds shall be payable, or, if all bonds outstanding shall be registered bonds without coupons or coupon bonds registered as to principal, such notice shall be sufficiently given if mailed, first class, postage prepaid, and registered if the Company so elects, to each registered holder of bonds at the last address of such holder appearing on the registry books, such publication or mailing, as the case may be, to be made not less than thirty days prior to such execution. Any failure of the Company to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 6. As supplemented and amended as above set forth, the Indenture is in all respects ratified and confirmed, and the Indenture and all indentures supplemental thereto shall be read, taken and construed as one and the same instrument. SECTION 7. The Trustee assumes no responsibility for or in respect of the validity or sufficiency of this Supplemental Indenture or of the Indenture as hereby supplemented or the due execution hereof by the Company or for or in respect of the recitals and statements contained herein (other than those contained in the sixth, seventh, eighth and ninth recitals hereof), all of which recitals and statements are made solely by the Company. 15 SECTION 8. This Supplemental Indenture may be simultaneously executed in several counterparts and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. SECTION 9. In the event the date of any notice required or permitted hereunder shall not be a Business Day (as defined below), then (notwithstanding any other provision of the Indenture or of any supplemental indenture thereto) such notice need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date fixed for such notice. "Business Day" means, with respect to this Section 9, any day, other than a Saturday or Sunday, on which banks generally are open in New York, New York for the conduct of substantially all of their commercial lending activities and on which interbank wire transfers can be made on the Fedwire system. SECTION 10. This Supplemental Indenture and the 2017 Bonds shall be governed by and deemed to be a contract under, and construed in accordance with, the laws of the State of Michigan, and for all purposes shall be construed in accordance with the laws of such state, except as may otherwise be required by mandatory provisions of law. SECTION 11. Detailed Description of Property Mortgaged: I. ELECTRIC GENERATING PLANTS AND DAMS All the electric generating plants and stations of the Company, constructed or otherwise acquired by it and not heretofore described in the Indenture or any supplement thereto and not heretofore released from the lien of the Indenture, including all powerhouses, buildings, reservoirs, dams, pipelines, flumes, structures and works and the land on which the same are situated and all water rights and all other lands and easements, rights of way, permits, privileges, towers, poles, wires, machinery, equipment, appliances, appurtenances and supplies and all other property, real or personal, forming a part of or appertaining to or used, occupied or enjoyed in connection with such plants and stations or any of them, or adjacent thereto. II. ELECTRIC TRANSMISSION LINES All the electric transmission lines of the Company, constructed or otherwise acquired by it and not heretofore described in the Indenture or any supplement thereto and not heretofore released from the lien of the Indenture, including towers, poles, pole lines, wires, switches, switch racks, switchboards, insulators and other appliances and equipment, and all other property, real or personal, forming a part of or appertaining to or used, occupied or enjoyed in connection with such transmission lines or any of them or adjacent thereto; together with all real property, rights of way, easements, permits, privileges, franchises and rights for or relating to the construction, maintenance or operation thereof, through, over, under or upon any private property or any public streets or highways, within as well as without the corporate limits of any municipal corporation. Also all the real property, rights of way, easements, permits, privileges 16 and rights for or relating to the construction, maintenance or operation of certain transmission lines, the land and rights for which are owned by the Company, which are either not built or now being constructed. III. ELECTRIC DISTRIBUTION SYSTEMS All the electric distribution systems of the Company, constructed or otherwise acquired by it and not heretofore described in the Indenture or any supplement thereto and not heretofore released from the lien of the Indenture, including substations, transformers, switchboards, towers, poles, wires, insulators, subways, trenches, conduits, manholes, cables, meters and other appliances and equipment, and all other property, real or personal, forming a part of or appertaining to or used, occupied or enjoyed in connection with such distribution systems or any of them or adjacent thereto; together with all real property, rights of way, easements, permits, privileges, franchises, grants and rights, for or relating to the construction, maintenance or operation thereof, through, over, under or upon any private property or any public streets or highways within as well as without the corporate limits of any municipal corporation. IV. ELECTRIC SUBSTATIONS, SWITCHING STATIONS AND SITES All the substations, switching stations and sites of the Company, constructed or otherwise acquired by it and not heretofore described in the Indenture or any supplement thereto and not heretofore released from the lien of the Indenture, for transforming, regulating, converting or distributing or otherwise controlling electric current at any of its plants and elsewhere, together with all buildings, transformers, wires, insulators and other appliances and equipment, and all other property, real or personal, forming a part of or appertaining to or used, occupied or enjoyed in connection with any of such substations and switching stations, or adjacent thereto, with sites to be used for such purposes. V. GAS COMPRESSOR STATIONS, GAS PROCESSING PLANTS, DESULPHURIZATION STATIONS, METERING STATIONS, ODORIZING STATIONS, REGULATORS AND SITES All the compressor stations, processing plants, desulphurization stations, metering stations, odorizing stations, regulators and sites of the Company, constructed or otherwise acquired by it and not heretofore described in the Indenture or any supplement thereto and not heretofore released from the lien of the Indenture, for compressing, processing, desulphurizing, metering, odorizing and regulating manufactured or natural gas at any of its plants and elsewhere, together with all buildings, meters and other appliances and equipment, and all other property, real or personal, forming a part of or appertaining to or used, occupied or enjoyed in connection with any of such purposes, with sites to be used for such purposes. 17 VI. GAS STORAGE FIELDS The natural gas rights and interests of the Company, including wells and well lines (but not including natural gas, oil and minerals), the gas gathering system, the underground gas storage rights, the underground gas storage wells and injection and withdrawal system used in connection therewith, constructed or otherwise acquired by it and not heretofore described in the Indenture or any supplement thereto and not heretofore released from the lien of the Indenture: In the Overisel Gas Storage Field, located in the Township of Overisel, Allegan County, and in the Township of Zeeland, Ottawa County, Michigan; in the Northville Gas Storage Field located in the Township of Salem, Washtenaw County, Township of Lyon, Oakland County, and the Townships of Northville and Plymouth and City of Plymouth, Wayne County, Michigan; in the Salem Gas Storage Field, located in the Township of Salem, Allegan County, and in the Township of Jamestown, Ottawa County, Michigan; in the Ray Gas Storage Field, located in the Townships of Ray and Armada, Macomb County, Michigan; in the Lenox Gas Storage Field, located in the Townships of Lenox and Chesterfield, Macomb County, Michigan; in the Ira Gas Storage Field, located in the Township of Ira, St. Clair County, Michigan; in the Puttygut Gas Storage Field, located in the Township of Casco, St. Clair County, Michigan; in the Four Corners Gas Storage Field, located in the Townships of Casco, China, Cottrellville and Ira, St. Clair County, Michigan; in the Swan Creek Gas Storage Field, located in the Township of Casco and Ira, St. Clair County, Michigan; and in the Hessen Gas Storage Field, located in the Townships of Casco and Columbus, St. Clair, Michigan. VII. GAS TRANSMISSION LINES All the gas transmission lines of the Company, constructed or otherwise acquired by it and not heretofore described in the Indenture or any supplement thereto and not heretofore released from the lien of the Indenture, including gas mains, pipes, pipelines, gates, valves, meters and other appliances and equipment, and all other property, real or personal, forming a part of or appertaining to or used, occupied or enjoyed in connection with such transmission lines or any of them or adjacent thereto; together with all real property, right of way, easements, permits, privileges, franchises and rights for or relating to the construction, maintenance or operation thereof, through, over, under or upon any private property or any public streets or highways, within as well as without the corporate limits of any municipal corporation. VIII. GAS DISTRIBUTION SYSTEMS All the gas distribution systems of the Company, constructed or otherwise acquired by it and not heretofore described in the Indenture or any supplement thereto and not heretofore released from the lien of the Indenture, including tunnels, conduits, gas mains and pipes, service pipes, fittings, gates, valves, connections, meters and other appliances and equipment, and all other property, real or personal, forming a part of or appertaining to or used, 18 occupied or enjoyed in connection with such distribution systems or any of them or adjacent thereto; together with all real property, rights of way, easements, permits, privileges, franchises, grants and rights, for or relating to the construction, maintenance or operation thereof, through, over, under or upon any private property or any public streets or highways within as well as without the corporate limits of any municipal corporation. IX. OFFICE BUILDINGS, SERVICE BUILDINGS, GARAGES, ETC. All office, garage, service and other buildings of the Company, wherever located, in the State of Michigan, constructed or otherwise acquired by it and not heretofore described in the Indenture or any supplement thereto and not heretofore released from the lien of the Indenture, together with the land on which the same are situated and all easements, rights of way and appurtenances to said lands, together with all furniture and fixtures located in said buildings. X. TELEPHONE PROPERTIES AND RADIO COMMUNICATION EQUIPMENT All telephone lines, switchboards, systems and equipment of the Company, constructed or otherwise acquired by it and not heretofore described in the Indenture or any supplement thereto and not heretofore released from the lien of the Indenture, used or available for use in the operation of its properties, and all other property, real or personal, forming a part of or appertaining to or used, occupied or enjoyed in connection with such telephone properties or any of them or adjacent thereto; together with all real estate, rights of way, easements, permits, privileges, franchises, property, devices or rights related to the dispatch, transmission, reception or reproduction of messages, communications, intelligence, signals, light, vision or sound by electricity, wire or otherwise, including all telephone equipment installed in buildings used as general and regional offices, substations and generating stations and all telephone lines erected on towers and poles; and all radio communication equipment of the Company, together with all property, real or personal (except any in the Indenture expressly excepted), fixed stations, towers, auxiliary radio buildings and equipment, and all appurtenances used in connection therewith, wherever located, in the State of Michigan. XI. OTHER REAL PROPERTY All other real property of the Company and all interests therein, of every nature and description (except any in the Indenture expressly excepted) wherever located, in the State of Michigan, acquired by it and not heretofore described in the Indenture or any supplement thereto and not heretofore released from the lien of the Indenture. Such real property includes but is not limited to the following described property, such property is subject to any interests that were excepted or reserved in the conveyance to the Company: 19 ALCONA COUNTY Certain land in Caledonia Township, Alcona County, Michigan described as: The East 330 feet of the South 660 feet of the SW 1/4 of the SW 1/4 of Section 8, T28N, R8E, except the West 264 feet of the South 330 feet thereof; said land being more particularly described as follows: To find the place of beginning of this description, commence at the Southwest corner of said section, run thence East along the South line of said section 1243 feet to the place of beginning of this description, thence continuing East along said South line of said section 66 feet to the West 1/8 line of said section, thence N 02 degrees 09' 30" E along the said West 1/8 line of said section 660 feet, thence West 330 feet, thence S 02 degrees 09' 30" W, 330 feet, thence East 264 feet, thence S 02 degrees 09' 30" W, 330 feet to the place of beginning. ALLEGAN COUNTY Certain land in Lee Township, Allegan County, Michigan described as: The NE 1/4 of the NW 1/4 of Section 16, T1N, R15W. ALPENA COUNTY Certain land in Wilson and Green Townships, Alpena County, Michigan described as: All that part of the S'ly 1/2 of the former Boyne City-Gaylord and Alpena Railroad right of way, being the Southerly 50 feet of a 100 foot strip of land formerly occupied by said Railroad, running from the East line of Section 31, T31N, R7E, Southwesterly across said Section 31 and Sections 5 and 6 of T30N, R7E and Sections 10, 11 and the E 1/2 of Section 9, except the West 1646 feet thereof, all in T30N, R6E. ANTRIM COUNTY Certain land in Mancelona Township, Antrim County, Michigan described as: The S 1/2 of the NE 1/4 of Section 33, T29N, R6W, excepting therefrom all mineral, coal, oil and gas and such other rights as were reserved unto the State of Michigan in that certain deed running from the State of Michigan to August W. Schack and Emma H. Schack, his wife, dated April 15, 1946 and recorded May 20, 1946 in Liber 97 of Deeds on page 682 of Antrim County Records. 20 ARENAC COUNTY Certain land in Standish Township, Arenac County, Michigan described as: A parcel of land in the SW 1/4 of the NW 1/4 of Section 12, T18N, R4E, described as follows: To find the place of beginning of said parcel of land, commence at the Northwest corner of Section 12, T18N, R4E; run thence South along the West line of said section, said West line of said section being also the center line of East City Limits Road 2642.15 feet to the W 1/4 post of said section and the place of beginning of said parcel of land; running thence N 88 degrees 26' 00" E along the East and West 1/4 line of said section, 660.0 feet; thence North parallel with the West line of said section, 310.0 feet; thence S 88 degrees 26' 00" W, 330.0 feet; thence South parallel with the West line of said section, 260.0 feet; thence S 88 degrees 26' 00" W, 330.0 feet to the West line of said section and the center line of East City Limits Road; thence South along the said West line of said section, 50.0 feet to the place of beginning. BARRY COUNTY Certain land in Johnstown Township, Barry County, Michigan described as: A strip of land 311 feet in width across the SW 1/4 of the NE 1/4 of Section 31, T1N, R8W, described as follows: To find the place of beginning of this description, commence at the E 1/4 post of said section; run thence N 00 degrees 55' 00" E along the East line of said section, 555.84 feet; thence N 59 degrees 36' 20" W, 1375.64 feet; thence N 88 degrees 30' 00" W, 130 feet to a point on the East 1/8 line of said section and the place of beginning of this description; thence continuing N 88 degrees 30' 00" W, 1327.46 feet to the North and South 1/4 line of said section; thence S 00 degrees 39'35" W along said North and South 1/4 line of said section, 311.03 feet to a point, which said point is 952.72 feet distant N'ly from the East and West 1/4 line of said section as measured along said North and South 1/4 line of said section; thence S 88 degrees 30' 00" E, 1326.76 feet to the East 1/8 line of said section; thence N 00 degrees 47' 20" E along said East 1/8 line of said section, 311.02 feet to the place of beginning. BAY COUNTY Certain land in Frankenlust Township, Bay County, Michigan described as: The South 250 feet of the N 1/2 of the W 1/2 of the W 1/2 of the SE 1/4 of Section 9, T13N, R4E. 21 BENZIE COUNTY Certain land in Benzonia Township, Benzie County, Michigan described as: A parcel of land in the Northeast 1/4 of Section 7, Township 26 North, Range 14 West, described as beginning at a point on the East line of said Section 7, said point being 320 feet North measured along the East line of said section from the East 1/4 post; running thence West 165 feet; thence North parallel with the East line of said section 165 feet; thence East 165 feet to the East line of said section; thence South 165 feet to the place of beginning. BRANCH COUNTY Certain land in Girard Township, Branch County, Michigan described as: A parcel of land in the NE 1/4 of Section 23 T5S, R6W, described as beginning at a point on the North and South quarter line of said section at a point 1278.27 feet distant South of the North quarter post of said section, said distance being measured along the North and South quarter line of said section, running thence S89 degrees 21'E 250 feet, thence North along a line parallel with the said North and South quarter line of said section 200 feet, thence N89 degrees 21'W 250 feet to the North and South quarter line of said section, thence South along said North and South quarter line of said section 200 feet to the place of beginning. CALHOUN COUNTY Certain land in Convis Township, Calhoun County, Michigan described as: A parcel of land in the SE 1/4 of the SE 1/4 of Section 32, T1S, R6W, described as follows: To find the place of beginning of this description, commence at the Southeast corner of said section; run thence North along the East line of said section 1034.32 feet to the place of beginning of this description; running thence N 89 degrees 39' 52" W, 333.0 feet; thence North 290.0 feet to the South 1/8 line of said section; thence S 89 degrees 39' 52" E along said South 1/8 line of said section 333.0 feet to the East line of said section; thence South along said East line of said section 290.0 feet to the place of beginning. (Bearings are based on the East line of Section 32, T1S, R6W, from the Southeast corner of said section to the Northeast corner of said section assumed as North.) CASS COUNTY Certain easement rights located across land in Marcellus Township, Cass County, Michigan described as: The East 6 rods of the SW 1/4 of the SE 1/4 of Section 4, T5S, R13W. 22 CHARLEVOIX COUNTY Certain land in South Arm Township, Charlevoix County, Michigan described as: A parcel of land in the SW 1/4 of Section 29, T32N, R7W, described as follows: Beginning at the Southwest corner of said section and running thence North along the West line of said section 788.25 feet to a point which is 528 feet distant South of the South 1/8 line of said section as measured along the said West line of said section; thence N 89 degrees 30' 19" E, parallel with said South 1/8 line of said section 442.1 feet; thence South 788.15 feet to the South line of said section; thence S 89 degrees 29' 30" W, along said South line of said section 442.1 feet to the place of beginning. CHEBOYGAN COUNTY Certain land in Inverness Township, Cheboygan County, Michigan described as: A parcel of land in the SW frl 1/4 of Section 31, T37N, R2W, described as beginning at the Northwest corner of the SW frl 1/4, running thence East on the East and West quarter line of said Section, 40 rods, thence South parallel to the West line of said Section 40 rods, thence West 40 rods to the West line of said Section, thence North 40 rods to the place of beginning. CLARE COUNTY Certain land in Frost Township, Clare County, Michigan described as: The East 150 feet of the North 225 feet of the NW 1/4 of the NW 1/4 of Section 15, T20N, R4W. CLINTON COUNTY Certain land in Watertown Township, Clinton County, Michigan described as: The NE 1/4 of the NE 1/4 of the SE 1/4 of Section 22, and the North 165 feet of the NW 1/4 of the NE 1/4 of the SE 1/4 of Section 22, T5N, R3W. CRAWFORD COUNTY Certain land in Lovells Township, Crawford County, Michigan described as: A parcel of land in Section 1, T28N, R1W, described as: Commencing at NW corner said section; thence South 89 degrees 53'30" East along North section line 105.78 feet to point of beginning; thence South 89 degrees 53'30" East along North section line 649.64 feet; thence South 55 degrees 42'30" East 340.24 feet; thence South 55 degrees 44' 37"" East 5,061.81 feet to the East section line; thence South 00 degrees 00' 08"" West along East section line 441.59 feet; thence North 55 degrees 44' 37" West 5,310.48 feet; thence North 55 degrees 42'30" West 877.76 feet to point of beginning. 23 EATON COUNTY Certain land in Eaton Township, Eaton County, Michigan described as: A parcel of land in the SW 1/4 of Section 6, T2N, R4W, described as follows: To find the place of beginning of this description commence at the Southwest corner of said section; run thence N 89 degrees 51' 30" E along the South line of said section 400 feet to the place of beginning of this description; thence continuing N 89 degrees 51' 30" E, 500 feet; thence N 00 degrees 50' 00" W, 600 feet; thence S 89 degrees 51' 30" W parallel with the South line of said section 500 feet; thence S 00 degrees 50' 00" E, 600 feet to the place of beginning. EMMET COUNTY Certain land in Wawatam Township, Emmet County, Michigan described as: The West 1/2 of the Northeast 1/4 of the Northeast 1/4 of Section 23, T39N, R4W. GENESEE COUNTY Certain land in Argentine Township, Genesee County, Michigan described as: A parcel of land of part of the SW 1/4 of Section 8, T5N, R5E, being more particularly described as follows: Beginning at a point of the West line of Duffield Road, 100 feet wide, (as now established) distant 829.46 feet measured N01 degrees 42'56"W and 50 feet measured S88 degrees 14'04"W` from the South quarter corner, Section 8, T5N, R5E; thence S88 degrees 14'04"W a distance of 550 feet; thence N01 degrees 42'56"W a distance of 500 feet to a point on the North line of the South half of the Southwest quarter of said Section 8; thence N88 degrees 14'04"E along the North line of South half of the Southwest quarter of said Section 8 a distance 550 feet to a point on the West line of Duffield Road, 100 feet wide (as now established); thence S01 degrees 42'56"E along the West line of said Duffield Road a distance of 500 feet to the point of beginning. GLADWIN COUNTY Certain land in Secord Township, Gladwin County, Michigan described as: The East 400 feet of the South 450 feet of Section 2, T19N, R1E. 24 GRAND TRAVERSE COUNTY Certain land in Mayfield Township, Grand Traverse County, Michigan described as: A parcel of land in the Northwest 1/4 of Section 3, T25N, R11W, described as follows: Commencing at the Northwest corner of said section, running thence S 89 degrees 19'15" E along the North line of said section and the center line of Clouss Road 225 feet, thence South 400 feet, thence N 89 degrees 19'15" W 225 feet to the West line of said section and the center line of Hannah Road, thence North along the West line of said section and the center line of Hannah Road 400 feet to the place of beginning for this description. GRATIOT COUNTY Certain land in Fulton Township, Gratiot County, Michigan described as: A parcel of land in the NE 1/4 of Section 7, Township 9 North, Range 3 West, described as beginning at a point on the North line of George Street in the Village of Middleton, which is 542 feet East of the North and South one-quarter (1/4) line of said Section 7; thence North 100 feet; thence East 100 feet; thence South 100 feet to the North line of George Street; thence West along the North line of George Street 100 feet to place of beginning. HILLSDALE COUNTY Certain land in Litchfield Village, Hillsdale County, Michigan described as: Lot 238 of Assessors Plat of the Village of Litchfield. HURON COUNTY Certain easement rights located across land in Sebewaing Township, Huron County, Michigan described as: The North 1/2 of the Northwest 1/4 of Section 15, T15N, R9E. INGHAM COUNTY Certain land in Vevay Township, Ingham County, Michigan described as: A parcel of land 660 feet wide in the Southwest 1/4 of Section 7 lying South of the centerline of Sitts Road as extended to the North-South 1/4 line of said Section 7, T2N, R1W, more particularly described as follows: Commence at the Southwest corner of said Section 7, thence North along the West line of said Section 2502.71 feet to the centerline of Sitts Road; thence South 89 degrees 54'45" East along said centerline 2282.38 feet to the place of beginning of this description; thence continuing South 89 degrees 54'45" East along said centerline and said centerline extended 660.00 feet to the North-South 1/4 line of said section; thence South 00 degrees 07'20" West 1461.71 feet; thence North 89 degrees 34'58" West 660.00 feet; thence North 00 degrees 07'20" East 1457.91 feet to the centerline of Sitts Road and the place of beginning. 25 IONIA COUNTY Certain land in Sebewa Township, Ionia County, Michigan described as: A strip of land 280 feet wide across that part of the SW 1/4 of the NE 1/4 of Section 15, T5N, R6W, described as follows: To find the place of beginning of this description commence at the E 1/4 corner of said section; run thence N 00 degrees 05' 38" W along the East line of said section, 1218.43 feet; thence S 67 degrees 18' 24" W, 1424.45 feet to the East 1/8 line of said section and the place of beginning of this description; thence continuing S 67 degrees 18' 24" W, 1426.28 feet to the North and South 1/4 line of said section at a point which said point is 105.82 feet distant N'ly of the center of said section as measured along said North and South 1/4 line of said section; thence N 00 degrees 04' 47" E along said North and South 1/4 line of said section, 303.67 feet; thence N 67 degrees 18' 24" E, 1425.78 feet to the East 1/8 line of said section; thence S 00 degrees 00' 26" E along said East 1/8 line of said section, 303.48 feet to the place of beginning. (Bearings are based on the East line of Section 15, T5N, R6W, from the E 1/4 corner of said section to the Northeast corner of said section assumed as N 00 degrees 05' 38" W.) IOSCO COUNTY Certain land in Alabaster Township, Iosco County, Michigan described as: A parcel of land in the NW 1/4 of Section 34, T21N, R7E, described as follows: To find the place of beginning of this description commence at the N 1/4 post of said section; run thence South along the North and South 1/4 line of said section, 1354.40 feet to the place of beginning of this description; thence continuing South along the said North and South 1/4 line of said section, 165.00 feet to a point on the said North and South 1/4 line of said section which said point is 1089.00 feet distant North of the center of said section; thence West 440.00 feet; thence North 165.00 feet; thence East 440.00 feet to the said North and South 1/4 line of said section and the place of beginning. ISABELLA COUNTY Certain land in Chippewa Township, Isabella County, Michigan described as: The North 8 rods of the NE 1/4 of the SE 1/4 of Section 29, T14N, R3W. JACKSON COUNTY Certain land in Waterloo Township, Jackson County, Michigan described as: A parcel of land in the North fractional part of the N fractional 1/2 of Section 2, T1S, R2E, described as follows: To find the place of beginning of this description commence at the E 1/4 post of said section; run thence N 01 degrees 26 03' 40" E along the East line of said section 1335.45 feet to the North 1/8 line of said section and the place of beginning of this description; thence N 89 degrees 32' 00" W, 2677.7 feet to the North and South 1/4 line of said section; thence S 00 degrees 59' 25" W along the North and South 1/4 line of said section 22.38 feet to the North 1/8 line of said section; thence S 89 degrees 59' 10" W along the North 1/8 line of said section 2339.4 feet to the center line of State Trunkline Highway M-52; thence N 53 degrees 46' 00" W along the center line of said State Trunkline Highway 414.22 feet to the West line of said section; thence N 00 degrees 55' 10" E along the West line of said section 74.35 feet; thence S 89 degrees 32' 00" E, 5356.02 feet to the East line of said section; thence S 01 degrees 03' 40" W along the East line of said section 250 feet to the place of beginning. KALAMAZOO COUNTY Certain land in Alamo Township, Kalamazoo County, Michigan described as: The South 350 feet of the NW 1/4 of the NW 1/4 of Section 16, T1S, R12W, being more particularly described as follows: To find the place of beginning of this description, commence at the Northwest corner of said section; run thence S 00 degrees 36' 55" W along the West line of said section 971.02 feet to the place of beginning of this description; thence continuing S 00 degrees 36' 55" W along said West line of said section 350.18 feet to the North 1/8 line of said section; thence S 87 degrees 33' 40" E along the said North 1/8 line of said section 1325.1 feet to the West 1/8 line of said section; thence N 00 degrees 38' 25" E along the said West 1/8 line of said section 350.17 feet; thence N 87 degrees 33' 40" W, 1325.25 feet to the place of beginning. KALKASKA COUNTY Certain land in Kalkaska Township, Kalkaska County, Michigan described as: The NW 1/4 of the SW 1/4 of Section 4, T27N, R7W, excepting therefrom all mineral, coal, oil and gas and such other rights as were reserved unto the State of Michigan in that certain deed running from the Department of Conservation for the State of Michigan to George Welker and Mary Welker, his wife, dated October 9, 1934 and recorded December 28, 1934 in Liber 39 on page 291 of Kalkaska County Records, and subject to easement for pipeline purposes as granted to Michigan Consolidated Gas Company by first party herein on April 4, 1963 and recorded June 21, 1963 in Liber 91 on page 631 of Kalkaska County Records. KENT COUNTY Certain land in Caledonia Township, Kent County, Michigan described as: A parcel of land in the Northwest fractional 1/4 of Section 15, T5N, R10W, described as follows: To find the place of beginning of this description commence at the North 1/4 corner of said section, run thence S 0 degrees 59' 26" 27 E along the North and South 1/4 line of said section 2046.25 feet to the place of beginning of this description, thence continuing S 0 degrees 59' 26" E along said North and South 1/4 line of said section 332.88 feet, thence S 88 degrees 58' 30" W 2510.90 feet to a point herein designated "Point A" on the East bank of the Thornapple River, thence continuing S 88 degrees 53' 30" W to the center thread of the Thornapple River, thence NW'ly along the center thread of said Thornapple River to a point which said point is S 88 degrees 58' 30" W of a point on the East bank of the Thornapple River herein designated "Point B", said "Point B" being N 23 degrees 41' 35" W 360.75 feet from said above-described "Point A", thence N 88 degrees 58' 30" E to said "Point B", thence continuing N 88 degrees 58' 30" E 2650.13 feet to the place of beginning. (Bearings are based on the East line of Section 15, T5N, R10W between the East 1/4 corner of said section and the Northeast corner of said section assumed as N 0 degrees 59' 55" W.) LAKE COUNTY Certain land in Pinora and Cherry Valley Townships, Lake County, Michigan described as: A strip of land 50 feet wide East and West along and adjoining the West line of highway on the East side of the North 1/2 of Section 13 T18N, R12W. Also a strip of land 100 feet wide East and West along and adjoining the East line of the highway on the West side of following described land: The South 1/2 of NW 1/4, and the South 1/2 of the NW 1/4 of the SW 1/4, all in Section 6, T18N, R11W. LAPEER COUNTY Certain land in Hadley Township, Lapeer County, Michigan described as: The South 825 feet of the W 1/2 of the SW 1/4 of Section 24, T6N, R9E, except the West 1064 feet thereof. LEELANAU COUNTY Certain land in Cleveland Township, Leelanau County, Michigan described as: The North 200 feet of the West 180 feet of the SW 1/4 of the SE 1/4 of Section 35, T29N, R13W. LENAWEE COUNTY Certain land in Madison Township, Lenawee County, Michigan described as: A strip of land 165 feet wide off the West side of the following described premises: The E 1/2 of the SE 1/4 of Section 12. The E 1/2 of the NE 1/4 and the NE 1/4 of the SE 1/4 of Section 13, being all in T7S, R3E, excepting therefrom a parcel of land in the E 1/2 of the SE 1/4 of Section 12, T7S, R3E, beginning at the 28 Northwest corner of said E 1/2 of the SE 1/4 of Section 12, running thence East 4 rods, thence South 6 rods, thence West 4 rods, thence North 6 rods to the place of beginning. LIVINGSTON COUNTY Certain land in Cohoctah Township, Livingston County, Michigan described as: Parcel 1 The East 390 feet of the East 50 rods of the SW 1/4 of Section 30, T4N, R4E. Parcel 2 A parcel of land in the NW 1/4 of Section 31, T4N, R4E, described as follows: To find the place of beginning of this description commence at the N 1/4 post of said section; run thence N 89 degrees 13' 06" W along the North line of said section, 330 feet to the place of beginning of this description; running thence S 00 degrees 52' 49" W, 2167.87 feet; thence N 88 degrees 59' 49" W, 60 feet; thence N 00 degrees 52' 49" E, 2167.66 feet to the North line of said section; thence S 89 degrees 13' 06" E along said North line of said section, 60 feet to the place of beginning. MACOMB COUNTY Certain land in Macomb Township, Macomb County, Michigan described as: A parcel of land commencing on the West line of the E 1/2 of the NW 1/4 of fractional Section 6, 20 chains South of the NW corner of said E 1/2 of the NW 1/4 of Section 6; thence South on said West line and the East line of A. Henry Kotner's Hayes Road Subdivision #15, according to the recorded plat thereof, as recorded in Liber 24 of Plats, on page 7, 24.36 chains to the East and West 1/4 line of said Section 6; thence East on said East and West 1/4 line 8.93 chains; thence North parallel with the said West line of the E 1/2 of the NW 1/4 of Section 6, 24.36 chains; thence West 8.93 chains to the place of beginning, all in T3N, R13E. MANISTEE COUNTY Certain land in Manistee Township, Manistee County, Michigan described as: A parcel of land in the SW 1/4 of Section 20, T22N, R16W, described as follows: To find the place of beginning of this description, commence at the Southwest corner of said section; run thence East along the South line of said section 832.2 feet to the place of beginning of this description; thence continuing East along said South line of said section 132 feet; thence North 198 feet; thence West 132 feet; thence South 198 feet to the place of beginning, excepting 29 therefrom the South 2 rods thereof which was conveyed to Manistee Township for highway purposes by a Quitclaim Deed dated June 13, 1919 and recorded July 11, 1919 in Liber 88 of Deeds on page 638 of Manistee County Records. MASON COUNTY Certain land in Riverton Township, Mason County, Michigan described as: Parcel 1 The South 10 acres of the West 20 acres of the S 1/2 of the NE 1/4 of Section 22, T17N, R17W. Parcel 2 A parcel of land containing 4 acres of the West side of highway, said parcel of land being described as commencing 16 rods South of the Northwest corner of the NW 1/4 of the SW 1/4 of Section 22, T17N, R17W, running thence South 64 rods, thence NE'ly and N'ly and NW'ly along the W'ly line of said highway to the place of beginning, together with any and all right, title, and interest of Howard C. Wicklund and Katherine E. Wicklund in and to that portion of the hereinbefore mentioned highway lying adjacent to the E'ly line of said above described land. MECOSTA COUNTY Certain land in Wheatland Township, Mecosta County, Michigan described as: A parcel of land in the SW 1/4 of the SW 1/4 of Section 16, T14N, R7W, described as beginning at the Southwest corner of said section; thence East along the South line of Section 133 feet; thence North parallel to the West section line 133 feet; thence West 133 feet to the West line of said Section; thence South 133 feet to the place of beginning. MIDLAND COUNTY Certain land in Ingersoll Township, Midland County, Michigan described as: The West 200 feet of the W 1/2 of the NE 1/4 of Section 4, T13N, R2E. MISSAUKEE COUNTY Certain land in Norwich Township, Missaukee County, Michigan described as: A parcel of land in the NW 1/4 of the NW 1/4 of Section 16, T24N, R6W, described as follows: Commencing at the Northwest corner of said section, running thence N 89 degrees 01' 45" E along the North line of said section 233.00 feet; thence South 233.00 feet; thence S 89 degrees 01' 45" W, 233.00 feet to the 30 West line of said section; thence North along said West line of said section 233.00 feet to the place of beginning. (Bearings are based on the West line of Section 16, T24N, R6W, between the Southwest and Northwest corners of said section assumed as North.) MONROE COUNTY Certain land in Whiteford Township, Monroe County, Michigan described as: A parcel of land in the SW 1/4 of Section 20, T8S, R6E, described as follows: To find the place of beginning of this description commence at the S 1/4 post of said section; run thence West along the South line of said section 1269.89 feet to the place of beginning of this description; thence continuing West along said South line of said section 100 feet; thence N 00 degrees 50' 35" E, 250 feet; thence East 100 feet; thence S 00 degrees 50' 35" W parallel with and 16.5 feet distant W'ly of as measured perpendicular to the West 1/8 line of said section, as occupied, a distance of 250 feet to the place of beginning. MONTCALM COUNTY Certain land in Crystal Township, Montcalm County, Michigan described as: The N 1/2 of the S 1/2 of the SE 1/4 of Section 35, T10N, R5W. MONTMORENCY COUNTY Certain land in the Village of Hillman, Montmorency County, Michigan described as: Lot 14 of Hillman Industrial Park, being a subdivision in the South 1/2 of the Northwest 1/4 of Section 24, T31N, R4E, according to the plat thereof recorded in Liber 4 of Plats on Pages 32-34, Montmorency County Records. MUSKEGON COUNTY Certain land in Casnovia Township, Muskegon County, Michigan described as: The West 433 feet of the North 180 feet of the South 425 feet of the SW 1/4 of Section 3, T10N, R13W. NEWAYGO COUNTY Certain land in Ashland Township, Newaygo County, Michigan described as: The West 250 feet of the NE 1/4 of Section 23, T11N, R13W. 31 OAKLAND COUNTY Certain land in Wixcom City, Oakland County, Michigan described as: The E 75 feet of the N 160 feet of the N 330 feet of the W 526.84 feet of the NW 1/4 of the NW 1/4 of Section 8, T1N, R8E, more particularly described as follows: Commence at the NW corner of said Section 8, thence N 87 degrees 14' 29" E along the North line of said Section 8 a distance of 451.84 feet to the place of beginning for this description; thence continuing N 87 degrees 14' 29" E along said North section line a distance of 75.0 feet to the East line of the West 526.84 feet of the NW 1/4 of the NW 1/4 of said Section 8; thence S 02 degrees 37' 09" E along said East line a distance of 160.0 feet; thence S 87 degrees 14' 29" W a distance of 75.0 feet; thence N 02 degrees 37' 09" W a distance of 160.0 feet to the place of beginning. OCEANA COUNTY Certain land in Crystal Township, Oceana County, Michigan described as: The East 290 feet of the SE 1/4 of the NW 1/4 and the East 290 feet of the NE 1/4 of the SW 1/4, all in Section 20, T16N, R16W. OGEMAW COUNTY Certain land in West Branch Township, Ogemaw County, Michigan described as: The South 660 feet of the East 660 feet of the NE 1/4 of the NE 1/4 of Section 33, T22N, R2E. OSCEOLA COUNTY Certain land in Hersey Township, Osceola County, Michigan described as: A parcel of land in the North 1/2 of the Northeast 1/4 of Section 13, T17N, R9W, described as commencing at the Northeast corner of said Section; thence West along the North Section line 999 feet to the point of beginning of this description; thence S 01 degrees 54' 20" E 1327.12 feet to the North 1/8 line; thence S 89 degrees 17' 05" W along the North 1/8 line 330.89 feet; thence N 01 degrees 54' 20" W 1331.26 feet to the North Section line; thence East along the North Section line 331 feet to the point of beginning. OSCODA COUNTY Certain land in Comins Township, Oscoda County, Michigan described as: The East 400 feet of the South 580 feet of the W 1/2 of the SW 1/4 of Section 15, T27N, R3E. 32 OTSEGO COUNTY Certain land in Corwith Township, Otsego County, Michigan described as: Part of the NW 1/4 of the NE 1/4 of Section 28, T32N, R3W, described as: Beginning at the N 1/4 corner of said section; running thence S 89 degrees 04' 06" E along the North line of said section, 330.00 feet; thence S 00 degrees 28' 43" E, 400.00 feet; thence N 89 degrees 04' 06" W, 330.00 feet to the North and South 1/4 line of said section; thence N 00 degrees 28' 43" W along the said North and South 1/4 line of said section, 400.00 feet to the point of beginning; subject to the use of the N'ly 33.00 feet thereof for highway purposes. OTTAWA COUNTY Certain land in Robinson Township, Ottawa County, Michigan described as: The North 660 feet of the West 660 feet of the NE 1/4 of the NW 1/4 of Section 26, T7N, R15W. PRESQUE ISLE COUNTY Certain land in Belknap and Pulawski Townships, Presque Isle County, Michigan described as: Part of the South half of the Northeast quarter, Section 24, T34N, R5E, and part of the Northwest quarter, Section 19, T34N, R6E, more fully described as: Commencing at the East 1/4 corner of said Section 24; thence N 00 degrees 15'47" E, 507.42 feet, along the East line of said Section 24 to the point of beginning; thence S 88 degrees 15'36" W, 400.00 feet, parallel with the North 1/8 line of said Section 24; thence N 00 degrees 15'47" E, 800.00 feet, parallel with said East line of Section 24; thence N 88 degrees 15'36"E, 800.00 feet, along said North 1/8 line of Section 24 and said line extended; thence S 00 degrees 15'47" W, 800.00 feet, parallel with said East line of Section 24; thence S 88 degrees 15'36" W, 400.00 feet, parallel with said North 1/8 line of Section 24 to the point of beginning. Together with a 33 foot easement along the West 33 feet of the Northwest quarter lying North of the North 1/8 line of Section 24, Belknap Township, extended, in Section 19, T34N, R6E. ROSCOMMON COUNTY Certain land in Gerrish Township, Roscommon County, Michigan described as: A parcel of land in the NW 1/4 of Section 19, T24N, R3W, described as follows: To find the place of beginning of this description commence at the Northwest corner of said section, run thence East along the North line of said section 1,163.2 feet to the place of beginning of this description (said point also 33 being the place of intersection of the West 1/8 line of said section with the North line of said section), thence S 01 degrees 01' E along said West 1/8 line 132 feet, thence West parallel with the North line of said section 132 feet, thence N 01 degrees 01' W parallel with said West 1/8 line of said section 132 feet to the North line of said section, thence East along the North line of said section 132 feet to the place of beginning. SAGINAW COUNTY Certain land in Chapin Township, Saginaw County, Michigan described as: A parcel of land in the SW 1/4 of Section 13, T9N, R1E, described as follows: To find the place of beginning of this description commence at the Southwest corner of said section; run thence North along the West line of said section 1581.4 feet to the place of beginning of this description; thence continuing North along said West line of said section 230 feet to the center line of a creek; thence S 70 degrees 07' 00" E along said center line of said creek 196.78 feet; thence South 163.13 feet; thence West 185 feet to the West line of said section and the place of beginning. SANILAC COUNTY Certain easement rights located across land in Minden Township, Sanilac County, Michigan described as: The Southeast 1/4 of the Southeast 1/4 of Section 1, T14N, R14E, excepting therefrom the South 83 feet of the East 83 feet thereof. SHIAWASSEE COUNTY Certain land in Burns Township, Shiawassee County, Michigan described as: The South 330 feet of the E 1/2 of the NE 1/4 of Section 36, T5N, R4E. ST. CLAIR COUNTY Certain land in Ira Township, St. Clair County, Michigan described as: The N 1/2 of the NW 1/4 of the NE 1/4 of Section 6, T3N, R15E. ST. JOSEPH COUNTY Certain land in Mendon Township, St. Joseph County, Michigan described as: The North 660 feet of the West 660 feet of the NW 1/4 of SW 1/4, Section 35, T5S, R10W. 34 TUSCOLA COUNTY Certain land in Millington Township, Tuscola County, Michigan described as: A strip of land 280 feet wide across the East 96 rods of the South 20 rods of the N 1/2 of the SE 1/4 of Section 34, T10N, R8E, more particularly described as commencing at the Northeast corner of Section 3, T9N, R8E, thence S 89 degrees 55' 35" W along the South line of said Section 34 a distance of 329.65 feet, thence N 18 degrees 11' 50" W a distance of 1398.67 feet to the South 1/8 line of said Section 34 and the place of beginning for this description; thence continuing N 18 degrees 11' 50" W a distance of 349.91 feet; thence N 89 degrees 57' 01" W a distance of 294.80 feet; thence S 18 degrees 11' 50" E a distance of 350.04 feet to the South 1/8 line of said Section 34; thence S 89 degrees 58' 29" E along the South 1/8 line of said section a distance of 294.76 feet to the place of beginning. VAN BUREN COUNTY Certain land in Covert Township, Van Buren County, Michigan described as: All that part of the West 20 acres of the N 1/2 of the NE fractional 1/4 of Section 1, T2S, R17W, except the West 17 rods of the North 80 rods, being more particularly described as follows: To find the place of beginning of this description commence at the N 1/4 post of said section; run thence N 89 degrees 29' 20" E along the North line of said section 280.5 feet to the place of beginning of this description; thence continuing N 89 degrees 29' 20" E along said North line of said section 288.29 feet; thence S 00 degrees 44' 00" E, 1531.92 feet; thence S 89 degrees 33' 30" W, 568.79 feet to the North and South 1/4 line of said section; thence N 00 degrees 44' 00" W along said North and South 1/4 line of said section 211.4 feet; thence N 89 degrees 29' 20" E, 280.5 feet; thence N 00 degrees 44' 00" W, 1320 feet to the North line of said section and the place of beginning. WASHTENAW COUNTY Certain land in Manchester Township, Washtenaw County, Michigan described as: A parcel of land in the NE 1/4 of the NW 1/4 of Section 1, T4S, R3E, described as follows: To find the place of beginning of this description commence at the Northwest corner of said section; run thence East along the North line of said section 1355.07 feet to the West 1/8 line of said section; thence S 00 degrees 22' 20" E along said West 1/8 line of said section 927.66 feet to the place of beginning of this description; thence continuing S 00 degrees 22' 20" E along said West 1/8 line of said section 660 feet to the North 1/8 line of said section; thence N 86 degrees 36' 57" E along said North 1/8 line of said section 660.91 feet; thence N 00 degrees 22' 20" W, 660 feet; thence S 86 degrees 36' 57" W, 660.91 feet to the place of beginning. 35 WAYNE COUNTY Certain land in Livonia City, Wayne County, Michigan described as: Commencing at the Southeast corner of Section 6, T1S, R9E; thence North along the East line of Section 6 a distance of 253 feet to the point of beginning; thence continuing North along the East line of Section 6 a distance of 50 feet; thence Westerly parallel to the South line of Section 6, a distance of 215 feet; thence Southerly parallel to the East line of Section 6 a distance of 50 feet; thence easterly parallel with the South line of Section 6 a distance of 215 feet to the point of beginning. WEXFORD COUNTY Certain land in Selma Township, Wexford County, Michigan described as: A parcel of land in the NW 1/4 of Section 7, T22N, R10W, described as beginning on the North line of said section at a point 200 feet East of the West line of said section, running thence East along said North section line 450 feet, thence South parallel with said West section line 350 feet, thence West parallel with said North section line 450 feet, thence North parallel with said West section line 350 feet to the place of beginning. SECTION 12. The Company is a transmitting utility under Section 9501(2) of the Michigan Uniform Commercial Code (M.C.L. 440.9501(2)) as defined in M.C.L. 440.9102(1)(aaaa). IN WITNESS WHEREOF, said Consumers Energy Company has caused this Supplemental Indenture to be executed in its corporate name by its Chairman of the Board, President, a Vice President or its Treasurer and its corporate seal to be hereunto affixed and to be attested by its Secretary or an Assistant Secretary, and said JPMorgan Chase Bank, N.A., as Trustee as aforesaid, to evidence its acceptance hereof, has caused this Supplemental Indenture to be executed in its corporate name by a Vice President and its corporate seal to be hereunto affixed and to be attested by a Trust Officer, in several counterparts, all as of the day and year first above written. 36 CONSUMERS ENERGY COMPANY (SEAL) By: /s/ Laura L. Mountcastle -------------------------------- Laura L. Mountcastle Attest: Vice President and Treasurer /s/ Joyce H. Norkey - ----------------------------------- Joyce H. Norkey Assistant Secretary Signed, sealed and delivered by CONSUMERS ENERGY COMPANY in the presence of /s/ Kimberly C. Wilson - ----------------------------------- Kimberly C. Wilson /s/ Sammie B. Dalton - ----------------------------------- Sammie B. Dalton STATE OF MICHIGAN ) ss. COUNTY OF JACKSON ) The foregoing instrument was acknowledged before me this 20th day of January, 2005, by Laura L. Mountcastle, Vice President and Treasurer of CONSUMERS ENERGY COMPANY, a Michigan corporation, on behalf of the corporation. /s/ Margaret Hillman ------------------------------------ Margaret Hillman, Notary Public [Seal] State of Michigan, County of Jackson My Commission Expires: 06/14/10 Acting in the County of Jackson S-1 JPMORGAN CHASE BANK, N.A., AS TRUSTEE (SEAL) By: /s/ L. O'Brien --------------------------------- L. O'Brien Attest: Vice President /s/ Rosa Ciaccia - --------------------------------- Rosa Ciaccia Trust Officer Signed, sealed and delivered by JPMORGAN CHASE BANK, N.A. in the presence of /s/ Nicholas Sberlati - --------------------------------- Nicholas Sberlati /s/ James D. Heaney - --------------------------------- James D. Heaney STATE OF NEW YORK ) ss. COUNTY OF NEW YORK ) The foregoing instrument was acknowledged before me this 20th day of January, 2005, by L. O'Brien, a Vice President of JPMORGAN CHASE BANK, N.A., as Trustee, a national banking association, on behalf of the bank. /s/ Emily Fayan ---------------------------------------- EMILY FAYAN Notary Public, State of New York [Seal] No. 01FA4737006 Qualified in Kings County Certificate Filed in New York County Commission Expires Dec. 31, 2005 Prepared by: When recorded, return to: Kimberly C. Wilson Consumers Energy Company One Energy Plaza, EP11-219 Business Services Real Estate Dept. Jackson, MI 49201 Attn: Nancy Fisher EP7-439 One Energy Plaza Jackson, MI 49201 S-2 EX-4.(B)(I) 3 k91832exv4wxbyxiy.txt 4TH SUPPLEMENTAL INDENTURE DATED AS OF MAY 31, 2001 EXHIBIT 4(b)(i) ==================================== FOURTH SUPPLEMENTAL INDENTURE between CONSUMERS ENERGY COMPANY and THE BANK OF NEW YORK Dated as of May 31, 2001 ==================================== TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS SECTION 1.1. Definition of Terms...................................................................2 ARTICLE II. GENERAL TERMS AND CONDITIONS OF THE NOTES SECTION 2.1. Designation and Principal Amount......................................................3 SECTION 2.2. Maturity..............................................................................3 SECTION 2.3. Form and Payment......................................................................3 SECTION 2.4. Global Note...........................................................................3 SECTION 2.5. Interest..............................................................................5 ARTICLE III. REDEMPTION OF THE NOTES SECTION 3.1. Special Event Redemption..............................................................6 SECTION 3.2. Optional Redemption by Issuer.........................................................6 SECTION 3.3. No Sinking Fund.......................................................................7 ARTICLE IV. EXTENSION OF INTEREST PAYMENT PERIOD SECTION 4.1. Extension of Interest Payment Period..................................................7 SECTION 4.2. Notice of Extension...................................................................7 ARTICLE V. EXPENSES SECTION 5.1. Payment of Expenses...................................................................8 SECTION 5.2. Payment Upon Resignation or Removal...................................................9 ARTICLE VI. SUBORDINATION SECTION 6.1. Agreement to Subordinate..............................................................9
i ARTICLE VII. COVENANT TO LIST ON EXCHANGE SECTION 7.1. Listing on an Exchange............................................................... 9 ARTICLE VIII. FORM OF NOTES SECTION 8.1. Form of Note......................................................................... 9 ARTICLE IX. ORIGINAL ISSUE OF NOTES SECTION 9.1. Original Issue of Notes..............................................................15 ARTICLE X. MISCELLANEOUS SECTION 10.1 Provisions of Indenture for the Sole Benefit of Parties and Holders of Trust Securities..........................................................15 SECTION 10.2 Ratification of Indenture............................................................15 SECTION 10.3. Trustee Not Responsible for Recitals.................................................15 SECTION 10.4. Governing Law........................................................................16 SECTION 10.5. Separability.........................................................................16 SECTION 10.6. Counterparts.........................................................................16

ii FOURTH SUPPLEMENTAL INDENTURE, dated as of May 31, 2001, (the "Fourth Supplemental Indenture"), between Consumers Energy Company, a Michigan Corporation (the "Issuer"), and The Bank of New York, as trustee (the "Trustee") under the Indenture dated as of January 1, 1996 between the Issuer and the Trustee (the "Indenture"). WHEREAS, the Issuer executed and delivered the Indenture to the Trustee to provide for the future issuance of the Issuer's Securities to be issued from time to time in one or more series as might be determined by the Issuer under the Indenture, in an unlimited aggregate principal amount which may be authenticated and delivered as provided in the Indenture; and WHEREAS, Section 2.3 of the Indenture permits the terms of any series of Securities to be established in an indenture supplemental to the Indenture; and WHEREAS, Section 8.1(d) of the Indenture provided that a supplemental indenture may be entered into without the consent of any Holders of Securities to supplement certain provisions of the Indenture; and WHEREAS, Section 8.1(e) of the Indenture provides that a supplemental indenture may be entered into by the Issuer and the Trustee without the consent of any Holders of the Securities to establish the form and terms of the Securities of any series; and WHEREAS, pursuant to the terms of the Indenture, the Issuer desires to provide for the establishment of a new series of its Securities to be known as its 9% subordinated Debentures due June 30, 2031 (the "Notes"), the form and substance of such Notes and the terms, provisions and conditions thereof to be set forth as provided in the Indenture and this Fourth Supplemental Indenture; and WHEREAS, Consumers Energy Company Financing IV, a Delaware statutory business trust (the "Trust"), has offered to the public $125 million aggregate liquidation amount of its 9% Trust Originated Preferred Securities (the "Preferred Securities"), representing undivided beneficial interests in the assets of the Trust and proposes to invest the proceeds from such offering, together with the proceeds of the issuance and sale by the Trust to the Issuer of $3,866,000 aggregate liquidation amount of its 9% Trust Originated Common Securities (together the "Trust Securities"), in $128,866,000 aggregate principal amount of the Notes; and WHEREAS, the Issuer wishes to supplement Section 13.2 of the Indenture with respect to the Notes and the Preferred Securities; and WHEREAS, the Issuer has requested that the Trustee execute and deliver this Fourth Supplemental Indenture and all requirements necessary to make this Fourth Supplemental Indenture a valid instrument in accordance with its terms, and to make the Notes, when executed by the Issuer and authenticated and delivered by the Trustee, the valid obligations of the Issuer, have been performed, and the execution and delivery of this Fourth Supplemental Indenture has been duly authorized in all respects. 1 NOW THEREFORE, in consideration of the purchase and acceptance of the Notes by the Holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of the Notes and the terms, provisions and conditions thereof, the Issuer covenants and agrees with the Trustee as follows: ARTICLE I. DEFINITIONS SECTION 1.1. Definition of Terms. Unless the context otherwise requires: (a) a term defined in the Indenture has the same meaning when used in this Fourth Supplemental Indenture; (b) a term defined anywhere in this Fourth Supplemental Indenture has the same meaning throughout; (c) the singular includes the plural and vice versa; (d) a reference to a Section or Article is to a Section or Article of this Fourth Supplemental Indenture; (e) headings are for convenience of reference only and do not affect interpretation; (f) the following terms have the meanings given to them in the Declaration: (i) Clearing Agency; (ii) Delaware Trustee; (iii) Redemption Tax Opinion; (iv) No Recognition Opinion; (v) Preferred Security Certificate; (vi) Property Trustee; (vii) Regular Trustees; (viii) Special Event; (ix) Tax Event; (x) Underwriting Agreement; (xi) Investment Company Event; and (xii) Distribution; (g) the following terms have the meanings given to them in this Section 1.1(g): "Additional Interest" shall have the meaning set forth in Section 2.5. "Compounded Interest" shall have the meaning set forth in Section 4.1. "Coupon Rate" shall have the meaning set forth in Section 2.5. "Declaration" means the Amended and Restated Declaration of Trust of Consumers Energy Company Financing IV, a Delaware statutory business trust, dated as of , . "Deferred Interest" shall have the meaning set forth in Section 4.1. 2 "Dissolution Event" means that, as a result of the occurrence and continuation of a Special Event, the Trust is to be dissolved in accordance with the Declaration, and the Notes held by the Property Trustee are to be distributed to the holders of the Trust Securities issued by the Trust pro rata in accordance with the Declaration. "Extended Interest Payment Period" shall have the meaning set forth in Section 4.1. "Global Note" shall have the meaning set forth in Section 2.4. "Non Book-Entry Preferred Securities" shall have the meaning set forth in Section 2.4. "Optional Redemption Price" shall have the meaning set forth in Section 3.2. ARTICLE II. GENERAL TERMS AND CONDITIONS OF THE NOTES SECTION 2.1. Designation and Principal Amount. There is hereby authorized and established a series of unsecured Securities designated the "9% subordinated Debentures due June 30, 2031", limited in aggregate principal amount to $125,000,000 (except as contemplated in Section 2(f)(2) of the Indenture). SECTION 2.2. Maturity. The Maturity Date of the Notes is June 30, 2031. SECTION 2.3. Form and Payment. The Notes shall be issued in fully registered form without interest coupons. Principal and interest on the Notes issued in certificated form will be payable, the transfer of such Notes will be registrable and such Notes will be exchangeable for Notes bearing identical terms and provisions, at the office or agency of the Trustee in the Borough of Manhattan, the City of New York; provided, however, that payment of interest may be made at the option of the Issuer by check mailed to the Holder at such address as shall appear in the Security Register or by wire transfer to an account maintained by the Holder. Notwithstanding the foregoing, so long as the Holder of any Notes is the Property Trustee, the payment of the principal of and interest (including Compounded Interest and Additional Interest, if any) on such Notes held by the Property Trustee will be made at such place and to such account as may be designated by the Property Trustee. SECTION 2.4. Global Note. (a) In connection with a Dissolution Event, 3 (i) the Notes may be presented to the Trustee by the Property Trustee in exchange for a global Note in an aggregate principal amount equal to the aggregate principal amount of all outstanding Notes (a "Global Note"), to be registered in the name of the Clearing Agency, or its nominee, and delivered by the Trustee to the Clearing Agency for crediting to the accounts of its participants pursuant to the instructions of the Regular Trustees and the Clearing Agency will act as Depository for the Notes. The Issuer upon any such presentation, shall execute a Global Note in such aggregate principal amount and deliver the same to the Trustee for authentication and delivery in accordance with the Indenture and this Fourth Supplemental Indenture. Payments on the Notes issued as a Global Note will be made to the Depositary; and (ii) if any Preferred Securities are held in non book-entry certificated form, the Notes may be presented to the Trustee by the Property Trustee and any Preferred Security Certificate which represents Preferred Securities other than Preferred Securities held by the Clearing Agency or its nominee ("Non Book-Entry Preferred Securities") will be deemed to represent beneficial interests in Notes presented to the Trustee by the Property Trustee having an aggregate principal amount equal to the aggregate liquidation amount of the Non Book-Entry Preferred Securities until such Preferred Security Certificates are presented to the Security Registrar for transfer or reissuance at which time such Preferred Security Certificates will be canceled and a Note, registered in the name of the holder of the Preferred Security Certificate or the transferee of the holder of such Preferred Security Certificate, as the case may be, with an aggregate principal amount equal to the aggregate liquidation amount of the Preferred Security Certificate canceled, will be executed by the Issuer and delivered to the Trustee for authentication and delivery in accordance with the Indenture and this Fourth Supplemental Indenture. (b) Except as provided in (c) below, a Global Note may be transferred, in whole but not in part, only to another nominee of the Depositary, or to a successor Depositary selected or approved by the Issuer or to a nominee of such successor Depositary. (c) If at any time the Depositary notifies the Issuer that it is unwilling or unable to continue as Depositary or if at any time the Depositary for such series shall no longer be registered or in good standing under the Securities Exchange Act of 1934, as amended, or other applicable statute or regulation, and a successor Depositary for such series is not appointed by the Issuer within 90 days after the Issuer receives such notice or becomes aware of such condition, as the case may be, the Issuer will execute, and, subject to Section 2.8 of the Indenture, the Trustee, upon written notice from the Issuer, will authenticate and deliver the Notes in definitive registered form, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Note in exchange for such Global Note. In addition, the Issuer may at any time determine that the Notes shall no longer be represented by a Global Note. In such event the Issuer will execute, and subject to Section 2.8 of the Indenture, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Issuer, will authenticate and deliver the Notes in definitive registered form, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Note in exchange for such Global Note. Upon the exchange of the Global Note for such Notes in definitive registered form, in authorized denominations, the Global 4 Note shall be canceled by the Trustee. Such Notes in definitive registered form issued in exchange for the Global Note shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Notes to the Depositary for delivery to the Persons in whose names such Notes are so registered. SECTION 2.5. Interest. (a) Each Note will bear interest at the rate of 9% per annum (the "Coupon Rate") from the original date of issuance until the principal thereof becomes due and payable, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest, at the Coupon Rate, compounded quarterly, payable (subject to the provisions of Article IV) quarterly in arrears on March 31, June 30, September 30, and December 31 of each year (each, an "Interest Payment Date," commencing on June 30, 2001), to the Person in whose name such Note or any predecessor Note is registered, at the close of business on the regular record date for such interest installment, which, in respect of any Notes of which the Property Trustee is the Holder or a Global Note, shall be the close of business on the Business Day next preceding that Interest Payment Date. Notwithstanding the foregoing sentence, if the Preferred Securities are no longer in book-entry only form or, except if the Notes are held by the Property Trustee, the Notes are not represented by a Global Note, the regular record date for such interest installment shall be the fifteenth day of the month in which the applicable Interest Payment Date occurs. (b) The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the following sentence, the amount of interest payable for any period shorter than a full quarterly period for which interest is computed, will be computed on the basis of the actual number of days elapsed in such a 90-day period. In the event that any date on which interest is payable on the Notes is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. (c) If, at any time while the Property Trustee is the Holder of any Notes, the Trust or the Property Trustee is required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any case, the Issuer will pay as additional interest ("Additional Interest") on the Notes held by the Property Trustee, such additional amounts as shall be required so that the net amounts received and retained by the Trust and the Property Trustee after paying such taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust and the Property Trustee would have received had no such taxes, duties, assessments or other governmental charges been imposed. 5 ARTICLE III. REDEMPTION OF THE NOTES SECTION 3.1. Special Event Redemption. If (a) a Tax Event has occurred and is continuing and (i) the Issuer has received a Redemption Tax Opinion, or (ii) The Regular Trustees shall have been informed by tax counsel that a No Recognition Opinion cannot be delivered to the Trust, or (b) an Investment Company Event has occurred and is continuing, then, notwithstanding Section 3.2(a) but subject to Section 3.2(b) and Article Eleven of the Indenture, the Issuer shall have the right upon not less than 30 days' nor more than 60 days' notice to the Holders of the Notes to redeem the Notes, in whole or in part, for cash within 90 days' following the occurrence of such Special Event (the "90 Day Period") at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest thereon to the date of such redemption (the "Redemption Price"), provided that, if at the time there is available to the Issuer or the Trust the opportunity to eliminate, within the 90 Day Period, the Special Event by taking some ministerial action ("Ministerial Action"), such as filing a form or making an election, or pursuing some other similar reasonable measure which has no adverse effect on the Issuer, the Trust or the Holders of the Trust Securities issued by the Trust, the Issuer shall pursue such Ministerial Action in lieu of redemption, and, provided, further, that the Issuer shall have no right to redeem the Notes while the Trust is pursuing any Ministerial Action pursuant to its obligations under the Declaration. The Redemption Price shall be paid prior to 12:00 noon, New York time, on the date of such redemption or such earlier time as the Issuer determines, and the Issuer shall deposit with the Trustee an amount sufficient to pay the Redemption Price by 10:00 a.m., New York time, on the date such Redemption Price is to be paid. SECTION 3.2. Optional Redemption by Issuer. (a) Subject to the provisions of Section 3.2(b) and to the provisions of Article Eleven of the Indenture, the Issuer shall have the right to redeem the Notes, in whole or in part, from time to time, on or after June 30, 2006, at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest thereon to the date of such redemption (the "Optional Redemption Price"). Any redemption pursuant to this paragraph will be made upon not less than 30 days' nor more than 60 days' notice to the Holder of the Notes, at the Optional Redemption Price. If the Notes are only partially redeemed pursuant to this Section 3.2, the Notes will be redeemed on a pro rata basis; provided that, if at the time of redemption the Notes are registered as a Global Note, the Depository shall determine, in accordance with its procedures, the principal amount of such Notes held by each Holder of Notes to be redeemed. The Optional Redemption Price shall be paid prior to 12:00 noon, New York time, on the date of such redemption or at such earlier time as the Issuer determines and the Issuer shall deposit with the Trustee an amount sufficient to pay the Optional Redemption Price by 10:00 a.m., New York time, on the date such Optional Redemption Price is to be paid. (b) If a partial redemption of the Notes would result in the delisting of the Preferred Securities from any national securities exchange or other organization on which the Preferred Securities are then listed, the Issuer shall not be permitted to effect such partial redemption and may only redeem the Notes in whole. 6 SECTION 3.3. No Sinking Fund. The Notes are not entitled to the benefit of any sinking fund. ARTICLE IV. EXTENSION OF INTEREST PAYMENT PERIOD SECTION 4.1. Extension of Interest Payment Period. The Issuer shall have the right, at any time and from time to time during the term of the Notes, to defer payments of interest by extending the interest payment period of such Notes for a period not exceeding 20 consecutive quarters (the "Extended Interest Payment Period"), during which Extended Interest Payment Period no interest shall be due and payable; provided that, no Extended Interest Payment Period may extend beyond the Maturity Date. To the extent permitted by applicable law, interest, the payment of which has been deferred because of the extension of the interest payment period pursuant to this Section 4.1, will bear interest thereon at the Coupon Rate compounded quarterly for each quarter of the Extended Interest Payment Period ("Compounded Interest"). At the end of the Extended Interest Payment Period, the Issuer shall pay all interest accrued and unpaid on the Notes, including any Additional Interest and Compounded Interest (together, "Deferred Interest") that shall be payable to the Holders of the Notes in whose names the Notes are registered in the Security Register on the First record date after the end of the Extended Interest Payment Period. Prior to the termination of any Extended Interest Payment Period, the Issuer may further extend such period, provided that such period together with all such further extensions thereof shall not exceed 20 consecutive quarters. Upon the termination of any Extended Interest Payment Period and upon the payment of all Deferred Interest then due, the Issuer may commence a new Extended Interest Payment Period, subject to the foregoing requirements. No interest shall be due and payable during an Extended Interest Payment Period, except at the end thereof, but the Issuer may prepay at any time all or any portion of the interest accrued during an Extended Interest Payment Period. The limitations set forth in Section 3.5 of the Indenture shall apply during any Extended Interest Payment Period. SECTION 4.2. Notice of Extension. (a) If the Property Trustee is the only registered Holder of the Notes at the time the Issuer elects an Extended Interest Payment Period, the Issuer shall give written notice to the Regular Trustees, the Property Trustee and the Trustee of its election of such Extended Interest Payment Period one Business Day before the earlier of (i) the next succeeding date on which Distributions on the Trust Securities issued by the Trust are payable, or (ii) the date the Trust is required to give notice of the record date, or the date such Distributions are payable, to the New York Stock Exchange or other applicable self-regulatory organization or to holders of the Preferred Securities, but in any event at least one Business Day before such record date. 7 (b) If the Property Trustee is not the only Holder of the Notes at the time the Issuer elects an Extended Interest Payment Period, the Issuer shall give the Holders of the Notes and the Trustee written notice of its election of such Extended Interest Payment Period one Business Days before the earlier of (i) the next succeeding Interest Payment Date, or (ii) the date the Issuer is required to give notice of the record or payment date of such interest payment to the New York Stock Exchange or other applicable self-regulatory organization or to Holders of the Notes. (c) The quarter in which any notice is given pursuant to paragraphs (a) or (b) of this Section 4.2 shall be counted as one of the 20 quarters permitted in the maximum Extended Interest Payment Period permitted under Section 4.1. ARTICLE V. EXPENSES SECTION 5.1. Payment of Expenses. In connection with the offering, sale and issuance of the Notes to the Property Trustee and in connection with the sale of the Trust Securities by the Trust, the Issuer, in its capacity as borrower with respect to the Notes, shall: (a) pay all costs and expenses relating to the offering, sale and issuance of the Notes, including commissions to the underwriters payable pursuant to the Underwriting Agreement and the Pricing Agreements, and compensation of the Trustee under the Indenture in accordance with the provisions of Section 6.6 of the Indenture; (b) pay all costs and expenses of the Trust (including, but not limited to, costs and expenses relating to the organization of the Trust, the offering, sale and issuance of the Trust Securities (including commissions to the underwriters in connection therewith), the fees and expenses of the Property Trustee and the Delaware Trustee, the costs and expenses relating to the operation of the Trust, including without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, paying agent(s), registrar(s), transfer agent(s), duplicating, travel and telephone and other telecommunications expenses and costs and expenses incurred in connection with the acquisition, financing, and disposition of Trust assets); (c) be primarily liable for any indemnification obligations arising with respect to the Declaration; and (d) pay any and all taxes (other than United States withholding taxes attributable to the Trust or its assets) and all liabilities, costs and expenses with respect to such taxes of the Trust. 8 SECTION 5.2. Payment Upon Resignation or Removal. Upon termination of this Fourth Supplemental Indenture or the Indenture or the removal or resignation of the Trustee pursuant to Section 6.10 of the Indenture, the Issuer shall pay to the Trustee all amounts accrued to the date of such termination, removal or resignation. Upon termination of the Declaration or the removal or resignation of the Delaware Trustee or the Property Trustee, as the case may be, pursuant to Section 5.6 of the Declaration, the Issuer shall pay to the Delaware Trustee or the Property Trustee, as the case may be, all amounts accrued to the date of such termination, removal or resignation. ARTICLE VI. SUBORDINATION SECTION 6.1. Agreement to Subordinate. The Issuer covenants and agrees, and each Holder of Notes issued hereunder, by such Holder's acceptance thereof likewise covenants and agrees, that pursuant to Section 2.3(f)(9) of the Indenture all Notes shall be issued as Subordinated Securities subject to the provisions of Article Twelve of the Indenture and this Article VI; and each Holder of a Note by its acceptance thereof accepts and agrees to be bound by such provisions. ARTICLE VII. COVENANT TO LIST ON EXCHANGE SECTION 7.1. Listing on an Exchange. In connection with the distribution of the Notes to the holders of the Preferred Securities upon a Dissolution Event, the Issuer will use its best efforts to list such Notes on the New York Stock Exchange or on such other exchange as the Preferred Securities are then listed. ARTICLE VIII. FORM OF NOTES SECTION 8.1. Form of Note. The Notes and the Trustee's Certificate of Authentication to be endorsed thereon are to be substantially in the following forms and the Notes shall have such additional terms as may be set forth in such form: (FORM OF FACE OF NOTE) 9 [IF THE NOTE IS TO BE A GLOBAL NOTES, INSERT - This Note is a Global Note 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 Note is exchangeable for Notes registered in the name of a person other than the Depositary or its nominee only in the limited circumstances described in the Indenture, and no transfer of this Note (other than a transfer of this Note 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) may be registered except in limited circumstances. Unless this Note is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) to the issuer or its agent for registration of transfer, exchange or payment, and any Note issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein.] No. $ CUSIP NO. 21051E202 CONSUMERS ENERGY COMPANY 9% SUBORDINATED DEBENTURES DUE June 30, 2031 Consumers Energy Company, a Michigan corporation (the "Issuer", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to ______________, or registered assigns, the principal sum of one hundred twenty eight million eight hundred sixty six thousand Dollars ($128,866,000) on June 30, 2001, and to pay interest on said principal sum from May 31, 2001, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 31, June 30, September 30, and December 31 of each year commencing June 30, 2001 at the rate of 9% per annum until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum compounded quarterly. 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. In the event that any date on which interest is payable on this Note is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and 10 effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the person in whose name this Note (or one or more Predecessor Securities, as defined in said Indenture) is registered at the close of business on the regular record date for such interest installment, which shall be the close of business on the Business Day next preceding such Interest Payment Date. [IF PURSUANT TO THE PROVISIONS OF THE INDENTURE THE DEBENTURES ARE NO LONGER REPRESENTED BY A GLOBAL NOTE -- which shall be the close of business on the 15th day of the month in which such Interest Payment Date occurs.] If and to the extent the Issuer shall default in the payment of the interest due on such Interest Payment Date, interest shall be paid to the person in whose name this Note is registered at the close of business on a subsequent record date (which shall not be less than five Business Days prior to the date of payment of such defaulted interest) established by notice given by mail by or on behalf of the Issuer to the Holder of this Note not less than 15 days preceding such subsequent Record Date. The principal of (and premium, if any) and the interest on this Note shall be payable at the office or agency of the Trustee in the Borough of Manhattan, the City of New York maintained for that purpose in any coin or currency of the United States of America that at the time is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Issuer by check mailed to the registered Holder at such address as shall appear in the Security Register or by wire transfer to an account maintained by the Holder. Notwithstanding the foregoing, so long as the Holder of this Note is the Property Trustee, the payment of the principal of (and premium, if any) and interest on this Note will be made at such place and to such account as may be designated by the Property Trustee. The indebtedness evidenced by this Note is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Note is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Note, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Note shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Note are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. 11 IN WITNESS WHEREOF, the Issuer has caused this instrument to be executed. Dated Consumers Energy Company [Seal] By: Name: Title Attest: By: Name: Title: (FORM OF CERTIFICATE OF AUTHENTICATION) CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series of Securities described in the within-mentioned Indenture. ----------------------------------- as Trustee By Authorized Signatory (FORM OF REVERSE OF NOTE) This Note is one of a duly authorized series of Securities of the Issuer (herein sometimes referred to as the "Notes"), specified in the Indenture, all issued or to be issued in one or more series under and pursuant to an Indenture dated as of January 1, 1996, duly executed and delivered between the Issuer and The Bank of New York, a New York banking corporation, as Trustee (the "Trustee"), as supplemented by certain supplemental indentures, including the Fourth Supplemental Indenture dated as of May 31, 2001, between the Issuer and the Trustee (the Indenture as so supplemented, the "Indenture"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Issuer and the Holders of the Notes. By the terms of the Indenture, the Notes are issuable in series that may vary as to amount, date of maturity, rate of 12 interest and in other respects as provided in the Indenture. This series of Notes is limited in aggregate principal amount as specified in said Third Supplemental Indenture. The Issuer shall have the right to redeem this Note at the option of the Issuer, without premium or penalty, in whole or in part at any time on or after June 30, 2001 or at any time in certain circumstances upon the occurrence of a Special Event, at a redemption price equal to 100% of the principal amount plus any accrued but unpaid interest, to the date of such redemption. Any redemption pursuant to this paragraph will be made upon not less than 30 days nor more than 60 days' notice. If the Notes are only partially redeemed by the Issuer pursuant to an Optional Redemption, the Notes will be redeemed pro rata. In the event of redemption of this Note in part only, a new Note or Notes of this series for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Notes may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Issuer and the Trustee, with the consent of the Holders of not less than a majority in aggregate principal amount of the Notes and other Indenture securities of each series affected at the time Outstanding and affected (voting as one class), as defined in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Notes; provided, however, that the Company and the Trustee may not, without the consent of the Holder of each Note then Outstanding and affected thereby: (a) change the time of payment of the principal (or any installment) of any Note, or reduce the principal amount thereof, or reduce the rate or change the time of payment of interest thereon, or impair the right to institute suit for the enforcement of any payment on any Note when due or (b) reduce the percentage in principal amount of the Notes, the consent of whose Holders is required for any such modification or for any waiver provided for in the Indenture. The Indenture also contains provisions providing that prior to the acceleration of the maturity of any Note or other securities outstanding under the Indenture, the Holders of a majority in aggregate principal amount of Notes of and other Securities Outstanding under the Indenture with respect to which a default or/an Event of Default shall have occurred and be continuing (voting as one class) may on behalf of the Holders of all such affected Securities (including the Notes) waive any past default and its consequences, except a default or an Event of Default in respect of a covenant or provision of the Indenture or of any Note or other Security which cannot be modified or amended without the consent of the Holder of each Note or other Security affected. Any such consent or waiver by the registered Holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such Holder and upon all future Holders and owners of this Note and of any Note issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Note. 13 No reference herein to the Indenture and no provision of this 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 premium, if any, and interest on this Note at the time and place and at the rate and in the money herein prescribed. The Issuer shall have the right at any time during the term of the Notes and from time to time to extend the interest payment period of such Notes for up to 20 consecutive quarters (an "Extended Interest Payment Period"), at the end of which period the Issuer shall pay all interest then accrued and unpaid (together with interest thereon at the rate specified for the Notes to the extent that payment of such interest is enforceable under applicable law). Before the termination of any such Extended Interest Payment Period, the Issuer may further extend such Extended Interest Payment Period, provided that such Extended Interest Payment Period together with all such further extensions thereof shall not exceed 20 consecutive quarters. At the termination of any such Extended Interest Payment Period and upon the payment of all accrued and unpaid interest and any additional amounts then due, the Issuer may commence a new Extended Interest Payment Period. As provided in the Indenture and subject to certain limitations therein set forth, this Note is transferable by the registered Holder hereof on the Security Register of the Issuer, upon surrender of this Note for registration of transfer at the office or agency of the Trustee in the City and State of New York accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuer or the Trustee duly executed by the registered Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Note, the Issuer, the Trustee, any paying agent and the Security Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Note shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Security Registrar) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and interest due hereon and for all other purposes, and neither the Issuer nor the Trustee nor any paying agent nor any Security Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Note, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Issuer or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. Notes of this series so issued are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereof. As provided in the Indenture and subject to 14 certain limitations herein and therein set forth, Notes of this series so issued are exchangeable for a like aggregate principal amount of Notes of this series in authorized denominations, as requested by the Holder surrendering the same. All terms used in this Note that are defined in the Indenture shall have the meanings assigned to them in the Indenture. [END OF FORM OF NOTE] ARTICLE IX. ORIGINAL ISSUE OF NOTES SECTION 9.1. Original Issue of Notes. Notes in the aggregate principal amount of $128,866,000 may, upon execution of this Fourth Supplemental Indenture, be executed by the Issuer and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes to or upon the written order of the Issuer, in accordance with Section 2.4 of the Indenture. ARTICLE X. MISCELLANEOUS SECTION 10.1 Provisions of Indenture for the Sole Benefit of Parties and Holders of Trust Securities. Notwithstanding Section 13.2 of the Indenture, for so long as any Trust Securities remain outstanding, the Issuer's obligations under the Indenture and this Fourth Supplemental Indenture will also be for the benefit of the holders of the Trust Securities, and the Issuer acknowledges and agrees that such holders will be entitled to enforce certain payment obligations under the Notes directly against the Issuer to the extent provided in the Declaration. SECTION 10.2 Ratification of Indenture. The Indenture, as supplemented by this Fourth Supplemental Indenture, is in all respects ratified and confirmed, and this Fourth Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided. SECTION 10.3. Trustee Not Responsible for Recitals. The recitals herein contained are made by the Issuer and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this Fourth Supplemental Indenture. 15 SECTION 10.4. Governing Law. This Fourth Supplemental Indenture and each Note shall be deemed to be a contract made under the internal laws of the State of Michigan, and for all purposes shall be construed in accordance with the laws of said State; provided, however, that the rights, duties and obligations of the Trustee are governed and construed in accordance with the laws of the State of New York. SECTION 10.5. Separability. In case any one or more of the provisions contained in this Fourth Supplemental Indenture or in the Notes shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Fourth Supplemental Indenture or of the Notes, but this Fourth Supplemental Indenture and the Notes shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 10.6. Counterparts. This Fourth Supplemental Indenture may be executed in any number of counterparts each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. 16 IN WITNESS WHEREOF, the parties hereto have caused this Fourth Supplemental Indenture to be duly executed on the date or dates indicated in the acknowledgments and as of the day and year first above written. Consumers Energy Company By: /s/ Alan M. Wright ---------------------------------------- Name: Alan M. Wright Title: Executive Vice President, Chief Financial Officer and Chief Administrative Officer [Seal] Attest: /s/ Adam Norlander By: Adam Norlander ------------------------ The Bank of New York, as Trustee By: /s/ Paul Schmalzel ---------------------------------------- Name: Paul Schmalzel Title: Vice President 17 STATE OF MICHIGAN ) )ss. COUNTY OF WAYNE ) On the 31st day of May, 2001, before me personally came Alan M. Wright, to me known, who, being by me duly sworn, did depose and say that he resides at Ann Arbor, Michigan; that he is Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Consumers Energy Company, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. [Notarial Seal] /s/ Leslie C. Higdon - -------------------------------- Notary Public, Wayne County, Michigan My Commission Expires: 10/5/04 18 EX-4.(D)(I) 4 k91832exv4wxdyxiy.txt 15TH SUPPLEMENTAL INDENTURE DATED AS OF 9/29/04 EXHIBIT 4(d)(i) FIFTEENTH SUPPLEMENTAL INDENTURE DATED AS OF SEPTEMBER 29, 2004 -------------------- This Fifteenth Supplemental Indenture, dated as of the 29th day of September, 2004 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 J.P. Morgan Trust Company, N.A., a national banking association (hereinafter called the "Trustee") and having its Corporate Trust Office at 227 W. Monroe Street, Suite 2700, Chicago, IL 60606. WITNESSETH: WHEREAS, the Issuer and the Trustee (ultimate 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 WHERAS, the Issuer issued its series of "7.75% Senior Notes due 2010 (the "Original 2010 Notes") on July 17, 2003 pursuant to the Fourteenth Supplemental Indenture dated July 17, 2003 between the Issuer and the Trustee; and WHEREAS, the Issuer entered into a registration rights agreement with the initial purchasers of the Original 2010 Notes whereby the Issuer agreed to register a series of notes with the Securities and Exchange Commission that would be exchanged pursuant to an exchange offer to existing holders of the Original 2010 Notes for their Original 2010 Notes; and WHEREAS, the Issuer has registered a new series of notes to be exchanged for the Original 2010 Notes and has requested the Trustee to join with it in the execution and delivery of this Fifteenth 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 such 2010 Notes to be exchanged for the Original 2010 Notes; and 1 WHEREAS, the Issuer and the Trustee desire to enter into this Fifteenth 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 Fifteenth Supplemental Indenture; and WHEREAS, all things necessary to make this Fifteenth 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 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 Fifteenth 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 ---- ------- 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
2
Term Section ---- ------- Issue 4.04(a) Issuer Preamble; 2.03 Lien 4.02(a) Maturity 2.03 Original Indenture Recitals Original Issue Date 2.03 Original 2010 Notes Recitals 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) Restricted Payment 4.05(a) 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. 3 "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 "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. 4 "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 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; 5 (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 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. 6 "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 Fifteenth 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. "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. 7 "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); (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. "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 8 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. "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. 9 "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 any other class of such corporation; provided that Hybrid Preferred Securities shall not be considered Preferred Stock for purposes of this definition. "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. "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. "Subordinated Indebtedness" means any Indebtedness of the Issuer (whether outstanding on the date of this Fifteenth Supplemental Indenture or thereafter incurred) which is contractually subordinated or junior in right of payment to the 2010 Notes. 10 "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 September 29, 2004), 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 on the Original 2010 Notes, 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 events specified in Events of Default with respect to the 2010 Notes shall include the events specified in Article V of this Fifteenth 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 Fifteenth 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.: 125896 AV 2 ISIN No.: 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 September 29, 2004 (the "Original Issue Date") or from the date interest has last been paid or duly provided for on the 7.75% Senior Notes Due 2010 issued by the Issuer on July 17, 2003 (the "Original 2010 Notes") pursuant to the terms of the Fourteenth Supplemental Indenture dated July 17, 2004 between the Issuer and the Trustee for which the 2010 Notes have been exchanged, 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 14 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 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. 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. 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 Fifteenth Supplemental Indenture, dated as of September 29, 2004 (herein collectively referred to as the "Indenture"), between the Issuer and J.P. Morgan Trust Company, N.A., a national banking association (ultimate 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, 15 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 which interest has been paid or duly provided for on the 2010 Notes, and, if no interest has been paid, from September 29, 2004), 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. 16 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 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. 17 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 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. 18 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. J.P. MORGAN TRUST COMPANY, N.A., as Trustee By -------------------------------- Authorized Officer 19 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 20 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). 21 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 22 (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. 23 (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 Fifteenth 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; 24 (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 25 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: (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; 26 (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. 27 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 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 Fifteenth 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 nominee to a successor Depositary for 2010 Notes or a nominee of such successor Depositary. 28 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 29 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 Fifteenth Supplemental Indenture with respect to the 2010 Notes. ARTICLE VIII SUPPLEMENTAL INDENTURES This Fifteenth Supplemental Indenture is a supplement to the Original Indenture. As supplemented by this Fifteenth Supplemental Indenture, the Original Indenture is in all respects ratified, approved and confirmed, and the Original Indenture and this Fifteenth 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; or (b) change the terms applicable to redemption or purchase of the 2010 Notes in a manner adverse to the Holder. 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. 30 TESTIMONIUM This Fifteenth 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. 31 IN WITNESS WHEREOF, the parties hereto have caused this Fifteenth 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 L. Mountcastle ------------------------ J.P. MORGAN TRUST COMPANY, N.A., as Trustee /s/ Renee Johnson -------------------------------------- Renee Johnson Attest: /s/ Mietka T. Collins ------------------------ Mietka T. Collins 32 Schedule 4.04(b)(2) - See Attached - 33 EX-4.(D)(II) 5 k91832exv4wxdyxiiy.txt 16TH SUPPLEMENTAL INDENTURE DATED AS OF 12/16/04 Exhibit 4(d)(ii) SIXTEENTH SUPPLEMENTAL INDENTURE DATED AS OF DECEMBER 16, 2004 ---------- This Sixteenth Supplemental Indenture, dated as of the 16th day of December, 2004 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 J.P. Morgan Trust Company, N.A., a national banking association (hereinafter called the "Trustee") and having its Corporate Trust Office at 227 West Monroe St., 26th Floor, Chicago, IL 60606. 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 exchanged the Original 2023 Notes for the 2023 Notes; and WHEREAS, the Issuer has requested the Trustee to join with it in the execution and delivery of this Sixteenth 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, Series B" (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 Sixteenth 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 Sixteenth Supplemental Indenture; and 1 WHEREAS, all things necessary to make this Sixteenth 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 Sixteenth 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 Additional Shares 6.06(e) Application Period 7.06 Asset Sale 7.06 Company 2.03 Conversion Date 6.02 Conversion Rate 6.01 Conversion Value 6.13(a) Depositary Article IX Determination Date 6.13(b) Distributed Assets or Securities 6.06(c) Dividend Adjustment Amount 6.06(d)(ii) DTC 2.03 Effective Date 2.04(d) 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
2
Term Section - ---- -------------- Interest Payment Date 2.03 Issue 7.04(a) Issuer Preamble; 2.03 Issuer Notice 5.01 Issuer Notice Date 5.01 Lien 7.02(a) Maturity 2.03 Maximum Conversion Rate 6.06(j) Net Share Amount 6.13(b)(ii) Net Shares 6.13(b)(ii) Original 2023 Notes 2.03 Original Indenture Recitals Original Issue Date 2.03 Place of Payment 2.03 Principal Return 6.13(b)(i) Pre-Dividend Sale Price 6.06(d)(i) Public Acquirer Change of Control 6.06(f) Public Acquirer Common Stock 6.06(f) 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 Ten Day Average Closing Stock Price 6.13(a) 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: "Additional Registration Defaults" means failure of the Issuer to, at Issuer's cost and using its best efforts, amend the shelf registration statement on Form S-3 filed with the Securities and Exchange Commission on September 24, 2004 to cover resales of 2023 Notes and cause such shelf registration to be declared effective under the Securities Act of 1933, as amended, no later than February 15, 2005. "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. 3 "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. "CMS Electric and Gas" means CMS Electric and Gas Company, a Michigan corporation and wholly-owned subsidiary of Enterprises. "CMS ERM" means CMS Energy Resource Management Company, formerly CMS MST, a 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 wholly-owned subsidiary of Enterprises, whose name was changed to CMS Energy Resource Management Company effective January 2004. "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. 4 "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 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 ERM 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 ERM 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; 5 (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 ERM 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 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. 6 "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 November 9, 2004 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. "Designated Enterprises Subsidiary" means any wholly-owned subsidiary of Enterprises formed after the date of this Sixteenth 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 7 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 (1) the Last Reported Sale Price of Common Stock for any five Trading Days within the ten consecutive Trading Days ending immediately before the later of the Fundamental Change or the public announcement thereof equals or exceeds 105% of the applicable Conversion Price of the Notes in effect immediately before the Fundamental Change or the public announcement thereof (except that this clause (1) shall not apply to the events described in Section 6.06(e) hereof) or (2) at least 90% of the consideration (excluding cash payments for fractional shares) in the transaction or transactions constituting the Fundamental Change consists of shares of capital stock traded on a national securities exchange or quoted on the Nasdaq National Market (or which 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 8 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); (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. 9 "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 the applicable security 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 the applicable security is traded or, if the applicable security is not listed on a U.S. national or regional securities exchange, as reported by the Nasdaq National Market. If the applicable security 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 the applicable security in the over-the-counter market on the relevant date as reported by the National Quotation Bureau or similar organization. If the applicable security 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 applicable security on the relevant date from each of at least three nationally recognized independent investment banking firms selected by the Issuer for this purpose. "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 Sixteenth 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 10 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 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. 11 "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 Original 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, except that Registration Default shall not include the registration default contained in Section 2(c)(i)(1) of the Registration Rights Agreement.. "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. "Share Price" means the price per share of Common Stock paid in connection with a corporate transaction described in Section 6.06(e) hereof, which shall be equal to (i) if holders of Common Stock receive only cash in such corporate transaction, the cash amount paid per share of Common Stock and (ii) in all other cases, the average of the Last Reported Sale Prices of Common Stock on the five Trading Days up to but not including the Effective Date. "Spin-off Market Price" per share of Common Stock 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 12 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 Sixteenth 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 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 13 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). 14 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, Series B" to be issued in an initial aggregate principal amount of up to $150,000,000. 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 December 16, 2004), 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 on the Original 2023 Notes, 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 Sixteenth 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. 15 (i) The events specified in Events of Default with respect to the 2023 Notes shall include the events specified in Article VIII of this Sixteenth 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 Sixteenth Supplemental Indenture. 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. 16 CMS ENERGY CORPORATION 3.375% CONVERTIBLE SENIOR NOTES DUE 2023, SERIES B No. 1 $150,000,000 CUSIP No.: 125896AT7 ISIN No.: US125896AT74 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 December 16, 2004 (the "Original Issue Date") or from the date interest has been paid or duly provided for on the 3.375% Convertible Senior Notes Due 2023 issued by the Issuer on July 16, 2003 (the "Original 2023 Notes") pursuant to the terms of the Thirteenth Supplemental Indenture dated July 16, 2003 between the Issuer and the Trustee for which the 2023 Notes have been exchanged, semi-annually in arrears on January 15 and July 15, in each year, commencing on January 15, 2005 (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 17 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, AS AMENDED (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 18 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. IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed under its corporate seal. Dated: CMS ENERGY CORPORATION By ------------------------------------- Its: Executive Vice President and Chief Financial Officer By ------------------------------------- Its: Vice President and Treasurer SECTION 2.04. Form of Reverse of 2023 Note. This 3.375% Convertible Senior Note due 2023, Series B 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 Sixteenth Supplemental Indenture, dated as of December 16, 2004 (herein collectively referred to as the "Indenture"), between the Issuer and J.P. Morgan Trust Company, N.A., a national banking association (ultimate 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. 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 19 interest has been paid, from December 16, 2004), 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 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 or upon the occurrence of an Additional Registration Default, which rate will increase by an additional 0.25% per annum if such Registration Default or Additional 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 and Additional 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 and Additional 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 20 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. 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). 21 Subject to the procedures set forth in the Indenture, a Holder may convert 2023 Notes into cash and shares of 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; (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 22 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 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 cash and shares of 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 23 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 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 cash and shares of 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 any 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. 24 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. 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 25 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 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, the Conversion Value, the Principal Return, the Net Share Amount, 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. 26 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 cash and 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 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 cash and 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 (if (Name) less than all): - ------------------------------------- (Street Address) $______,000 - ------------------------------------- Social Security or other taxpayer number (City, state and zip code) 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. 27 J.P. MORGAN TRUST COMPANY, N.A., as Trustee By ------------------------------------- Authorized Officer 28 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 (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 Sixteenth Supplemental Indenture. 29 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. Upon doing so, the Paying Agent shall have no further liability for the cash delivered to the Trustee. 30 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 Sixteenth 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. (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. 31 (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 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: 32 (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 Sixteenth 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; (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 33 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; (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 34 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 Sixteenth 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 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 35 (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 cash and shares of Common Stock at any time during which the conditions stated in the 2023 Notes are met. The cash and 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 Section 6.13 hereof, 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"). Subject to the procedures set forth in Section 6.13 hereof, as soon as practicable, but in no event later than the fifth Business Day following the Conversion Date, the Issuer shall deliver the Conversion Value in cash and deliver the Common Stock by either of the following methods: (i) update the global security representing the shares of Common Stock to record the Holder's interest in the Common Stock, or (ii) deliver to the Holder, through the Conversion Agent, a certificate for the number of full shares of Common Stock representing Net Shares, if any, together with, in either case, 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. 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, delivery of the Principal Return and the Net Shares (together with the cash or check payment, if any, in lieu of fractional shares) will be deemed to satisfy the Issuer's obligation to pay the principal amount of the converted 2023 Notes as well as accrued interest with respect to the converted 2023 Notes. Accrued interest on the 2023 Notes 36 shall be deemed canceled, extinguished or forfeited, rather than paid in full. 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 amount of cash and 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 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 37 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 cash and 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 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 38 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 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 cash and 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 applicable Conversion Rate shall again be adjusted 39 to the Conversion Rate which would then be in effect if such distribution had not been declared. (d) In case the Issuer shall declare a cash dividend or cash distribution to all or substantially all of the holders of Common Stock, the Conversion Rate shall be increased so that the applicable Conversion Rate shall equal the price determined by multiplying the Conversion Rate in effect immediately prior to the record date for such dividend or distribution by a fraction, (i) the numerator of which shall be the average of the Last Reported Sale Price of Common Stock for the five consecutive Trading Days ending on the Trading Day immediately preceding the record date for such dividend or distribution (the "Pre-Dividend Sale Price"), and (ii) the denominator of which shall be the Pre-Dividend Sale Price, minus the full amount of such cash dividend or cash distribution applicable to one share of Common Stock (the "Dividend Adjustment Amount"), with such adjustment to become effective immediately after the record date for such dividend or distribution; provided that if the denominator of the foregoing fraction is less than $1.00 (including a negative amount), 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 cash and Common Stock issuable upon such conversion, the amount of cash such Holder would have received had such Holder converted its 2023 Note solely into Common Stock at the then applicable Conversion Rate immediately prior to the record date for such cash dividend or cash distribution. If such cash dividend or cash distribution is not so paid or made, the applicable Conversion Rate shall again be adjusted to be the Conversion Rate that would then be in effect if such dividend or distribution had not been declared. (e) If a Holder elects to convert 2023 Notes in connection with a corporate transaction that occurs on or prior to July 15, 2008, that constitutes a Fundamental Change (other than as described in clause (iv) of the definition of Fundamental Change) and 10% or more of the Fair Market Value of the consideration for the Common Stock (as determined by the Board of Directors, whose determination shall be conclusive evidence of such Fair Market Value) in the corporate transaction consists of (i) cash, (ii) other property or (iii) securities that are not traded or scheduled to be traded immediately following such transaction on a U.S. national securities exchange or the Nasdaq National Market, then the Conversion Rate for the 2023 Notes surrendered for conversion by such Holder shall be adjusted so that such Holder will be entitled to receive cash and shares of Common Stock equal to the sum of (A) the Conversion Value and (B) the number of additional shares of Common Stock (the "Additional Shares") determined in the manner set forth below, subject in each case to the Issuer's payment elections as described in Section 6.13 hereof. For the avoidance of doubt, the adjustment provided for in this Section 6.06(e) shall only be made with respect to the 2023 Notes being converted in connection with such Fundamental Change and shall not be effective as to any 2023 Notes not so converted. 40 The number of Additional Shares will be determined by reference to the table below, based on the date on which such corporate transaction becomes effective (the "Effective Date") and the Share Price; provided that if the Share Price is between two Share Price amounts in the table below or the Effective Date is between two Effective Dates in the table, the number of Additional Shares will be determined by a straight-line interpolation between the number of Additional Shares set forth for the higher and lower Share Price amounts and the two dates, as applicable, based on a 365-day year. The Share Prices set forth in the first row of the table below (i.e., column headers) will be adjusted as of any date on which the applicable Conversion Rate of the 2023 Notes is adjusted pursuant to this Section 6.06. The adjusted Share Prices will equal the Share Prices applicable immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the Conversion Rate immediately prior to the adjustment giving rise to the share price adjustment and the denominator of which is the Conversion Rate as so adjusted. The following table sets forth the hypothetical Share Price and number of Additional Shares to be received per $1,000 principal amount of 2023 Notes:
SHARE PRICE ----------------------------------------------------------------------------------------------------- EFFECTIVE DATE $7.21 $8.00 $9.00 $10.00 $11.00 $12.00 $13.00 $14.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $50.00 - -------------- ----- ----- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ November 9, 2004 45.0 36.3 28.3 22.6 18.5 15.3 13.0 11.1 9.7 5.6 3.7 2.6 1.9 1.4 0.0 July 15, 2005 45.0 36.4 28.0 22.1 17.9 14.7 12.3 10.5 9.1 5.2 3.5 2.5 1.9 1.4 0.0 July 15, 2006 45.0 35.5 26.7 20.5 16.1 12.9 10.6 8.9 7.6 4.2 2.8 2.0 1.5 1.1 0.0 July 15, 2007 45.0 34.4 24.8 18.2 13.7 10.5 8.3 6.8 5.7 3.1 2.1 1.5 1.2 0.9 0.0 July 15, 2008 44.9 33.1 22.4 15.2 10.6 7.5 5.5 4.3 3.4 1.8 1.3 1.0 0.7 0.6 0.0
The Share Prices and Additional Share amounts set forth above are based upon an initial Conversion Rate per share of 93.7137 per $1,000 principal amount of 2023 Notes. If the Share Price is equal to or in excess of $50.00 per share (subject to adjustment), no Additional Shares will be issued upon conversion. If the Share Price is less than $7.21 per share (subject to adjustment), no Additional Shares will be issued upon conversion. Notwithstanding the foregoing, any adjustment to the applicable Conversion Rate relating to the issuance of Additional Shares as described in this section will not exceed the Maximum Conversion Rate. (f) Notwithstanding the foregoing, in the case of a Public Acquirer Change of Control, the Issuer may, in lieu of increasing the applicable Conversion Rate by Additional Shares as described in Section 6.06(e) hereof, elect to adjust the applicable Conversion Rate and the related conversion obligation such that upon conversion the Issuer will deliver cash and a number of shares of Public Acquirer Common Stock such that by multiplying the Conversion Rate in effect immediately before the Public Acquirer Change of Control shall be adjusted by a fraction: 41 (i) the numerator of which will be the average of the Last Reported Sale Price of the Common Stock for the five consecutive Trading Days prior to but excluding the effective date of such Public Acquirer Change of Control; and (ii) the denominator of which will be the average of the Last Reported Sale Price of the Public Acquirer Common Stock for the five consecutive Trading Days commencing on the Trading Day next succeeding the effective date of such Public Acquirer Change of Control. A "Public Acquirer Change of Control" means any event described in Section 6.06(e) hereof that would otherwise obligate the Issuer to increase the Conversion Rate as described in Section 6.06(e) hereof and the acquirer (or any entity of which the acquirer is a directly or indirectly wholly-owned Subsidiary and such entity provides a guarantee to the new 2023 Notes) has a class of common stock traded on a U.S. national securities exchange or quoted on the Nasdaq National Market or which will be so traded or quoted when issued or exchanged in connection with such event (the "Public Acquirer Common Stock"). After the adjustment of the applicable Conversion Rate in connection with a Public Acquirer Change of Control, the applicable Conversion Rate will be subject to further similar adjustments in the event that any of the events described in this Section 6.06 occur thereafter. The Issuer is required to notify Holders of its election in writing of such transaction which notice shall be made five Business Days prior to the effective date of such Public Acquirer Change of Control. In addition, the Holder can also, subject to certain conditions, require the Company to repurchase all or a portion of its 2023 Notes as described under Article III. (g) 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 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. (h) Upon conversion of the 2023 Notes, the Holders shall receive, in addition to the cash and 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 42 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. (i) 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. (j) Notwithstanding the foregoing, in no event shall the Conversion Rate exceed the maximum conversion rate specified under this Section 6.06(j) (the "Maximum Conversion Rate") as a result of an adjustment pursuant to Sections 6.06(c), 6.06(d) and 6.06(e). 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. 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 Sixteenth Supplemental Indenture; 43 (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 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; 44 (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 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. 45 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 Conversion Value of 2023 Notes Tendered. (a) Subject to certain exceptions described in Sections 2.04(b) and 2.04(e), Holders tendering the 2023 Notes for conversion shall be entitled to receive, upon conversion of such 2023 Notes, cash and shares of Common Stock, the value of which (the "Conversion Value") shall be equal to the product of: (i) (A) the aggregate principal amount of 2023 Notes to be converted divided by 1,000 multiplied by (B) the then applicable Conversion Rate; and (ii) the average of the Common Stock prices for the ten consecutive Trading Days (appropriately adjusted to take into account the occurrence during such period of stock splits, stock dividends and similar events) beginning on the second Trading Day immediately following the day the 2023 Notes are tendered for conversion (the "Ten Day Average Closing Stock Price"). (b) Subject to certain exceptions described below and under Sections 2.04(b) and 2.04(e), the Issuer shall deliver the Conversion Value to converting Holders as follows: (i) an amount in cash (the "Principal Return") equal to the lesser of (a) the Conversion Value of the 2023 Notes to be converted and (b) the aggregate principal amount of the 2023 Notes to be converted; (ii) if the Conversion Value of the 2023 Notes to be converted is greater than the Principal Return, an amount in whole shares (the "Net Shares"), determined as set forth below, equal to such aggregate Conversion Value less the Principal Return (the "Net Share Amount"); and (iii) an amount paid in cash, determined as set forth below, in lieu of any fractional shares of Common Stock. The number of Net Shares to be paid shall be determined by dividing the Net Share Amount by the Ten Day Average Closing Stock Price. Holders of 2023 Notes will not receive fractional shares upon conversion of 2023 Notes. In lieu of fractional shares, Holders will receive cash for the value of the fractional shares, which cash payment shall be based on the Ten Day Average Closing Stock Price. 46 The Conversion Value, Principal Return, number of Net Shares and Net Share Amount shall be determined by the Issuer at the end of the ten consecutive Trading Day period beginning on the second Trading Day immediately following the day the 2023 Notes are tendered for conversion (the "Determination Date"). The Issuer shall pay the Principal Return and cash for fractional shares and deliver the Net Shares, if any, as promptly as practicable after the Determination Date, but in no event later than five Business Days thereafter. Except as provided in Section 2.04, delivery of the Principal Return, Net Shares and cash in lieu of fractional shares shall be deemed to satisfy the Issuer's obligation to pay the principal amount of a converted 2023 Note including accrued but unpaid interest (including Additional Amounts, if any) thereon. Any accrued and unpaid interest (including Additional Amounts, if any) payable on a converted 2023 Note shall be deemed canceled, extinguished or forfeited rather than paid in full. (c) Neither the Trustee nor the Conversion Agent has any duty to determine or calculate the Conversion Value, Principal Return, number of Net Shares, the Net Share Amount or any other computation required under this Section 6.13, all of which shall be determined by the Issuer (or the Trustee, as the case may be) in accordance with the provisions of this Indenture, and the Trustee and Conversion Agent shall not be under any responsibility to determine the correctness of any such determinations and/or calculations and may conclusively rely on the correctness thereof. SECTION 6.14. 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 Section 6.14. 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. 47 SECTION 6.15. 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 6.15 shall be done to evade the principle set forth in Section 6.06(j) 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 6.16. 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 6.17. 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 6.18. 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 6.19. 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 Sixteenth 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. 48 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 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 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 (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 49 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: (1) Indebtedness of the Issuer to banks not to exceed $1,000,000,000 in aggregate outstanding principal amount at any time; 50 (2) Indebtedness (other than Indebtedness described in Section 7.04(b)(1) hereof) outstanding on the date of this Sixteenth 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 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 51 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 ERM 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: (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 52 (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 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 53 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; (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 54 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 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 55 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. 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 Sixteenth Supplemental Indenture with respect to the 2023 Notes. 56 ARTICLE XI SUPPLEMENTAL INDENTURES This Sixteenth Supplemental Indenture is a supplement to the Original Indenture. As supplemented by this Sixteenth Supplemental Indenture, the Original Indenture is in all respects ratified, approved and confirmed, and the Original Indenture and this Sixteenth 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. 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, 57 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. 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 58 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 Sixteenth 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. 59 IN WITNESS WHEREOF, the parties hereto have caused this Sixteenth 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 L. Mountcastle - ------------------------------------- Laura L. Mountcastle J.P. MORGAN TRUST COMPANY, N.A., as Trustee /s/ Renee Johnson ---------------------------------------- Renee Johnson Attest: /s/ Mietka T. Collins - ------------------------------------- Mietka T. Collins 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 Sixteenth 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 cash or 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 Sixteenth 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 cash or 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 EX-4.(J) 6 k91832exv4wxjy.txt $300 MILLION FIFTH AMENDED AND RESTATED CREDIT AGREEMENT Exhibit 4(j) $300,000,000 FIFTH AMENDED AND RESTATED CREDIT AGREEMENT Dated as of August 3, 2004 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 WACHOVIA BANK, NATIONAL ASSOCIATION as Syndication Agent and BANK ONE, NA BARCLAYS BANK PLC AND UNION BANK OF CALIFORNIA, N.A. as Documentation Agents ---------- CITIGROUP GLOBAL MARKETS INC. AND WACHOVIA CAPITAL MARKETS LLC 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 .................... 22 SECTION 1.03. Accounting Terms ............................................. 22 ARTICLE II COMMITMENTS, LOANS, FEES, PREPAYMENTS AND OUTSTANDINGS SECTION 2.01. Making Loans ................................................. 23 SECTION 2.02. Fees ......................................................... 23 SECTION 2.03. Commitments; Mandatory Prepayments ........................... 24 SECTION 2.04. Computations of Outstandings ................................. 25 ARTICLE III LOANS SECTION 3.01. Loans ........................................................ 25 SECTION 3.02. Conversion of Loans .......................................... 26 SECTION 3.03. Interest Periods ............................................. 26 SECTION 3.04. Other Terms Relating to the Making and Conversion of Loans ... 27 SECTION 3.05. Repayment of Loans; Interest ................................. 29 ARTICLE IV LETTERS OF CREDIT SECTION 4.01. Issuing Banks ................................................ 29 SECTION 4.02. Letters of Credit ............................................ 30 SECTION 4.03. Issuing Bank Fees ............................................ 31 SECTION 4.04. Reimbursement to Issuing Banks ............................... 31 SECTION 4.05. Obligations Absolute ......................................... 32 SECTION 4.06. Indemnification; Liability of Issuing Banks and the Lenders .. 33 SECTION 4.07. Currency Equivalents ......................................... 34 SECTION 4.08. Judgement Currency ........................................... 34 SECTION 4.09. Cash Collateral Agreement .................................... 35 SECTION 4.10. Court Order .................................................. 35 ARTICLE V PAYMENTS, COMPUTATIONS AND YIELD PROTECTION SECTION 5.01. Payments and Computations .................................... 35
i SECTION 5.02. Interest Rate Determination .................................. 37 SECTION 5.03. Prepayments .................................................. 37 SECTION 5.04. Yield Protection ............................................. 38 SECTION 5.05. Sharing of Payments, Etc ..................................... 40 SECTION 5.06. Taxes ........................................................ 40 SECTION 5.07. Apportionment of Payments .................................... 41 SECTION 5.08. Proceeds of Collateral ....................................... 43 ARTICLE VI CONDITIONS PRECEDENT SECTION 6.01. Conditions Precedent to the Effectiveness of this Agreement .. 43 SECTION 6.02. Conditions Precedent to Each Extension of Credit ............. 46 SECTION 6.03. Conditions Precedent to Certain Extensions of Credit ......... 47 SECTION 6.04. Reliance on Certificates ..................................... 47 ARTICLE VII REPRESENTATIONS AND WARRANTIES SECTION 7.01. Representations and Warranties of the Borrowers .............. 47 ARTICLE VIII COVENANTS OF THE BORROWERS SECTION 8.01. Affirmative Covenants ........................................ 52 SECTION 8.02. Negative Covenants ........................................... 54 SECTION 8.03. Reporting Obligations ........................................ 63 ARTICLE IX DEFAULTS SECTION 9.01. Events of Default ............................................ 66 SECTION 9.02. Remedies ..................................................... 68 ARTICLE X THE AGENTS SECTION 10.01. Authorization and Action ..................................... 69 SECTION 10.02. Indemnification .............................................. 71 SECTION 10.03. Concerning the Collateral and the Loan Documents ............. 72 SECTION 10 04. Release of Guarantors ........................................ 73 ARTICLE XI MISCELLANEOUS SECTION 11.01. Amendments, Etc .............................................. 73 SECTION 11.02. Notices, Etc.................................................. 74 SECTION 11.03. No Waiver of Remedies ........................................ 74 SECTION 11.04. Costs, Expenses and Indemnification .......................... 75 SECTION 11.05. Right of Set-of............................................... 76

ii SECTION 11.06. Binding Effect ............................................... 76 SECTION 11.07. Assignments and Participation ................................ 77 SECTION 11.08. Confidentiality .............................................. 79 SECTION 11.09. Waiver of Jury Trial ......................................... 80 SECTION 11.10. GOVERNING LAW; SUBMISSION TO JURISDICTION .................... 80 SECTION 11.11. Relation of the Parties; No Beneficiary ...................... 81 SECTION 11.12. Execution in Counterparts .................................... 81 SECTION 11.13. Survival of Agreement ........................................ 81 SECTION 11.14. Platform ..................................................... 81 SECTION 11.15. USA Patriot Act .............................................. 83 ARTICLE XII CO-BORROWER PROVISIONS SECTION 12.01. Appointment .................................................. 83 SECTION 12.02. Separate Actions ............................................. 84 SECTION 12.03. Obligations Absolute and Unconditional ....................... 84 SECTION 12.04. Waivers and Acknowledgements ................................. 84 SECTION 12.05. Contribution Among Borrowers ................................. 85 SECTION 12.06. Subrogation; Reinstatement ................................... 86 SECTION 12.07. Subordination ................................................ 86 ARTICLE XIII NO NOVATION; REFERENCES TO THIS AGREEMENT IN LOAN DOCUMENTS SECTION 13.01 No Novation .................................................. 87 SECTION 13.02. References to This Agreement In Loan Documents ............... 87

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 EXHIBIT N - Form of Cash Collateral Account Agreement

~~Schedules COMMITMENT SCHEDULE SCHEDULE I Certain Debt SCHEDULE II Pledged Ownership Interests SCHEDULE III Transitional Letters of Credit ATTACHMENT A Reaffirmation~~

iv FIFTH AMENDED AND RESTATED CREDIT AGREEMENT Dated as of August 3, 2004 THIS FIFTH 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) Wachovia Bank, National Association, as syndication agent (the "SYNDICATION AGENT"), and Bank One, NA, Barclays Bank PLC and Union Bank of California, N.A., as documentation agents (the "DOCUMENTATION AGENTS"). PRELIMINARY STATEMENTS The Borrowers have 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. 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 and the Issuing Banks 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. "ALTERNATIVE CURRENCY" means euro and Indian Rupees; provided, that if with respect to any of the foregoing currencies (x) currency control or other exchange regulations are 2 imposed in the country in which such currency is issued with the result that different types of such currency are introduced, (y) such currency is, in the determination of the Administrative Agent, no longer readily available or freely traded or (z) in the determination of the Administrative Agent, a Dollar Equivalent of such currency is not readily calculable, the Administrative Agent shall promptly notify the Lenders and the Company, and such currency shall no longer be an Alternative Currency until such time as all of the Lenders agree to reinstate such currency as an Alternative Currency. "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 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 1.75% Eurodollar Rate Loans 2.75%~~
"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 Wachovia Capital Markets LLC. "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. 3 "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 Business Day relates to any Eurodollar Rate Loan, on which dealings are carried on in the London interbank market and, if the applicable Business Day relates to any Letter of Credit, a day of the year on which banks are not required or authorized to close in the principal place of business of the related Issuing Bank. "CASH COLLATERAL ACCOUNT" means the "Account" as defined in the Cash Collateral Agreement. "CASH COLLATERAL AGREEMENT" means that certain Cash Collateral Agreement, dated as of August 3, 2004, between the Borrowers, the Administrative Agent and the Collateral Agent, for the benefit of the Lenders, substantially in the form of Exhibit N, as amended, restated, supplemented or otherwise modified from time to time. "CASH COLLATERAL REQUIRED AMOUNT" means, as of any date of determination, the difference of (i) one hundred five percent (105%) of the Dollar Equivalent of the aggregate LC Outstandings at such time in respect of undrawn Letters of Credit less (y) the amount of cash on deposit in the Cash Collateral Account at such time which is free and clear of all rights and claims of third parties and has not been applied against the Obligations. "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. 4 "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 August 3, 2004. "CMS ERM" means CMS Energy Resource Management Company (formerly known as CMS Marketing, Services and Trading Company), a Michigan corporation, all of whose capital stock is on the Closing Date owned by Enterprises and its permitted successors. "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. "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, including, without limitation, all "Collateral" under (and as defined in) the Cash Collateral Agreement. "COMMITMENT" means, for each Lender, the obligation of such Lender to make Loans to the Borrowers and to participate in Extensions of Credit resulting from the issuance (or extension, modification or amendment) of any Letter of Credit 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 11.07(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 $300,000,000. "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. 5 "COMMITMENT TERMINATION DATE" means the earlier of (i) the Maturity Date and (ii) the date of termination or reduction in whole of the Commitments pursuant to Section 2.03 or 9.02. "COMMUNICATIONS" is defined in Section 11.14. "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 (i) reset put securities due July 1, 2003 or (ii) debt securities due January 15, 2005) 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 11.08. "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: (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 and Issuing Banks 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 CMS ERM or its Subsidiaries of natural gas, 6 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 CMS ERM's or any of its Subsidiary's obligations under any such purchase or sale transaction (a "COVERING TRANSACTION") entered into by CMS ERM 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 CMS ERM or any of its Subsidiaries in support of such Counterparty's payment obligations to CMS ERM 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, 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. 7 "CONSUMERS CREDIT FACILITY" means, collectively, Consumer's existing (i) $140,000,000 term loan facility and (ii) $500,000,000 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 twelvemonth 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. "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 8 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 8.01(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 7.01(f). "DIVIDEND COVERAGE RATIO" means, at any date, the ratio of (i) Pro Forma Dividend Amounts to (ii) Company Interest Expense. "DOLLAR EQUIVALENT" means, as to Dollars, the amount thereof, and as to any Alternative Currency, the Dollar equivalent of such Alternative Currency as determined by the Administrative Agent in accordance with the provisions of Section 4.07. "DOLLARS" and the sign "$" each means the lawful currency of the United States. "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) 9 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. "EURO" means the euro referred to in Council Regulation (EC) No. 1103/97 dated June 17, 1997 passed by the Counsel of the European Union, or if different, the lawful currency of the member states of the European Union that participate in the third stage of the Economic and Monetary Union. "EURO SUBLIMIT" means $40,000,000. "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). "EVENT OF DEFAULT" is defined in Section 9.01. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXISTING CREDIT AGREEMENT" means that certain $190,000,000 Fourth Amended and Restated Credit Agreement, dated as of December 8, 2003, among the Borrowers, the lenders from time to time parties thereto, and CUSA, as administrative agent and as collateral agent, as the same may have been amended, restated, supplemented or otherwise modified from time to time. "EXTENSION OF CREDIT" means (i) the making of a Borrowing (including any Conversion), (ii) the issuance of a Letter of Credit, or (iii) the amendment of any Letter of Credit having the effect of extending the stated termination date thereof, increasing the LC Outstandings thereunder, or otherwise altering any of the material terms or conditions thereof. "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 10 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 LETTERS" 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 8.01(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 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 11.07(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, CMS ERM, 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 8.01(l). 11 "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 whollyowned 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 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 11.04(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 12 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. "INDIAN RUPEE" means the lawful currency of India. "INDIAN RUPEE SUBLIMIT" means $3,000,000. "INTER-BORROWER DEBT" is defined in Section 12.07. "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. "ISSUING BANK" means any Lender designated by the Company in accordance with Section 4.01(a) as the issuer of a Letter of Credit pursuant to an Issuing Bank Agreement. "ISSUING BANK AGREEMENT" means an agreement between an Issuing Bank and the applicable Borrower, in form and substance satisfactory to the Administrative Agent, providing for the issuance of one or more Letters of Credit, in form and substance satisfactory to the Administrative Agent, in support of a general corporate activity of such Borrower. "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. "LC PAYMENT NOTICE" is defined in Section 4.04(b). "LC OUTSTANDINGS" means, for any Letter of Credit on any date of determination, the maximum amount available to be drawn under such Letter of Credit (assuming the satisfaction of all conditions for drawing enumerated therein) plus any amount which has been drawn on such Letter of Credit which has neither been reimbursed by a Borrower nor converted into an ABR Loan pursuant to the terms of Section 4.04. "LENDER ASSIGNMENT" is defined in Section 11.07(e). "LENDERS" means the Banks listed on the signature pages hereof, together with their successors and permitted assigns and, if and to the extent so provided in Section 4.04(c), each Issuing Bank. 13 "LETTER OF CREDIT" means (i) a letter of credit issued by an Issuing Bank pursuant to Section 4.02(a) or (ii) a Transitional Letter of Credit deemed issued by an Issuing Bank on the Closing Date pursuant to Section 4.02(b), in each case as such letter of credit may from time to time be amended, modified or extended in accordance with the terms of this Agreement and the Issuing Bank Agreement to which it relates. "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). "LIQUIDITY" means, as of any date, the aggregate of (i) the amount of Unrestricted Cash held by the Company and its Consolidated Subsidiaries as of such date and (ii) the unused portion of the Commitments hereunder as of such date. "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 Letters, the Issuing Bank Agreement(s), the Guaranty, the Pledge Agreements, the Intercreditor Agreement, the Cash Collateral 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 6.01(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 14 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. "MATURITY DATE" means August 3, 2007. "MEASUREMENT QUARTER" is defined in Section 8.01(i). "MOODY'S" means Moody's Investors Service, Inc. or any successor thereto. "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 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 15 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 LC Outstandings, 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, the Issuing Banks or any other indemnified party arising under the Loan Documents. "OECD" means the Organization for Economic Cooperation and Development. "OF-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 5.06(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 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%. "PARTICIPANT" is defined in Section 11.07(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 (i) the sum of (A) the aggregate outstanding principal amount of such Lender's Loans on such day plus (B) the Dollar Equivalent of such Lender's obligation to purchase participations in LC Outstandings on such day by (ii) the Total Outstandings on such date, and multiplying the quotient so obtained by 100%. 16 "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 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). 17 "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. "PLATFORM" is defined in Section 11.14 "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. 18 "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 11.08. "REGISTER" is defined in Section 11.07(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. "REQUEST FOR ISSUANCE" is defined in Section 4.02(a). "REQUIRED LENDERS" means, on any date of determination, Lenders that, collectively, on such date hold (i) more than 50% of the Commitments of all Lenders or (ii) if the Commitments have been terminated, interests in the Total Outstandings in excess of 50% of the Total Outstandings. 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 9.01(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 19 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, expenditures pursuant to the Clean Air Act, 42 U.S.C. Section 7401 et seq., 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 (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 11.07(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 20 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. "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 5.06(a). "TOTAL OUTSTANDINGS" means, as of any date of determination, the sum of (i) the aggregate principal amount of all Loans outstanding as of such date plus (ii) the Dollar Equivalent of the aggregate LC Outstandings of all Letters of Credit outstanding as of such date, after giving effect to all Extensions of Credit to be made on such date and the application of the proceeds thereof. "TRANSITIONAL LETTER OF CREDIT" is defined in Section 4.02(b). "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. "UNRESTRICTED CASH" means cash and Permitted Investments, in each case not subject to a Lien (including, without limitation, any Lien permitted hereunder), setoff (other than ordinary course setoff rights of a depository bank arising under a bank depository agreement for customary fees, charges and other account-related expenses due to such depository bank thereunder), counterclaim, recoupment, defense or other right in favor of any Person. 21 "USA PATRIOT ACT" means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L. No. 107-56, 115 Stat. 272 (2001), as amended. 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 7.01(e) ("GAAP"), it being understood that the financial covenants set forth in Sections 8.01(i) and (j) shall be calculated exclusive of all debt (i) 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 or (ii) that is re-categorized as debt from certain lease obligations pursuant to Emerging Issues Task Force ("EITF") Issue No. 01-8, any subsequent EITF Issue or recommendation or any other interpretation, bulletin or other similar document by the Financial Accounting Standards Board on or related to such re-categorization. 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 22 Liabilities, including, but not limited to, the application of Financial Accounting Standards Board Interpretation Nos. 45 and 46 and Financial Accounting Standards Board 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 8.03 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 in Dollars to the Borrowers and to participate in the issuance of Letters of Credit (and the LC Outstandings thereunder) denominated in Dollars or any Alternative Currency 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 or reduce or cancel Letters of Credit, 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 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 Company shall pay to the Administrative Agent and/or the Arrangers, as the case may be, the fees set forth in (i) that certain letter agreement, dated June 28, 2004, among the Company, the Administrative Agent, the Arrangers and the other parties thereto and (ii) that certain letter agreement, dated 23 June 28, 2004, among the Company, the Administrative Agent and the other parties thereto (collectively, the "FEE LETTERS"), in the amounts and at the times specified therein. (c) The Borrowers agree to pay to the Administrative Agent, for the account of each Lender, a letter of credit fee on the daily aggregate amount of the LC Outstandings 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 at a rate per annum equal to the Applicable Margin with respect to Eurodollar Rate Loans, payable quarterly in arrears on the last day of each March, June, September and December, commencing on the first such date to occur following the Closing Date, and on the Commitment Termination Date. 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, 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 and all of the LC Obligations shall be cash collateralized in accordance with the terms of Section 9.02, in each case 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 5.04(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 VIII. 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, then to repay outstanding Eurodollar Rate Loans with those Eurodollar Rate Loans which have earlier expiring Interest 24 Periods being repaid prior to those which have later expiring Interest Periods and then as cash collateral pursuant to the Cash Collateral Agreement, to secure LC Outstandings. 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 Total Outstandings. References to the unused portion of the Commitments shall refer to the excess, if any, of the Commitments hereunder over the Total Outstandings; 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 prior to the proposed Borrowing or, in the case of ABR Loans, no later than 11:00 a.m. (New York City time) on 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 1:00 p.m. (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 VI, 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) The Extensions of Credit made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business. The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Extensions of Credit made by the Lenders to the Borrowers and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of 25 the Borrowers hereunder to pay any amount owing with respect to the Obligations. In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. 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 11.07) be represented by one or more Promissory Notes in such form payable to the order of the payee named therein, except to the extent that any such Lender subsequently returns any such Promissory Note for cancellation and requests that such Loans once again be evidenced as described in the first sentence of this Section 3.01(c). 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 (x) no later than 12:00 noon (New York City time) on the third Business Day prior to the date of any proposed Conversion into a Eurodollar Rate Loan and (y) no later than 11:00 a.m. (New York City time) on 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 26 (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 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 5.04(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 27 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 11.07), 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 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 11.07, 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 5.04(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 28 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 VI, 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 9.02). (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 LETTERS OF CREDIT SECTION 4.01. ISSUING BANKS. Subject to the terms and conditions hereof, the Company may from time to time identify and arrange for one or more Lenders reasonably satisfactory to the Administrative Agent to act as Issuing Banks hereunder. Any such designation by the Company shall be notified to the Administrative Agent at least three (3) Business Days prior to the first date upon which the Company proposes that such Issuing Bank issue its first Letter of Credit. Nothing contained herein shall be deemed to require any Lender 29 to agree to act as an Issuing Bank, if it does not so desire. In the event of any conflict between any Issuing Bank Agreement and this Agreement, the terms of this Agreement shall control. SECTION 4.02. LETTERS OF CREDIT. (a) Each Letter of Credit shall be issued (or the stated maturity thereof extended or terms thereof modified or amended) for the account of the Company, Enterprises or a Subsidiary of Enterprises (in which case each Borrower and such Subsidiary shall be coapplicants with respect to such Letter of Credit) on not less than three (3) Business Days' prior written notice thereof to the Administrative Agent (which shall promptly distribute copies thereof to the Lenders) and the relevant Issuing Bank and shall be denominated in Dollars or in an Alternative Currency. Each such notice (a "REQUEST FOR ISSUANCE") shall be delivered no later than 12:00 noon (New York City time) on the third Business Day prior to the proposed date of issuance, extension, modification or amendment and shall specify (i) the date (which shall be a Business Day) of issuance of such Letter of Credit (or the date of effectiveness of such extension, modification or amendment) and the stated expiry date thereof (which shall be no later than the earlier of the date that is five (5) Business Days (or, in the case of any commercial Letter of Credit, thirty (30) Business Days) prior to the Commitment Termination Date and the date which is one year after the requested date of issuance, provided that any Letter of Credit with a one year tenor may provide for the renewal thereof for additional periods of up to one year which shall in no event extend beyond the date which is five (5) Business Days (or, in the case of any commercial Letter of Credit, thirty (30) Business Days) prior to the Commitment Termination Date), (ii) the proposed stated amount of such Letter of Credit (which shall not be less than $100,000 (or the Dollar Equivalent thereof in an Alternative Currency) unless otherwise agreed by the applicable Issuing Bank), (iii) the currency in which such Letter of Credit shall be denominated (which currency shall be Dollars or an Alternate Currency), (iv) the identity of the applicable Borrower and (v) such other information as shall demonstrate compliance of such Letter of Credit with the requirements specified therefor in this Agreement and the relevant Issuing Bank Agreement. Each Request for Issuance shall be irrevocable unless modified or rescinded by the applicable Borrower in writing not less than two (2) Business Days prior to the proposed date of issuance (or effectiveness) specified therein. Not later than 12:00 noon (New York City time) on the proposed date of issuance (or effectiveness) specified in such Request for Issuance, and upon fulfillment of the applicable conditions precedent and the other requirements set forth herein and in the relevant Issuing Bank Agreement, such Issuing Bank shall issue (or extend, amend or modify) such Letter of Credit and provide notice and a copy thereof to the Administrative Agent, which shall promptly furnish copies thereof to the Lenders. (b) Schedule III contains a schedule of certain letters of credit issued for the account of the Company prior to the Closing Date. Subject to the satisfaction of the applicable conditions contained in Article VI, from and after the Closing Date such letters of credit shall be deemed to be Letters of Credit issued pursuant to this Article IV for all purposes hereunder (each such Letter of Credit, a "TRANSITIONAL LETTER OF CREDIT"). For purposes of clarification, each term or provision applicable to the issuance of a Letter of Credit (including conditions applicable thereto) shall be deemed to include the deemed issuance of the Transitional Letters of Credit on the Closing Date. 30 (c) Each Lender severally agrees with each Issuing Bank to participate in the Extension of Credit resulting from the issuance or deemed issuance (or extension, modification or amendment) of each Letter of Credit issued or deemed issued (or extended, amended or modified) pursuant to this Section 4.02 in the manner and the amount provided in Section 4.04(b), and the issuance or deemed issuance of such Letter of Credit shall be deemed to be a confirmation by each Issuing Bank and each Lender of such participation in such amount. (d) Notwithstanding anything herein to the contrary, no Issuing Bank shall have any obligation to, and no Issuing Bank shall, issue, extend, amend or modify any Letter of Credit if on the date of such issuance, extension, amendment or modification, before or after giving effect thereto, (i) the Total Outstandings at such time would exceed the Commitments, (ii) the Dollar Equivalent of the aggregate LC Outstandings with respect to Letters of Credit denominated in euros would exceed the Euro Sublimit or (iii) the Dollar Equivalent of the aggregate LC Outstandings with respect to Letters of Credit denominated in Indian Rupees would exceed the Indian Rupee Sublimit. SECTION 4.03. ISSUING BANK FEES. Each Borrower shall pay directly to each Issuing Bank such fees and expenses, if any, specified to be paid to such Issuing Bank pursuant to each Issuing Bank Agreement to which it is a party, at the times, and in the manner, specified in such Issuing Bank Agreement. SECTION 4.04. REIMBURSEMENT TO ISSUING BANKS. (a) Each Borrower hereby agrees to pay to the Administrative Agent for the account of each Issuing Bank, on demand made by such Issuing Bank to the Borrowers and the Administrative Agent, on and after each date on which such Issuing Bank shall pay any amount under any Letter of Credit issued by such Issuing Bank, a sum in Dollars equal to the Dollar Equivalent of the amount so paid (calculated as of the date of such payment by such Issuing Bank) plus interest on such Dollar Equivalent of such amount from the date so paid by such Issuing Bank until repayment to such Issuing Bank in full at a fluctuating interest rate per annum equal at all times to the Applicable Rate for ABR Loans. (b) If any Issuing Bank shall not have been reimbursed in full by the Borrowers for any payment made by such Issuing Bank under a Letter of Credit issued by such Issuing Bank on the date of such payment, such Issuing Bank shall give the Administrative Agent and each Lender prompt notice thereof (an "LC PAYMENT NOTICE") no later than 12:00 noon (New York City time) on the Business Day immediately succeeding the date of such payment by such Issuing Bank. Each Lender severally agrees to purchase from each Issuing Bank a participation in the reimbursement obligation of the Borrowers to such Issuing Bank under subsection (a) above, by paying to the Administrative Agent for the account of such Issuing Bank an amount in Dollars equal to such Lender's Percentage of the Dollar Equivalent of such unreimbursed amount paid by such Issuing Bank (calculated as of the date of such payment by such Issuing Bank), plus interest on such Dollar Equivalent of such amount at a rate per annum equal to the Federal Funds Effective Rate from the date of such payment by such Issuing Bank to the date of payment to such Issuing Bank by such Lender. Each such payment by a Lender shall be made not later than 3:00 p.m. (New York City time) on the later to occur of (i) the Business Day immediately following the date of such payment by such Issuing Bank and 31 (ii) the Business Day on which such Lender shall have received an LC Payment Notice from such Issuing Bank. Each Lender's obligation to make each such payment to the Administrative Agent for the account of such Issuing Bank shall be several and shall not be affected by the occurrence or continuance of any Default or Event of Default or the failure of any other Lender to make any payment under this Section 4.04. Each Lender further agrees that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (c) The failure of any Lender to make any payment to the Administrative Agent for the account of an Issuing Bank in accordance with subsection (b) above, shall not relieve any other Lender of its obligation to make payment, but no Lender shall be responsible for the failure of any other Lender. If any Lender shall fail to make any payment to the Administrative Agent for the account of an Issuing Bank in accordance with subsection (b) above, within five (5) Business Days after the LC Payment Notice relating thereto, then, for so long as such failure shall continue, such Issuing Bank shall be deemed, for purposes of Section 5.05 and Article IX hereof and the Cash Collateral Agreement, to be a Lender hereunder owed a Loan in an outstanding principal amount equal to the amount due and payable by such Lender to the Administrative Agent for the account of such Issuing Bank pursuant to subsection (b) above. (d) Each participation purchased by a Lender under subsection (b) above, shall constitute an ABR Loan in the amount in Dollars paid by such Lender to the Administrative Agent for the account of the applicable Issuing Bank and shall be deemed made by such Lender to the Borrowers on the date of the related payment by the relevant Issuing Bank under the applicable Letter of Credit issued by such Issuing Bank (irrespective of the Borrowers' noncompliance, if any, with the conditions precedent for Loans hereunder); and all such payments by the Lenders in respect of any one such payment by such Issuing Bank shall constitute a single Borrowing hereunder. SECTION 4.05. OBLIGATIONS ABSOLUTE. The payment obligations of each Lender under Section 4.04(b) and of the Borrowers under this Agreement in respect of any payment under any Letter of Credit and any Loan made under Section 4.04(d) shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including the following circumstances: (i) any lack of validity or enforceability of any Loan Document or any other agreement or instrument relating thereto or to such Letter of Credit; (ii) any amendment or waiver of, or any consent to departure from, all or any of the Loan Documents; (iii) the existence of any claim, set-off, defense or other right which the Borrowers may have at any time against any beneficiary, or any transferee, of such Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), any Issuing Bank, or any other Person, whether in connection with this Agreement, the transactions contemplated herein or by such Letter of Credit, or any unrelated transaction; 32 (iv) any statement or any other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (v) payment in good faith by any Issuing Bank under a Letter of Credit issued by such Issuing Bank against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit; or (vi) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. SECTION 4.06. INDEMNIFICATION; LIABILITY OF ISSUING BANKS AND THE LENDERS. (a) In addition to amounts payable as elsewhere provided in this Agreement, the Borrowers hereby agree to pay and to protect, indemnify, and save harmless each Indemnified Person from and against any and all liabilities and costs that any such Indemnified Person may incur or be subject to as a consequence, direct or indirect, of (i) the issuance, execution and delivery or transfer of or payment or failure to pay under any Letter of Credit or (ii) the failure of any Issuing Bank to honor a demand for payment under any Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority, in each case other than to the extent solely as a result of the (x) gross negligence or willful misconduct of such Indemnified Person as determined by a court of competent jurisdiction by final and nonappealable judgment or (y) any Issuing Bank's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit. (b) The Borrowers assume all risks of the acts and omissions of any beneficiary or transferee of any Letter of Credit. Neither the Issuing Bank that has issued such Letter of Credit, nor any other Indemnified Person, shall be liable or responsible for (i) the use that may be made of such Letter of Credit or any acts or omissions of any beneficiary or transferee thereof in connection therewith; (ii) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by such Issuing Bank against presentation of documents that do not comply with the terms of such Letter of Credit, including failure of any documents to bear any reference or adequate reference to such Letter of Credit; or (iv) any other circumstances whatsoever in making or failing to make payment under such Letter of Credit, except that the Borrowers shall have the right to bring suit against such Issuing Bank, and such Issuing Bank shall be liable to the applicable Borrower and any Lender, to the extent of any direct, as opposed to consequential, damages suffered by the applicable Borrower or such Lender which the applicable Borrower or such Lender proves were caused by such Issuing Bank's willful misconduct or gross negligence as determined by a court of competent jurisdiction by final and nonappealable judgment, including such Issuing Bank's willful failure to make timely payment under such Letter of Credit following the presentation to it by the beneficiary thereof of a draft and accompanying certificate(s) which strictly comply with the terms and conditions of such Letter of Credit. In furtherance and not in limitation of the foregoing, any Issuing Bank may accept sight drafts and accompanying certificates presented under any Letter of Credit issued by such Issuing Bank that appear on their face to be in order, 33 without responsibility for further investigation, regardless of any notice or information to the contrary. Notwithstanding the foregoing, no Lender shall be obligated to indemnify the applicable Borrower for damages caused by any Issuing Bank's willful misconduct or gross negligence, and the obligation of the Borrowers to reimburse the Lenders hereunder shall be absolute and unconditional, notwithstanding the gross negligence or willful misconduct of any Issuing Bank. (c) The Borrowers' other obligations under this Section 4.06 shall survive the repayment of all amounts owing to the Lenders, the Issuing Banks 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 4.06 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 4.07. CURRENCY EQUIVALENTS. The Dollar Equivalent of any amount denominated in any Alternative Currency shall be determined by the Issuing Bank in accordance with prevailing exchange rates, as set forth in the applicable Issuing Bank Agreement, and notice of such amount shall be provided to the Administrative Agent, in each case on the applicable date. The Dollar Equivalent of the stated amount of each Letter of Credit outstanding made in an Alternative Currency and of the amount of each participation purchased by a Lender under Section 4.04(b) shall be recalculated hereunder on (i) each date that it shall be necessary to determine the unused portion of each Lender's Commitment, or the outstanding amount of any or all Loans, LC Outstandings or any Extension of Credit, or (ii) on any such other date which the Administrative Agent deems such recalculation necessary or advisable or is otherwise directed to make such recalculation by the Required Lenders, but in any event at least monthly. The Administrative Agent agrees to provide notice to the Lenders of the relevant Dollar Equivalent determined pursuant to each such determination and each such recalculation as soon as practicable following such determination or recalculation, as the case may be. SECTION 4.08. JUDGEMENT CURRENCY. If for the purposes of obtaining judgment in any court it is necessary to convert a sum due hereunder or under the Promissory Notes in any currency (the "ORIGINAL CURRENCY") into another currency (the "OTHER CURRENCY") the parties hereto agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the Original Currency with the Other Currency at the Administrative Agent's main office in New York, New York on the Business Day immediately preceding that on which final judgment is given. The obligation of any Borrower in respect of any sum due in the Original Currency from it to any Lender, any Issuing Bank, the Collateral Agent or Administrative Agent hereunder or under any other Loan Document shall, notwithstanding any judgment in any Other Currency, be discharged only to the extent that on the Business Day following receipt by such Lender, Issuing Bank, Collateral Agent or the Administrative Agent (as the case may be) of any sum adjudged to be so due in such Other Currency such Lender, Issuing Bank, Collateral Agent or Administrative Agent (as the case may be) may in accordance with normal banking procedures purchase the Original Currency with such Other Currency; if the amount of the Original Currency so purchased is less than the sum originally due to such Lender, Issuing Bank, Collateral Agent or Administrative Agent (as the case may be) in the Original Currency, the applicable Borrower agrees, as a separate obligation and notwithstanding 34 any such judgment, to indemnify such Lender, Issuing Lender, Collateral Agent or Administrative Agent (as the case may be) against such loss, and if the amount of the Original Currency so purchased exceeds the sum originally due in the Original Currency to any Lender, Issuing Lender, Collateral Agent or Administrative Agent (as the case may be), such Lender, Issuing Lender, Collateral Agent or Administrative Agent (as the case may be) agrees to remit to the applicable Borrower such excess. SECTION 4.09. CASH COLLATERAL AGREEMENT. Each Borrower agrees that the Company will, on behalf of itself and Enterprises, maintain pursuant to the Cash Collateral Agreement a cash collateral account, in the name of the Company but under the sole dominion and control of the Collateral Agent, for the benefit of itself, the Administrative Agent, the LC Issuers and the Lenders. Each Borrower hereby pledges, assigns and grants to the Collateral Agent, for the benefit of itself, the Administrative Agent, the LC Issuers and the Lenders, a security interest in all of such Borrower's right, title and interest in and to all funds which may from time to time be on deposit in such account to secure the prompt and complete payment and performance of all reimbursement obligations of the Borrowers now or hereafter existing with respect to LC Obligations. SECTION 4.10. COURT ORDER. If at any time any Issuing Bank shall have been served with or otherwise subjected to a court order, injunction, or other process or decree issued or granted at the instance of any Borrower restraining or seeking to restrain such Issuing Bank from paying any amount under any Letter of Credit issued by it (other than pursuant to any action or proceeding based on Section 5-109 of the Uniform Commercial Code) and either (i) there has been a drawing under such Letter of Credit which such Issuing Bank would otherwise be obligated to pay or (ii) the stated expiration date or any reduction of the stated amount of such Letter of Credit has occurred but the right of the beneficiary to draw thereunder has been extended in connection with the pendency of the related court action or proceeding, the Borrowers shall provide cash collateral pursuant to the Cash Collateral Agreement in an amount equal to one hundred five percent (105%) of the Dollar Equivalent of the LC Outstandings at such time in respect of such Letter of Credit. ARTICLE V PAYMENTS, COMPUTATIONS AND YIELD PROTECTION SECTION 5.01. 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, except payments to be made directly to any Issuing Bank as expressly provided herein; 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 35 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 Agent's acceptance of a Lender Assignment and recording of the information contained therein in the Register pursuant to Section 11.07, 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, each Lender and each Issuing Bank, if and to the extent payment owed to the Administrative Agent, such Lender or such Issuing Bank, 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, such Lender or such Issuing Bank, 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 36 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 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 5.07, (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 5.02. 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 5.03. 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; 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 any date on which (i) any termination or optional or mandatory reduction of the Commitments shall occur pursuant to Section 2.03(a) or (b), (ii) the Total Outstandings shall exceed the aggregate amount of the Commitments, (iii) the aggregate Dollar Equivalent of all LC Outstandings denominated in euros shall exceed the Euro Sublimit, or (iv) all LC Outstandings denominated in Indian Rupees shall exceed the Indian Rupee Sublimit, the Borrowers shall first, pay or prepay the principal outstanding on the Loans and/or all LC Outstandings that represent amounts that have been drawn under Letters of Credit but have neither been reimbursed by the Borrowers nor converted into ABR Loans, second, if all of the Loans and all of such unreimbursed amounts constituting LC Outstanding shall have been paid in full, provide cash collateral pursuant to the Cash Collateral Agreement, to secure remaining LC Outstandings, and third, cause an amount of Letters of Credit to be cancelled (if necessary after taking into account the payments and provision of cash collateral in the immediately preceding clauses), in each case, in an aggregate amount equal to the excess, as applicable, of (A)(i) the 37 Total Outstandings over (ii) the aggregate amount of the sum of the Commitments (following such termination or reduction, if any) and any cash collateral on deposit in the Cash Collateral Account or (B)(i)(x) the aggregate Dollar Equivalent of all LC Outstandings denominated in euro, over (y) the sum of the Euro Sublimit and, without duplication, such cash collateral or (ii)(x) the aggregate Dollar Equivalent of all LC Outstandings denominated in Indian Rupees, over (y) the sum of the Indian Rupee Sublimit and, without duplication, such cash collateral. Any payments and prepayments required by clause "first" of 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. (c) Any prepayment pursuant to this Section 4.03 shall be accompanied by (i) accrued interest to the date of such prepayment on the principal amount repaid and (ii) in the case of prepayments of Eurodollar Rate Loans, any amount payable to the Lenders pursuant to Section 5.04(b). In the event that the Borrowers request the release of any cash collateral pursuant to the terms of the Cash Collateral Agreement and on the date of such request or at any time prior to the time of such release, there has become, or there becomes, due and payable any prepayment of any Loans under this Agreement, the Borrowers hereby direct the Administrative Agent to apply the proceeds of such release of cash collateral to such prepayment of such Loans and agrees that any such request is a confirmation of such direction. SECTION 5.04. 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 (A) the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Loans, or of participating in the issuance, maintenance or funding of any Letter of Credit, or (B) the cost to any Issuing Bank of issuing or maintaining any Letter of Credit, then the Borrowers shall from time to time, upon demand by such Lender or Issuing Bank, as the case may be (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender or Issuing Bank, as the case may be, additional amounts sufficient to compensate such Lender or Issuing Bank, as the case may be, 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 or such Issuing Bank, as the case may be, 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 2.03, an acceleration of maturity of the Loans pursuant to Section 9.02, 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 38 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 or Issuing Bank 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 or Issuing Bank, whether directly, or indirectly as a result of commitments of any Person controlling such Lender or Issuing Bank (but without duplication), and (ii) the amount of such capital is increased by or based upon (A) the existence of such Lender's or such Issuing Bank's commitment to lend or issue or participate in any Letter of Credit hereunder, (B) the participation in or issuance or maintenance of any Letter of Credit or Loan or (C) other similar such commitments, then, upon demand by such Lender or Issuing Bank, the Borrowers jointly and severally agree immediately to pay to the Administrative Agent for the account of such Lender or Issuing Bank from time to time as specified by such Lender or Issuing Bank additional amounts sufficient to compensate such Lender or Issuing Bank in the light of such circumstances, to the extent that such Lender or Issuing Bank 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 or Issuing Bank, shall be conclusive and binding for all purposes, absent manifest error. (d) Notices. Each Lender and Issuing Bank 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 5.04 promptly after becoming aware of the occurrence thereof. The failure of any Lender or any Issuing Bank to provide such notice or to make demand for payment under said subsection shall not constitute a waiver of such Lender's or such Issuing Bank's (as the case may be) rights hereunder; provided that, notwithstanding any provision to the contrary contained in this Section 5.04, the Borrowers shall not be required to reimburse any Lender or any Issuing Bank for any amounts or costs incurred under subsection (a), (b) or (c) of this Section 5.04 more than 90 days prior to the date that such Lender or such Issuing Bank's (as the case may be) 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 or such Issuing Bank (as the case may be) to such compensation. If any Lender or any Issuing Bank shall subsequently determine that any amount demanded and collected under this Section 5.04 was done so in error, such Lender or such Issuing Bank (as the case may be) will promptly return such amount to the Borrowers. (e) Survival of Obligations. Subject to subsection (d) above, the Borrowers' obligations under this Section 5.04 shall survive the repayment of all other amounts owing to the Lenders, the Agents and the Issuing Banks under the Loan Documents and the termination of the Commitments. If and to the extent that the obligations of the Borrowers under this Section 5.04 39 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 5.05. 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 5.04 or Section 5.06) 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 5.05 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 5.05, on the date of receipt of such excess payment, return such excess payment to the Administrative Agent for distribution in accordance with Section 5.01(a). SECTION 5.06. TAXES. (a) All payments by the Borrowers hereunder and under the other Loan Documents shall be made in accordance with Section 5.01, 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, each Issuing Bank 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, Issuing Bank 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 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, Issuing Bank 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 5.06) such Lender, Issuing Bank 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. 40 (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, Issuing Bank 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 5.06) paid by such Lender, Issuing Bank 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, Issuing Bank or Agent (as the case may be) makes written demand therefor; provided, that such Lender, Issuing Bank or Agent (as the case may be) shall not be entitled to demand payment under this Section 5.06 for an amount if such demand is not made within one year following the date upon which such Lender, Issuing Bank 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 11.02, 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 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 5.07. APPORTIONMENT OF PAYMENTS. 41 (a) Subject to the provisions of Section 2.03, Section 5.03(b) and Section 5.07(b), all payments of principal and interest in respect of outstanding Loans, all payments in respect of unpaid reimbursement obligations under Section 4.04(a), all payments of fees and all other payments in respect of any other Obligations hereunder, shall be allocated among such of the Lenders and the Issuing Banks as are entitled thereto, ratably or otherwise as expressly provided herein. Except as provided in Section 5.07(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 Citibank 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 principal of and interest on all unpaid reimbursement obligations under Section 4.04(a); (iv) fourth, to the Cash Collateral Account, to secure outstanding Letters of Credit to the extent required pursuant to this Agreement; (v) fifth, to pay all other Obligations of any Loan Party under any Loan Document then due and payable, ratably; and (vi) sixth, 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 Loans, unpaid reimbursement obligations under Section 4.04(a) or any other Obligations, 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 Citibank 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; 42 (iii) third, to the ratable payment of any fees, expense reimbursements or indemnities then due to the Lenders and the Issuing Banks 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 pay principal of and interest on all unpaid reimbursement obligations under Section 4.04(a); (vii) seventh, to the Cash Collateral Account to secure LC Obligations in respect of outstanding Letters of Credit, in an amount equal to the Cash Collateral Required Amount; and (viii) eighth, 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 5.07(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 5.08. 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 5.07. 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 5.07. 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 5.07. ARTICLE VI CONDITIONS PRECEDENT SECTION 6.01. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AGREEMENT. The effectiveness of this Agreement is subject to the fulfillment of the following conditions precedent: 43 (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 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) The Cash Collateral Agreement, duly executed by each Borrower. (viii) 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 June 30, 2004; and (B) debt (as such term is construed in accordance with GAAP) of the Loan Parties as of June 30, 2004. (ix) A certificate, executed by a duly authorized officer of the Company, certifying that as of June 30, 2004 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). 44 (x) 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. (xi) 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 7.01 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 11.04(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: 45 (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 7.01(e)(i), (ii), (iii) and (iv) certifying that such financial statements have been prepared in accordance with GAAP and are true and correct as of the date of such certificate; (ii) Copies of the financial statements described in Sections 7.01(e)(i), (ii), (iii) and (iv); and (iii) Copies of the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003. (f) The Administrative Agent shall have received evidence satisfactory to it that on the Closing Date (i) 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 and (ii) that certain Credit Agreement, dated as of May 22, 2003, among the Company, the financial institutions party thereto, Union Bank of California, N.A., as documentation agent, and Bank One, NA, as administrative agent, has been or concurrently with the Closing Date is being terminated and all Liens securing obligations under such agreement have been or concurrently with the Closing Date are being released. SECTION 6.02. CONDITIONS PRECEDENT TO EACH EXTENSION OF CREDIT. The obligation of each Lender or Issuing Bank, as the case may be, to make an Extension of Credit (including the initial Extension of Credit (including the deemed issuance of the Transitional Letters 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 and the Issuing Banks) 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 7.01 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 or Issuing Bank, through the Administrative Agent, may reasonably request as to the legality, validity, binding effect or enforceability of the Loan 46 Documents or the business, assets, property, financial condition, results of operations or prospects of the Company and its Consolidated Subsidiaries. SECTION 6.03. CONDITIONS PRECEDENT TO CERTAIN EXTENSIONS OF CREDIT. The obligation of each Lender or Issuing Bank, as the case may be, to make an Extension of Credit (including the initial Extension of Credit (including the deemed issuance of the Transitional Letters 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, or to make an Extension of Credit of the type described in clause (ii) or (iii) of the definition thereof (except any amendment of a Letter of Credit the sole effects of which are to extend the stated termination date thereof and/or to make nonmaterial modifications thereto), 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 subsections (e)(v) and (f) of Section 7.01 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 or Issuing Bank, through the Administrative Agent, may reasonably request. SECTION 6.04. RELIANCE ON CERTIFICATES. The Lenders, the Issuing Banks 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 VII REPRESENTATIONS AND WARRANTIES SECTION 7.01. 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 47 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 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 (i) where applicable, creates valid and, upon filing of the financing statements delivered on or prior to the Closing Date and described in Section 6.01(c), perfected security interests in the Collateral covered thereby securing the payment of all of the Loans and reimbursement obligations purported to be secured thereby, which security interests shall be first priority perfected security interests, subject to Liens permitted under Section 8.02(a), and (ii) is the legal, valid and binding obligation of each Loan Party thereto 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, 2002 and December 31, 2003, 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, 2003, 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, all in accordance with generally accepted accounting principles consistently applied; (ii) the consolidated balance sheets of Consumers and its consolidated Subsidiaries as at December 31, 2002 and December 31, 2003, 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 48 Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003, 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, all in accordance with generally accepted accounting principles consistently applied; (iii) the consolidated balance sheets of the Company and its Consolidated Subsidiaries as at March 31, 2004 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 such date, 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 the Company and its Consolidated Subsidiaries as at such date and the results of the Company and its Consolidated Subsidiaries for such period, all in accordance with generally accepted accounting principles consistently applied; (iv) the consolidated balance sheets of Consumers and its Consolidated Subsidiaries as at March 31, 2004 and the related consolidated statements of income, retained earnings and cash flows of Consumers and its Consolidated Subsidiaries for the fiscal quarter ending on such date, 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 such date and the results of Consumers and its Consolidated Subsidiaries for such period, all in accordance with generally accepted accounting principles consistently applied; (v) since December 31, 2003, except as disclosed in the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003 and the Company's Quarterly Report on Form 10-Q for the quarter ending March 31, 2004 and Reports on Form 8-K filed with the Securities and Exchange Commission since December 31, 2003 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, 2003 and the Company's Quarterly Report on Form 10-Q for the quarter ending March 31, 2004 and Reports on Form 8-K filed with the Securities and Exchange Commission since December 31, 2003 but prior to the Closing Date, (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. 49 (g) Insurance. All insurance required by Section 8.01(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, 2003, 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 2004-2008 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 50 and after the Closing Date is true and correct in all material respects as at the dates and for the periods indicated therein. (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 or any drawing under any Letter of Credit 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 Loan or any drawing under any Letter 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, the Issuing Banks or the Lenders in regard to the occurrence of any Material Adverse Change. (s) Solvency. After giving effect to the Loans to be made or Letters of Credit to be issued on the Closing Date or such other date as Loans or Extensions of Credit requested hereunder are made, and the disbursement of the proceeds of such Loans or Extensions of Credit 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 June 30, 2004 (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). (u) OFAC. None of the Borrowers or any Subsidiary or Affiliate of the Borrowers is named on the United States Department of the Treasury's Specially Designated Nationals or Blocked Persons list available through http://www.treas.gov/offices/eotffc/ofac/ sdn/t11sdn.pdf. (v) or as otherwise published from time to time 51 ARTICLE VIII COVENANTS OF THE BORROWERS SECTION 8.01. AFFIRMATIVE COVENANTS. So long as any Loan or any other amount payable hereunder or under any Promissory Note shall remain unpaid, any Letter of Credit shall remain outstanding or any Lender shall have any Commitment: (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 8.02, 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 Issuing Banks, 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 or Issuing Bank shall, unless occurring at a time when a Default or Event of 52 Default shall be continuing, be at such Lender's or Issuing Bank's, as applicable, expense; all other such inspections and visitations shall be at such Borrower's expense. (f) Keeping of Books. 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. (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, to (ii) Consolidated EBITDA for the immediately preceding four-fiscal-quarter period ending on such day, of not more than 7.00 to 1.00, commencing with the Measurement Quarter ending June 30, 2004. (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 facility dated December 8, 2003, (3) all interest or dividends paid on Hybrid Preferred Securities and (4) interest expense payable by the Company in respect of any Debt owing to any Subsidiary thereof) 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 June 30, 2004; 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 53 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 any Lender or any Issuing Bank 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) CMS ERM), 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 Letters. The Borrowers shall comply with all of their respective obligations under the Fee Letters. (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 8.02(a). SECTION 8.02. NEGATIVE COVENANTS. So long as any Loan or any other amount payable hereunder or under any Promissory Note shall remain unpaid, any Letter of Credit shall remain outstanding 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 54 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: (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 CMS ERM 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 CMS ERM's energy trading operations in an aggregate amount not to exceed $40,000,000, (D) Support Obligations of any Borrower or any Loan Party, (E) obligations of Enterprises or CMS ERM 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 CMS ERM shall not exceed $400,000,000 at any one time outstanding, and (F) obligations of (x) the Company in respect of interest rate swap agreements and (y) any Loan Party in respect of foreign exchange swap agreements, provided that the aggregate amount of cash pledges or deposits securing such obligations under this clause (F) shall not exceed $50,000,000 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 8.02(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 55 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; (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 CMS ERM 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 CMS ERM in favor of Bank of America, N.A. (or any of its affiliates) to secure the reimbursement obligations of Enterprises, CMS Generation and CMS ERM 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 CMS ERM's energy trading obligations in an aggregate amount not to exceed $40,000,000; 56 (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; and (xvi) subordinated Liens on the capital stock of Enterprises and/or Consumers securing Debt incurred by the Company in an aggregate amount not to exceed $200,000,000; provided, that (i) such Liens are subordinated in priority to the Liens securing the Obligations, (ii) the holders of such Debt shall have no rights to direct or otherwise control at any time any disposition of Collateral or any proceeds thereof so long as any Obligations shall remain outstanding (all of which rights shall be waived to the fullest extent permitted by applicable law) pursuant to an intercreditor agreement on terms reasonably acceptable to the Administrative Agent and (iii) such Debt has terms and conditions (including maturity, amortization, interest rates, premiums, fees, covenants, subordination, events of default and remedies) that are reasonably acceptable to the Administrative Agent. (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 8.02(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 8.02(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 June 30, 2004 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 57 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 or CMS Capital, L.L.C. (or any successor by merger to CMS Capital, L.L.C.), (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 or other capital expenditures) 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 8.02(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 pursuant to clause (vii) above) in an aggregate principal amount not to exceed $30,000,000; 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; and (x) reimbursement obligations of Enterprises, CMS Generation or CMS ERM 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 CMS ERM's energy trading operations in an aggregate amount not to exceed $40,000,000. (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 58 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 8.02(b)(vi), (vi) investments constituting non-cash consideration received in connection with the sale of any asset not otherwise prohibited under this Agreement, (vii) additional loans, advances, purchases, contributions and other investments in an amount not to exceed $340,000,000 in the aggregate at any time, (viii) intercompany loans and advances by the Company to Consumers in an aggregate principal amount not to exceed $250,000,000 at any time, and (ix) investments by the Company in the capital stock of Consumers; provided, however, that investments described in clause (iv) above (solely with respect to investments made in any Subsidiary that is not a Loan Party) 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. (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)); (ii) payments made by such Borrower or any other Loan Party pursuant to the Tax Sharing Agreement; and (iii) any cash dividend or cash distribution on common stock of the Company made after January 1, 2005; provided, that the amount of any cash dividend or cash distribution made pursuant to the preceding clause (iii) shall not exceed, in the aggregate with each other such cash dividend and cash distribution made during the previous twelve-month period, (x) if after giving effect to such cash dividend or cash distribution the Company shall have Liquidity equal to or greater than $150,000,000, an amount equal to $75,000,000, (y) if 59 after giving effect to such cash dividend or cash distribution the Company shall have Liquidity equal to or greater than $100,000,000 and less than $150,000,000, an amount equal to $50,000,000 and (z) otherwise, zero. (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 good faith on an arm's-length basis with a non-Affiliate; provided that any transaction permitted under Sections 8.02(b), 8.02(e) or 8.02(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. 60 (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 CMS ERM) 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 CMS ERM) 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 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 8.02(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 8.02(o); (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; and (G) 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 61 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 8.02(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. (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 8.02(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 (other than any undrawn Letters of Credit) shall be outstanding hereunder and the Company shall have Unrestricted Cash in excess of $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 62 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 8.02(c)) in the aggregate in excess of $775,000,000 at any time. SECTION 8.03. REPORTING OBLIGATIONS. So long as any Loan or any other amount payable hereunder or under any Promissory Note shall remain unpaid, any Letter of Credit shall remain outstanding 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: (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 June 30, 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 June 30, 2004 and thereafter, the computations used by the Company in determining compliance with the covenants contained in Sections 8.01(i) and 8.01(j) and the ratio set forth in Section 9.01(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 the Company stating that no Default or Event of 63 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, 2004, 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 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 8.01(i) and 8.01(j) and the ratio set forth in Section 9.01(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 the Company 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 the first three fiscal quarters of each fiscal year of Enterprises, commencing with the fiscal quarter ending on June 30, 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, 2004, 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; 64 (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; (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 7.01(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; and 65 (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 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. ARTICLE IX DEFAULTS SECTION 9.01. 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 9.02: (a) The Borrowers shall fail to pay (i) any principal of any Loan when due, (ii) any reimbursement obligation under Section 4.04(a) within one Business Day after such amount shall have become due or (iii) any interest, fees or other Obligations (other than any principal of any Loan or any reimbursement obligation under Section 4.04(a)) 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 8.01(c), (h), (i), (j), (l) or (n) or in Section 8.02 (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 20 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 66 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 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 VI, 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 67 (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 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 9.02. 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 (other than Loans under Section 4.04) and of any Issuing Bank to issue Letters of Credit 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, (iii) make demand on the Borrowers to pay, and the Borrowers will be obligated to, upon such demand without any further notice or act, pay to the Administrative Agent the Cash Collateral Required Amount, which funds shall be deposited to the Cash Collateral Account as security for the LC Outstandings and (iv) 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 and of any Issuing Bank to issue Letters of Credit shall automatically be terminated, (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, and (C) the Administrative Agent shall make demand on the Borrowers to pay, and the Borrowers shall be obligated to, upon such demand without any further notice or act, pay to the Administrative Agent the Cash Collateral Required Amount, which funds shall be deposited to the Cash Collateral Account as security for the LC Outstandings. Notwithstanding anything to the contrary contained herein, no notice given or declaration made by the Administrative Agent pursuant to this Section 9.02 shall affect (i) the obligation of any Issuing Bank to make any payment under any Letter of Credit issued by such Issuing Bank in accordance with the terms of such Letter of Credit or (ii) the participatory interest of each Lender in each such payment. If at 68 any time while any Event of Default is continuing, the Administrative Agent determines that the Cash Collateral Required Amount is greater than zero, the Administrative Agent may make demand on the Borrowers to pay, and the Borrowers will be obligated to, upon such demand without any further notice or act, pay to the Administrative Agent the Cash Collateral Required Amount, which funds shall be deposited to the Cash Collateral Account as security for the LC Outstandings. ARTICLE X THE AGENTS SECTION 10.01. AUTHORIZATION AND ACTION. (a) Each of the Lenders and each of the Issuing Banks 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 or Issuing Bank serving as an Agent hereunder shall have the same rights and powers in its capacity as a Lender or an Issuing Bank as any other Lender or Issuing Bank, as applicable, and may exercise the same as though it were not an Agent, and such Lender or Issuing Bank, as applicable, 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 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 11.01), 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 11.01 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 69 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 VI 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 10.01 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, the Issuing Banks 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 the Lenders and the Issuing Banks, 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 11.04 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 70 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 11.05) 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 9.02. (h) Each Lender acknowledges and agrees that neither such Lender, nor any of its Affiliates, participants or assignees, may rely on the Administrative Agent to carry out such Lender's, Affiliate's, participant's or assignee's customer identification program, or other obligations required or imposed under or pursuant to the USA Patriot Act or the regulations thereunder, including the regulations contained in 31 C.F.R. 103.121 (as hereafter amended or replaced, the "CIP Regulations "), or any other applicable laws, rules, regulations or orders of any governmental authority, including any programs involving any of the following items relating to or in connection with any of the Borrowers, their Subsidiaries, their Affiliates or their agents, the Loan Documents or the transactions hereunder or contemplated hereby: (a) any identity verification procedures, (b) any recordkeeping, (c) comparisons with government lists, (d) customer notices or (e) other procedures required under the CIP Regulations or such other laws, rules, regulations or orders. (i) Within 10 days after the Closing Date and at such other times as are required under the USA Patriot Act, each Lender and each of its assignees and participants that are not incorporated under the laws of the United States of America or a state thereof (and is not excepted from the certification requirement contained in Section 313 of the USA Patriot Act and the applicable regulations because it is both (a) an affiliate of a depository institution or foreign bank that maintains a physical presence in the United States or foreign country, and (b) subject to supervision by a banking authority regulating such affiliated depository institution or foreign bank) shall deliver to the Administrative Agent the certification, or, if applicable, recertification, certifying that such Lender is not a "shell" and certifying to other matters as required by Section 313 of the USA Patriot Act and the applicable regulations. SECTION 10.02. 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 71 Agents and the Arrangers are entitled to reimbursement for such expenses pursuant to Section 11.04 but are not reimbursed for such expenses by the Borrowers. SECTION 10.03. CONCERNING THE COLLATERAL AND THE LOAN DOCUMENTS. (a) Each Lender and Issuing Bank authorizes and directs the Collateral Agent to enter into the Loan Documents relating to the Collateral for the benefit of the Lenders and the Issuing Banks. Each Lender and Issuing Bank agrees that any action taken by any Agent or the Required Lenders (or, where required by the express 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 and the Issuing Banks. 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 and the Issuing Banks 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 and the Issuing Banks 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, the Lenders and the Issuing Banks to act as collateral sub-agent for the Collateral Agent, the Lenders and the Issuing Banks 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 Agent, such Lender or such Issuing Bank, including, without limitation, deposit accounts maintained with, and cash held by, such Agent, such Lender or such Issuing Bank; (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, the Lenders or the Issuing Banks with respect to the Collateral under the Loan Documents relating thereto, applicable law or otherwise. (b) The Administrative Agent, each Lender and each Issuing Bank 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 and the Issuing Banks: (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; 72 (iv) against any part of the "Collateral" (as defined in the Cash Collateral Agreement) to the extent required pursuant to the Cash Collateral Agreement; and/or (v) 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, each Lender and each Issuing Bank 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 10.03(b) promptly upon the effectiveness of any such release. SECTION 10.04. 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 XI MISCELLANEOUS SECTION 11.01. 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 VI, (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 73 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 11.01, (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 10.03(b)), (viii) extend the Commitment Termination Date or the Maturity Date, (ix) amend, waive or modify any provision of Section 5.01(g), 5.05 or 5.07 that provides for or ensures ratable distributions to the Lenders or (x) amend, waive or modify any provision of Section 4.02 that requires each Letter of Credit to have a stated expiry date no later than five (5) Business Days (or, in the case of any commercial Letter of Credit, thirty (30) Business Days) prior to the Commitment Termination Date; 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; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by each Issuing Bank in addition to the Lenders required above to take such action, affect the rights or duties of any Issuing Bank under this Agreement or any other Loan Document. Any request from the Borrowers for any amendment, waiver or consent under this Section 11.01 shall be addressed to the Administrative Agent. SECTION 11.02. NOTICES, ETC. Subject to Section 11.14, 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 the signature page hereto with respect to such Bank; (iii) if to any Issuing Bank, at its address specified in the Issuing Bank Agreement to which it is a party; (iv) 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; (v) 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; (vi) 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 11.02 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 11.02, except that notices and communications to any Agent pursuant to Article II, III, or X shall not be effective until received by such Agent. SECTION 11.03. NO WAIVER OF REMEDIES. No failure on the part of any Borrower, any Lender, any Issuing Bank 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 74 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 11.04. 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 9.02 or an Event of Default specified in Section 9.01(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 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 Issuing Bank, 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. The Borrower shall pay any civil penalty or fine assessed by the Office of Foreign Assets Control against any Indemnified Person and all reasonable costs and expenses (including reasonable fees and expenses of counsel to such Indemnified Persons) incurred in connection with defense thereof, as a result of acts or omissions of the Borrowers contrary to the representation made in Section 7.01(u). 75 (c) The Borrowers' other obligations under this Section 11.04 shall survive the repayment of all amounts owing to the Lenders, the Issuing Banks 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 11.04 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 11.05. RIGHT OF SET-OF. (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 9.02 to authorize the Administrative Agent to declare the principal amount outstanding hereunder to be due and payable pursuant to the provisions of Section 9.02, each Lender and Issuing Bank 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 or such Issuing Bank, as applicable, 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 or the Issuing Bank Agreement to which such Issuing Bank is a party, as the case may be, irrespective of whether or not such Lender or such Issuing Bank, as applicable, shall have made any demand under this Agreement or such Promissory Notes or such Issuing Bank Agreement, as the case may be, and although such obligations may be unmatured. Each Lender and Issuing Bank agrees to notify promptly the applicable Borrower after any such set-off and application made by such Lender or Issuing Bank, as the case may be, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender and Issuing Bank under this Section 11.05 are in addition to other rights and remedies (including other rights of set-off) which such Lender and Issuing Bank 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 11.06. 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 8.02(h), neither Borrower shall have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. 76 SECTION 11.07. 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 11.01 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 11.05 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 11.05 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of set-off provided in Section 11.05, 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 11.05 as if each Participant were a Lender. The Borrowers further agree that each Participant shall be entitled to the benefits of Sections 5.04 and 5.06 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 11.07(c); provided that (i) a Participant shall not be entitled to receive any greater payment under Section 5.04 or 5.06 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 5.06 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 and each Issuing Bank (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 77 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 11.07 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 11.07 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. (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 5.06 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 5.06. 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 78 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 11.07(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; 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 11.02 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, the Issuing Banks 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, any Issuing Bank or any Lender at any reasonable time and from time to time upon reasonable prior notice. SECTION 11.08. 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, the Issuing Banks 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 79 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, prospective Participants in or assignees of the Recipient's position herein or direct or indirect counterparties (or their advisors) to any swap, securitization or derivative transaction relating to the Obligations, but the Recipient's ability to so exchange Confidential Information shall be conditioned upon any such Person entering into an agreement as to confidentiality similar to this Section 11.08. 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 11.07) (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. SECTION 11.09. Waiver of Jury Trial. THE BORROWERS, THE AGENTS, THE ISSUING BANKS 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 11.10. 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, THE ISSUING BANKS 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 80 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, THE ISSUING BANKS 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, ANY ISSUING BANK OR ANY LENDER. EACH BORROWER AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS IN ANY PROCEEDING BROUGHT BY ANY AGENT, ANY ISSUING BANK 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, ANY ISSUING BANK OR ANY LENDER. EACH BORROWER WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH ANY AGENT, ANY ISSUING BANK OR ANY LENDER MAY COMMENCE A PROCEEDING DESCRIBED IN THIS SECTION. SECTION 11.11. 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 none of the Agents, the Lenders or the Issuing Banks 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, the Lenders and the Issuing Banks, on the one hand, and such Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. SECTION 11.12. 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 11.13. 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, the Lenders and the Issuing Banks and shall survive the making by the Lenders and the Issuing Banks 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, any Letter of Credit remains outstanding or any Commitment of any Lender has not been terminated. SECTION 11.14. PLATFORM. 81 (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, each Issuing Bank and the Borrowers further agree that the Administrative Agent may make the Communications available to the Lenders and the Issuing Banks 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 or any Issuing Bank (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 the signature pages hereto, or as specified in the Lender Assignment pursuant to which it became 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 11.14 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 and Issuing Bank (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 constitute effective delivery of such Communications to such Lender or such Issuing Bank, as applicable, for purposes of this Agreement. Each Lender and Issuing Bank (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 or such Issuing Bank, as applicable, 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 11.14 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 82 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 11.14 shall terminate on the date that neither CUSA nor any of the Citigroup Parties is the Administrative Agent under this Agreement. SECTION 11.15. USA PATRIOT ACT. Each Lender hereby notifies the Borrowers that pursuant to requirements of the USA Patriot Act, it is required to obtain, verify and record information that identifies the Loan Parties, which information includes the name and address of each Loan Party and other information that will allow such Lender to identify such Loan Party in accordance with the USA Patriot Act. ARTICLE XII CO-BORROWER PROVISIONS SECTION 12.01. 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, the Issuing Banks and the Lenders shall be entitled to rely, and shall be fully 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, the Issuing Banks 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. 83 SECTION 12.02. 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, the Issuing Banks 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 12.03. 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, any Issuing Bank 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 9.01(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, any Issuing Bank 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 12.04. 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 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 84 (and the joint and several liability of each Borrower under Section 12.01) 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, any Issuing Bank or any Lender to secure payment of all or any part of the Obligations. (b) The Agents, the Issuing Banks 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 12.05. 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 XII (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 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 12.05 is intended only to define the relative rights of the Borrowers, and nothing set forth in this Section 12.05 is intended to or shall impair the 85 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 12.06. 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, any Issuing Bank or any Lender may now have or may hereafter have against the other Borrower. The provisions of this Article XII 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, any Issuing Bank or any Lender upon the insolvency, bankruptcy or reorganization of either Borrower or otherwise, all as though such payment had not been made. SECTION 12.07. 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, the Issuing Banks 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, no Letters of Credit remain outstanding 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 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 86 the Administrative Agent for application to the Obligations, due or to become due, until such Obligations shall have been paid in full in cash and no Letters of Credit remain outstanding. Each Borrower irrevocably authorizes and empowers the Administrative Agent, each of the Issuing Banks 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, such Issuing Bank's or such Lender's own name or in the name of such Borrower or otherwise, as the Administrative Agent, any Issuing Bank 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 8.02(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, the termination or cancellation of each Letter of Credit and the termination of the Commitments, such Borrower shall receive and hold the same in trust, as trustee, for the benefit of the Agents, the Issuing Banks 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, the Issuing Banks 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, the Issuing Banks or the Lenders, the Agents, the Issuing Banks 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, no Letters of Credit remain outstanding 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 XIII NO NOVATION; REFERENCES TO THIS AGREEMENT IN LOAN DOCUMENTS SECTION 13.01. NO NOVATION. It is the express intent of the parties hereto that this Agreement (i) shall re-evidence, in part, the Borrowers' indebtedness under the Existing Credit Agreement, (ii) is entered into in substitution for, and not in payment of, the obligations of the Borrowers under the Existing Credit Agreement, and (iii) is in no way intended to constitute a novation of any of the Borrowers' indebtedness which was evidenced by the Existing Credit Agreement or any of the other Loan Documents. SECTION 13.02. 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 Agreement," "thereunder," "thereof," "therein" or words of like import referring thereto) shall mean and be a reference to this Agreement. 87 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 Fifth Amended and Restated Credit Agreement CITICORP USA, INC., as Collateral Agent and as Administrative Agent By: /s/ Dale R. Goncher ------------------------------------ Name: Dale R. Goncher Title: Director CITIBANK, N.A., as a Lender By: /s/ Dale R. Goncher ------------------------------------ Name: Dale R. Goncher Title: Director Address: 388 Greenwich St. New York, NY 10013 Attn: Nicholas McKee Telephone: (212) 816-8592 Fax: (212) 816-8098 Signature Page to Fifth Amended and Restated Credit Agreement WACHOVIA BANK, NATIONAL ASSOCIATION, as Syndication Agent and a Lender By: /s/ Mark D. Weir ------------------------------------ Name: Mark D. Weir Title: Director Address: 301 S. College Street Charlotte, NC 28288-0608 Attn: Mark D. Weir Telephone: (704) 383-6610 Fax: (704) 383-6647 Signature Page to Fifth Amended and Restated Credit Agreement BANK ONE, NA, as a Documentation Agent and a Lender By: /s/ Jane Bek Keil ------------------------------------ Name: Jane Bek Keil Title: Director Address: JPMorgan Chase Bank 270 Park Avenue / 4 New York, NY 10017 Attn: Thomas L. Casey Telephone: (212) 270-5305 Fax: (212) 270-3089 Signature Page to Fifth Amended and Restated Credit Agreement BARCLAYS BANK PLC, as a Documentation Agent and a Lender By: /s/ Sydney G. Dennis ------------------------------------ Name: Sydney G. Dennis Title: Director Address: 200 Park Avenue New York, New York 10166 Attn: Sydney G. Dennis Telephone: (212) 412-2470 Fax: (212) 412-2441 Signature Page to Fifth Amended and Restated Credit Agreement UNION BANK OF CALIFORNIA, N.A., as a Documentation Agent and a Lender By: /s/ Robert J. Olson ------------------------------------ Name: Robert J. Olson Title: Senior Vice President Address: 445 S. Figueroa St., 15th Floor Los Angeles, CA 90071 Attn: Robert J. Olson Telephone: (213) 236-7407 Fax: (213) 236-4096 Signature Page to Fifth Amended and Restated Credit Agreement BNP PARIBAS, as a Lender By: /s/ Francis J. DeLaney ------------------------------------ Name: FRANCIS J. DeLANEY Title: Managing Director By: /s/ Timothy F. Vincent ------------------------------------ Name: TIMOTHY F. VINCENT Title: Director Address: 787 Seventh Avenue (31st Floor) New York, New York 10019 Attn: Mark Renaud Telephone: (212) 841-2807 Fax: (212) 841-2052 Signature Page to Fifth Amended and Restated Credit Agreement DEUTSCHE BANK TRUST COMPANY AMERICAS, as a Lender By: /s/ Marcus M. Tarkington ------------------------------------ Name: Marcus M. Tarkington Title: Director Deutsche Bank Address: 60 Wall Street NYC 60-4301 New York, NY 10005 Attn: Marcus Tarkington Telephone: 212 250-6153 Fax: 212 797-5694 Signature Page to Fifth Amended and Restated Credit Agreement MERRILL LYNCH BANK USA, as a Lender By: /s/ Louis Alder ------------------------------------ Name: Louis Alder Title: Director Address: 15 West South Temple, Ste 300 Salt Lake City, UT 84101 Attn: Frank Stepan Telephone: (801) 526-8316 Fax: (801) 531-7470 Signature Page to Fifth Amended and Restated Credit Agreement FOOTHILL INCOME TRUST II, L.P., as a Lender BY FIT II GP, LLC, Its General Partner By: /s/ Jeff Nikora ------------------------------------ Name: Jeff Nikora Title: Managing Member Address: 2450 Colorado Ave. #3000 West Santa Monica, CA 90404 Attn: Dennis Ascher / Elizabeth Eipe Telephone: (310) 453-7377 / (310) 453-7387 Fax: (310) 453-7470 / (310) 453-7472 Signature Page to Fifth Amended and Restated Credit Agreement KEYBANK NATIONAL ASSOCIATION, as a Lender By: /s/ Sherrie I. Manson ------------------------------------ Name: Sherrie I. Manson Title: Vice President Address: 127 Public Square Mailcode: OH-01-27-0623 Cleveland, Ohio 44114 Attn: Sherrie I. Manson Telephone: (216) 689-3443 Fax: (216) 689-4981 Signature Page to Fifth Amended and Restated Credit Agreement COMERICA BANK, as a Lender By: /s/ Blake W. Arnett ------------------------------------ Name: Blake W. Arnett Title: Account Officer Address: 500 Woodward, Mail Code 3268 Detroit, MI 48224 Attn: Blake W. Arnett Telephone: (313) 222-7802 Fax: (313) 222-9514 Signature Page to Fifth Amended and Restated Credit Agreement COMMITMENT SCHEDULE
LENDER Commitment - ------ ------------ CITIBANK, N.A. $ 33,500,000 WACHOVIA BANK, NATIONAL ASSOCIATION $ 33,500,000 BANK ONE, NA $ 33,500,000 BARCLAYS BANK PLC $ 33,500,000 UNION BANK OF CALIFORNIA, N.A. $ 33,500,000 BNP PARIBAS $ 28,000,000 DEUTSCHE BANK TRUST COMPANY AMERICAS $ 28,000,000 MERRILL LYNCH BANK USA $ 24,000,000 FOOTHILL INCOME TRUST II, L.P. $ 20,000,000 KEYBANK NATIONAL ASSOCIATION $ 20,000,000 COMERICA BANK $ 12,500,000 ------------ Total Commitments: $300,000,000 ============
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 Energy Resource Management 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%)
ATTACHMENT A REAFFIRMATION Each of the undersigned hereby acknowledges receipt of a copy of the foregoing Fifth Amended and Restated Credit Agreement dated as of August __, 2004 by and among CMS ENERGY CORPORATION (the "COMPANY") and CMS ENTERPRISES COMPANY ("ENTERPRISES"), the financial institutions from time to time party thereto (the "LENDERS"), and CITICORP USA, INC., as administrative agent (in such capacity, the "ADMINISTRATIVE AGENT") for the Lenders and as collateral agent (in such capacity, the "Collateral Agent") for the Lenders (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. As used herein, (i) "ENTERPRISES PLEDGE SUPPLEMENT" means the Pledge Supplement to the Pledge Agreement (as defined below), dated as of November 1, 2002, made by Enterprises, a Michigan corporation, in favor of the Collateral Agent (as defined therein); (ii) "CMSGTC PLEDGE SUPPLEMENT" means the Pledge Supplement to the Pledge Agreement (as defined below), dated as of November 1, 2002, made by CMS Gas Transmission Company, a Michigan corporation ("CMSGTC"), in favor of the Collateral Agent (as defined therein); (iii) "CMSGC PLEDGE SUPPLEMENT" means the Pledge Supplement to the Pledge Agreement (as defined below), dated as of November 1, 2002, made by CMS Generation Co., a Michigan corporation ("CMSGC"), in favor of the Collateral Agent (as defined therein); (iv) "CMSIV PLEDGE SUPPLEMENT" means the Pledge Supplement to the Pledge Agreement (as defined below), dated as of December 8, 2003, made by CMS International Ventures, L.L.C., a Michigan limited liability company ("CMSIV"), in favor of the Collateral Agent (as defined therein) and (v) "CMSEG PLEDGE SUPPLEMENT" means the Pledge Supplement to the Pledge Agreement (as defined below), dated as of December 8, 2003, made by CMS Electric & Gas, L.L.C. ("CMSEG"), a Michigan limited liability company, in favor of the Collateral Agent (as defined therein). Without in any way establishing a course of dealing by any Agent or any Lender, the Company: (a) reaffirms the grant of a security interest pursuant to that certain Third Amended and Restated Pledge and Security Agreement, dated as of December 8, 2003, made by the Company in favor of the Collateral Agent (as defined therein) on behalf of and for the ratable benefit of the Lenders (the "SECURITY AGREEMENT") and (b) hereby grants a security interest to the Collateral Agent, in all of the Company's right, title and interest, whether now owned or hereinafter acquired, in the Collateral (as defined in the Security Agreement) to secure the Secured Obligations (as defined in the Security Agreement). Attachment A 1 Without in any way establishing a course of dealing by any Agent or any Lender, each of Enterprises and the other entities that are signatories hereto (other than the Company): (a) reaffirms the grant of a security interest pursuant to that certain Pledge and Security Agreement, dated as of July 12, 2002, made by Enterprises and each other Grantor (as defined therein) in favor of the Collateral Agent (as defined therein) on behalf of and for the ratable benefit of the Lenders (the "PLEDGE AGREEMENT"); (b) hereby grants a security interest to the Collateral Agent, in all of such Grantor's right, title and interest, whether no owner or hereinafter acquired, in the Collateral (as defined in the Pledge Agreement) to secure the Obligations (as defined in the Pledge Agreement); (c) in the case of Enterprises, hereby grants a security interest to the Collateral Agent, in all of its right, title and interest, whether no owner or hereinafter acquired, in the collateral described on Schedule I to the Enterprises Pledge Supplement; (d) in the case of CMSGTC, hereby grants a security interest to the Collateral Agent, in all of its right, title and interest, whether no owner or hereinafter acquired, in the collateral described on Schedule I to the CMSGTC Pledge Supplement; (e) in the case of CMSGC, hereby grants a security interest to the Collateral Agent, in all of its right, title and interest, whether no owner or hereinafter acquired, in the collateral described on Schedule I to the CMSGC Pledge Supplement; (f) in the case of CMSIV, hereby grants a security interest to the Collateral Agent, in all of its right, title and interest, whether no owner or hereinafter acquired, in the collateral described on Schedule I to the CMSIV Pledge Supplement; (g) in the case of CMSEG, hereby grants a security interest to the Collateral Agent, in all of its right, title and interest, whether no owner or hereinafter acquired, in the collateral described on Schedule I to the CMSEG Pledge Supplement; (h) in the case of each Guarantor, reaffirms its unconditional guaranty of the Obligations pursuant to the Guaranty and (i) 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 Security Agreement, the Pledge Agreement and the Guaranty shall be a reference to the Credit Agreement as the same may from time to time hereafter be amended, modified or restated. Attachment A 2 THIS REAFFIRMATION 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 LAWS PRINCIPLES). Dated as of August ___ 2004 CMS ENTERPRISES COMPANY CMS ENERGY CORPORATION By: By: ---------------------------------- ----------------------------------- Name: Name: Title: Title: CMS GAS TRANSMISSION CMS ELECTRIC & GAS, L.L.C. COMPANY (formerly known as CMS Electric and Gas Company) By: ---------------------------------- By: Name: ----------------------------------- Title: Name: Title: CMS GENERATION CO. CMS CAPITAL, L.L.C. By: By: ---------------------------------- ----------------------------------- Name: Name: Title: Title: CMS ENERGY RESOURCE CMS INTERNATIOANL VENTURES, MANAGEMENT COMPANY L.L.C. By: By: ---------------------------------- ----------------------------------- Name: Name: Title: Title: Attachment A 3 CMS GENERATION MICHIGAN DEARBORN INDUSTRIAL ENERGY, POWER L.L.C. L.L.C. By: By: ---------------------------------- ----------------------------------- Name: Name: Title: Title: DEARBORN INDUSTRIAL GENERATION, L.L.C. By: By: ---------------------------------- ----------------------------------- Name: Name: Title: Title: Attachment A 4 AGREED AND ACKNOWLEDGED as of the date first written above. CITICORP USA, INC., as Collateral Agent By: ---------------------------------- Its: Attachment A 5 EX-4.(K) 7 k91832exv4wxky.txt REAFFIRMATION OF GRANT OF A SECURITY INTEREST Exhibit 4(k) EXECUTION COPY REAFFIRMATION Each of the undersigned hereby acknowledges receipt of a copy of the foregoing Fifth Amended and Restated Credit Agreement dated as of August 3, 2004 by and among CMS ENERGY CORPORATION (the "COMPANY") and CMS ENTERPRISES COMPANY ("ENTERPRISES"), the financial institutions from time to time party thereto (the "LENDERS"), and CITICORP USA, INC., as administrative agent (in such capacity, the "ADMINISTRATIVE AGENT") for the Lenders and as collateral agent (in such capacity, the "Collateral Agent") for the Lenders (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. As used herein, (i) "ENTERPRISES PLEDGE SUPPLEMENT" means the Pledge Supplement to the Pledge Agreement (as defined below), dated as of November 1, 2002, made by Enterprises, a Michigan corporation, in favor of the Collateral Agent (as defined therein); (ii) "CMSGTC PLEDGE SUPPLEMENT" means the Pledge Supplement to the Pledge Agreement (as defined below), dated as of November 1, 2002, made by CMS Gas Transmission Company, a Michigan corporation ("CMSGTC"), in favor of the Collateral Agent (as defined therein); (iii) "CMSGC PLEDGE SUPPLEMENT" means the Pledge Supplement to the Pledge Agreement (as defined below), dated as of November 1, 2002, made by CMS Generation Co., a Michigan corporation ("CMSGC"), in favor of the Collateral Agent (as defined therein); (iv) "CMSIV PLEDGE SUPPLEMENT" means the Pledge Supplement to the Pledge Agreement (as defined below), dated as of December 8, 2003, made by CMS International Ventures, L.L.C., a Michigan limited liability company ("CMSIV"), in favor of the Collateral Agent (as defined therein) and (v) "CMSEG PLEDGE SUPPLEMENT" means the Pledge Supplement to the Pledge Agreement (as defined below), dated as of December 8, 2003, made by CMS Electric & Gas, L.L.C. ("CMSEG"), a Michigan limited liability company, in favor of the Collateral Agent (as defined therein). Without in any way establishing a course of dealing by any Agent or any Lender, the Company: (a) reaffirms the grant of a security interest pursuant to that certain Third Amended and Restated Pledge and Security Agreement, dated as of December 8, 2003, made by the Company in favor of the Collateral Agent (as defined therein) on behalf of and for the ratable benefit of the Lenders (the "SECURITY AGREEMENT") and (b) hereby grants a security interest to the Collateral Agent, in all of the Company's right, title and interest, whether now owned or hereinafter acquired, in the Collateral (as defined in the Security Agreement) to secure the Secured Obligations (as defined in the Security Agreement). Without in any way establishing a course of dealing by any Agent or any Lender, each of Enterprises and the other entities that are signatories hereto (other than the Company): (a) reaffirms the grant of a security interest pursuant to that certain Pledge and Security Agreement, dated as of July 12, 2002, made by Enterprises and each other Grantor (as defined therein) in favor of the Collateral Agent (as defined therein) on behalf of and for the ratable benefit of the Lenders (the "PLEDGE AGREEMENT"); (b) hereby grants a security interest to the Collateral Agent, in all of such Grantor's right, title and interest, whether no owner or hereinafter acquired, in the Collateral (as defined in the Pledge Agreement) to secure the Obligations (as defined in the Pledge Agreement); (c) in the case of Enterprises, hereby grants a security interest to the Collateral Agent, in all of its right, title and interest, whether no owner or hereinafter acquired, in the collateral described on Schedule I to the Enterprises Pledge Supplement; (d) in the case of CMSGTC, hereby grants a security interest to the Collateral Agent, in all of its right, title and interest, whether no owner or hereinafter acquired, in the collateral described on Schedule I to the CMSGTC Pledge Supplement; (e) in the case of CMSGC, hereby grants a security interest to the Collateral Agent, in all of its right, title and interest, whether no owner or hereinafter acquired, in the collateral described on Schedule I to the CMSGC Pledge Supplement; (f) in the case of CMSIV, hereby grants a security interest to the Collateral Agent, in all of its right, title and interest, whether no owner or hereinafter acquired, in the collateral described on Schedule I to the CMSIV Pledge Supplement; (g) in the case of CMSEG, hereby grants a security interest to the Collateral Agent, in all of its right, title and interest, whether no owner or hereinafter acquired, in the collateral described on Schedule I to the CMSEG Pledge Supplement; (h) in the case of each Guarantor, reaffirms its unconditional guaranty of the Obligations pursuant to the Guaranty and (i) 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 Security Agreement, the Pledge Agreement and the Guaranty shall be a reference to the Credit Agreement as the same may from time to time hereafter be amended, modified or restated. 2 IN WITNESS WHEREOF, the parties hereto have caused this Reaffirmation to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. CMS ENERGY CORPORATION By: /s/ Laura L. Mountcastle ----------------------------------- Its: Authorized Representative CMS ENTERPRISES COMPANY CMS GENERATION CO. By: /s/ Laura L. Mountcastle By: /s/ Laura L. Mountcastle ----------------------------------- ---------------------------------- Its: Authorized Representative Its: Authorized Representative CMS GAS TRANSMISSION COMPANY CMS CAPITAL, L.L.C. By: /s/ Laura L. Mountcastle By: /s/ Laura L. Mountcastle ----------------------------------- ---------------------------------- Its: Authorized Representative Its: Authorized Representative CMS ELECTRIC & GAS, L.L.C. CMS INTERNATIONAL (formerly known as CMS Electric and VENTURES, L.L.C. Gas Company) By: /s/ Laura L. Mountcastle By: /s/ Laura L. Mountcastle ----------------------------------- ---------------------------------- Its: Authorized Representative Its: Authorized Representative CMS ENERGY RESOURCE DEARBORN INDUSTRIAL MANAGEMENT COMPANY GENERATION, L.L.C. By: /s/ Laura L. Mountcastle By: /s/ Laura L. Mountcastle ----------------------------------- ---------------------------------- Its: Authorized Representative Its: Authorized Representative CMS GENERATION MICHIGAN DEARBORN INDUSTRIAL POWER L.L.C. ENERGY, L.L.C. By: /s/ Laura L. Mountcastle By: /s/ Laura L. Mountcastle ----------------------------------- ---------------------------------- Its: Authorized Representative Its: Authorized Representative [SIGNATURE PAGE 1 OF 2 TO REAFFIRMATION] AGREED AND ACKNOWLEDGED as of the date first written above. CITICORP USA, INC., as Collateral Agent By: /s/ Dale R. Goncher ----------------------------------- Its: [SIGNATURE PAGE 2 OF 2 TO REAFFIRMATION] EX-4.(L) 8 k91832exv4wxly.txt ADMINISTRATIVE AGENT AND CASH COLLATERAL AGREEMENT Exhibit 4(l) EXECUTION COPY CASH COLLATERAL AGREEMENT THIS CASH COLLATERAL AGREEMENT, dated as of August 3, 2004 (this "AGREEMENT"), made by CMS ENERGY CORPORATION, a Michigan corporation (the "PLEDGOR"), to CITICORP USA, INC. ("CUSA"), as administrative agent (in such capacity, the "ADMINISTRATIVE AGENT") for the lenders (the "LENDERS") parties to the Credit Agreement (as hereinafter defined) and as collateral agent (in such capacity, the "COLLATERAL AGENT") for the Lenders. PRELIMINARY STATEMENTS (1) The Administrative Agent, the Collateral Agent and the Lenders have entered into that certain Fifth Amended and Restated Credit Agreement, dated as of August 3, 2004 (said Agreement, as it may hereafter be amended or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined), with the Pledgor and CMS Enterprises Company, a Michigan corporation ("ENTERPRISES" and, collectively with the Pledgor, the "BORROWERS"). (2) Pursuant to Section 5.03(b) of the Credit Agreement, any prepayments by the Borrowers required by such subsection are to be applied, first, to outstanding ABR Loans, second, to outstanding Eurodollar Rate Loans, and, third, as cash collateral, pursuant to this Agreement, to secure LC Outstandings. (3) The cash collateral referenced in preliminary statement (2), above, shall be deposited by the Administrative Agent in a special non-interest-bearing cash collateral account (the "ACCOUNT") with the Collateral Agent at its office at 388 Greenwich Street, New York, New York 10013, Account No. 30579578 (or at such other office of the Collateral Agent as the Collateral Agent may, from time to time, notify the Pledgor and the Administrative Agent), in the name of the Pledgor but under the sole control and dominion of the Collateral Agent and subject to the terms of this Agreement and the Credit Agreement. NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor hereby agrees with the Collateral Agent and the Administrative Agent, for their benefit and the ratable benefit of the Lenders and the LC Issuer, as follows: SECTION 1. PLEDGE AND ASSIGNMENT. The Pledgor hereby pledges and assigns to the Collateral Agent, for its benefit and the ratable benefit of the Administrative Agent, the Lenders and the LC Issuer, and grants to the Collateral Agent, for its benefit and the ratable benefit of the Administrative Agent, the Lenders and the LC Issuer, a security interest in, the following collateral (collectively, the "COLLATERAL"): (i) the Account, all funds held therein and all certificates and instruments, if any, from time to time representing or evidencing the Account; 1 (ii) all Investments (as hereinafter defined) from time to time, and all certificates and instruments, if any, from time to time representing or evidencing the Investments; (iii) all notes, certificates of deposit, deposit accounts, checks and other instruments from time to time hereafter delivered to or otherwise possessed by the Collateral Agent for or on behalf of the Pledgor in substitution for or in addition to any or all of the then existing Collateral; (iv) all interest, dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the then existing Collateral; and (v) all proceeds of any and all of the foregoing Collateral. SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures the payment of all reimbursement obligations of the Borrowers now or hereafter existing with respect to LC Outstandings and all obligations of the Pledgor now or hereafter existing under this Agreement (all such obligations of the Borrowers being the "SECURED OBLIGATIONS"). Without limiting the generality of the foregoing, this Agreement secures the payment of all amounts which constitute part of the Secured Obligations and which remain outstanding after the Commitment Termination Date or otherwise would be owed by the Borrowers to the Administrative Agent, the Collateral Agent or the Lenders under the Credit Agreement and the Promissory Notes (if any) but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving any Borrower. SECTION 3. DELIVERY OF COLLATERAL. All certificates or instruments, if any, representing or evidencing the Collateral shall be delivered to and held by or on behalf of the Collateral Agent pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Collateral Agent. The Collateral Agent shall have the right, at any time upon the occurrence and during the continuance of an Event of Default, in its discretion and without notice to the Pledgor, to transfer to or to register in the name of the Collateral Agent or any of its nominees any or all of the Collateral. In addition, the Collateral Agent shall have the right at any time to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations. SECTION 4. MAINTAINING THE ACCOUNT. So long as any LC Obligation shall remain unpaid, any Letter of Credit shall remain outstanding or any Lender shall have any Commitment: (a) The Pledgor will maintain the Account with the Collateral Agent. (b) It shall be a term and condition of the Account, notwithstanding any term or condition to the contrary in any other agreement relating to the Account and except as otherwise provided by the provisions of Sections 6, 13 and 17, that no amount (including interest on the Account, if any) shall be paid or released to or for the account of, or 2 withdrawn by or for the account of, the Pledgor or any other Person (other than the Administrative Agent or the Collateral Agent) from the Account. The Account shall be subject to such applicable laws, and such applicable regulations of the Board of Governors of the Federal Reserve System and of any other appropriate banking or governmental authority, as may now or hereafter be in effect. SECTION 5. INVESTING OF AMOUNTS IN THE ACCOUNT. If requested by the Pledgor, the Collateral Agent will, subject to the provisions of Section 6 and Section 13, from time to time (a) invest amounts on deposit in the Account in such Permitted Investments as the Pledgor may select and the Administrative Agent may approve and (b) invest interest paid on the Permitted Investments referred to in clause (a) above, and reinvest other proceeds of any such Permitted Investments which may mature or be sold, in each case in such Permitted Investments as the Pledgor may select and the Administrative Agent may approve (the Permitted Investments referred to in clauses (a) and (b) above, being collectively "INVESTMENTS"). Interest and proceeds that are not invested or reinvested in Investments as provided above shall be deposited and held in the Account. SECTION 6. RELEASE OF AMOUNTS. So long as no Event of Default or Default shall have occurred and be continuing, the Collateral Agent will pay and release to the Pledgor or at its order, upon the request of the Pledgor, (a) amounts of credit balance of the Account and of principal of any other Collateral when matured or sold to the extent that (i) the sum of the credit balance of the Account plus the aggregate outstanding principal amount of all other Collateral exceeds (ii) the aggregate Dollar Equivalent of the LC Outstandings in respect of all Letters of Credit and all other amounts owing by the Pledgor hereunder, (b) all amounts in the Account if (i) the aggregate of all of the Commitments shall exceed the Total Outstandings, (ii) the aggregate Dollar Equivalent of the LC Outstandings in respect of all Letters of Credit denominated in euro and all other amounts owing by the Pledgor hereunder are less than $40,000,000 and (iii) the aggregate Dollar Equivalent of the LC Outstandings in respect of all Letters of Credit denominated in Indian Rupees and all other amounts owing by the Pledgor hereunder are less than $3,000,000 and (c) all interest and earnings on the Investments deposited and held in the Account. SECTION 7. REPRESENTATIONS AND WARRANTIES. The Pledgor represents and warrants as follows: (a) The Pledgor is the legal and beneficial owner of the Collateral free and clear of any lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement. (b) The pledge and assignment of the Collateral pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, securing the payment of the Secured Obligations. (c) No consent of any other Person and no authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body is required (i) for the pledge and assignment by the Pledgor of the Collateral pursuant to 3 this Agreement or for the execution, delivery or performance of this Agreement by the Pledgor, (ii) for the perfection or maintenance of the security interest created hereby (including the first priority nature of such security interest) or (iii) for the exercise by the Collateral Agent of its rights and remedies hereunder. (d) There are no conditions precedent to the effectiveness of this Agreement that have not been satisfied or waived. (e) The Pledgor has, independently and without reliance upon the Administrative Agent, the Collateral Agent or any 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. SECTION 8. FURTHER ASSURANCES. The Pledgor agrees that at any time and from time to time, at the expense of the Pledgor, the Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. SECTION 9. TRANSFERS AND OTHER LIENS. The Pledgor agrees that it will not (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Collateral, or (ii) create or permit to exist any lien, security interest, option or other charge or encumbrance upon or with respect to any of the Collateral, except for the security interest under this Agreement. SECTION 10. COLLATERAL AGENT APPOINTED ATTORNEY-IN -FACT. The Pledgor hereby appoints the Collateral Agent the Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time upon the occurrence and during the continuance of an Event of Default or Default or otherwise to the extent that the Collateral Agent shall reasonably deem any action to be necessary in order to maintain its security interest in the Collateral, in the Collateral Agent's discretion, to take any action and to execute any instrument which the Collateral Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, indorse and collect all instruments made payable to the Pledgor representing any interest payment, dividend or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. SECTION 11. COLLATERAL AGENT MAY PERFORM. If the Pledgor fails to perform any agreement contained herein, the Collateral Agent may itself perform, or cause performance of, such agreement, and the expenses of the Collateral Agent incurred in connection therewith shall be payable by the Pledgor under Section 14. SECTION 12. THE COLLATERAL AGENT'S DUTIES. The powers conferred on the Collateral Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Collateral Agent 4 shall have no duty as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Administrative Agent, the Collateral Agent or any Lender has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any parties or any other rights pertaining to any Collateral. The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which the Collateral Agent accords its own property. SECTION 13. REMEDIES UPON DEFAULT. If any Event of Default shall have occurred and be continuing: (a) The Collateral Agent may, and shall at the direction of the Administrative Agent, without notice to the Pledgor except as required by law and at any time or from time to time, charge, set-off and otherwise apply all or any part of the Account against the Secured Obligations or any part thereof. (b) The Collateral Agent may also exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of New York at that time (the "CODE") (whether or not the Code applies to the affected Collateral), and may also, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Collateral Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Collateral Agent may deem commercially reasonable. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Collateral Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (c) Any cash held by the Collateral Agent as Collateral and all cash proceeds received by the Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Administrative Agent, be held by the Collateral Agent as collateral for, and/or then or at any time thereafter be applied (after payment of any amounts payable to the Collateral Agent pursuant to Section 14) in whole or in part by the Administrative Agent for its benefit and the ratable benefit of the Collateral Agent, the Lenders and the LC Issuer against, all or any part of the Secured Obligations in such order as the Administrative Agent shall elect. Any surplus of such cash or cash proceeds held by the Collateral Agent and remaining after payment in full of all the Secured Obligations shall be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive such surplus. 5 SECTION 14. EXPENSES. The Pledgor will upon demand pay to the Collateral Agent and the Administrative Agent the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Collateral Agent or the Administrative Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Administrative Agent, the Collateral Agent or the Lenders hereunder or (iv) the failure by the Pledgor to perform or observe any of the provisions hereof. SECTION 15. AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement, and no consent to any departure by the Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by the Administrative Agent and the Collateral Agent and, in the case of any amendment hereof, the Pledgor, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 16. ADDRESSES FOR NOTICES. All notices and other communications provided for hereunder shall be made and delivered in accordance with Section 11.02 of the Credit Agreement. SECTION 17. CONTINUING SECURITY INTEREST; ASSIGNMENTS UNDER CREDIT AGREEMENT. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until the later of (x) the payment in full of the Secured Obligations and the expiration or termination of each Letter of Credit and (y) the expiration or termination of the Commitments under the Credit Agreement, (ii) be binding upon the Pledgor, its successors and assigns, and (iii) inure to the benefit of, and be enforceable by, the Administrative Agent, the Collateral Agent, the Lenders, the LC Issuer and their respective successors, transferees and assigns. 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 Notes 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 Article X (concerning the Agents) and Section 11.07 of the Credit Agreement. Upon the later to occur of (x) the payment in full of the Secured Obligations and the expiration or termination of each Letter of Credit and (y) the expiration or termination of the Commitments under the Credit Agreement, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Pledgor. Upon any such termination, the Collateral Agent will, at the Pledgor's expense, return to the Pledgor such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof and execute and deliver to the Pledgor such documents as the Pledgor shall reasonably request to evidence such termination. SECTION 18. GOVERNING LAW; TERMS. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A 6 JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms defined in Article 9 of the Code are used herein as therein defined. [Remainder of page intentionally left blank.] 7 IN WITNESS WHEREOF, the Pledgor has caused this Agreement to be duly executed and delivered by its officer 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 ACCEPTED AND AGREED: CITICORP USA, INC., as Administrative Agent and as Collateral Agent By: /s/ Dale R. Goncher --------------------------------- Name: Dale R. Goncher Title: Director Signature Page to Cash Collateral Agreement EX-10.(F) 9 k91832exv10wxfy.txt ANNUAL OFFICER INCENTIVE COMPENSATION PLAN EXHIBIT 10(f) ANNUAL OFFICER INCENTIVE COMPENSATION PLAN FOR CMS ENERGY CORPORATION AND ITS SUBSIDIARIES Effective January 1, 2004 Approved by Committee on February 27, 2004 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 initial effective date of the Plan is January 1, 2004. The Plan as described herein, is amended and restated effective January 1, 2004. 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 2004 shall be added to Base Salary being paid in cash for the 2004 and 2004 Performance Years. 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. (i) "Company" means CMS Energy Corporation. 2 (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) "Disability" means that a participant has terminated employment with the Company or a Subsidiary and is entitled to disability payments under the Pension Plan. (l) "Earnings Per Share" (EPS) means the amount of ongoing net income per outstanding CMS Energy Share. (m) "GCR Recovery" means actual/forecast incremental GCR recovery during January and February 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, 2004 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 (salary grade E-3 and above) 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. (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 3 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. (e) Only Committee members who are Outside Directors shall participate in the Committee actions with respect to Code Section 162(m) Employees 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 75% is achieved. Each Component as well as 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 2004 is set forth below. (a) EPS COMPONENT. EPS performance shall constitute 40% of the composite Plan Performance Factor. The 100% EPS goal for the 2004 performance year is $.85 per share, and the EPS component shall increase or decrease by 25% for each $.05 per share change in performance. (Mathematical extrapolation shall be used for actual results not shown in the table.) There will be no payout under the plan unless at least $.80 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 2004 performance year is $ (100) million, and the CFCF component shall increase or decrease by 25% for each $50 million change in performance. (Mathematical extrapolation shall be used for actual results not shown in the table.) 4 COMPOSITE PERFORMANCE FACTORS FOR 2004 PERFORMANCE YEAR
CFCF COMPONENT (MILLIONS) $ (150) $ (100) $ (50) $ 0 $50 $100 ------------------------ ------- ------- ------ ----- ------ ------ EPS COMPONENT ------------------------ ------- ------- ------ ----- ------ ------ $ .80 75% 90% 105% 120% 135% 150% $ .85 85% 100% 115% 130% 145% 160% $ .90 95% 110% 125% 140% 155% 170% $ .95 105% 120% 135% 150% 165% 180% $1.00 115% 130% 145% 160% 175% 190% $1.05 125% 140% 155% 170% 185% 200%
Notes: Mathematical extrapolation 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 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 65% President & COO/Vice Chairman E-8 60% Executive Vice President E-7 55% President, Subsidiary - Sr. VP E-6 50% Senior Vice President E-5 45% Vice President E-4 40% Vice President E-3 35%
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 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, and provided further that the Annual Award for a particular Performance Year has not been deferred voluntarily pursuant to Section 4.2. 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 5 obligation of the company on whose payroll the Officer is enrolled at the time the Committee makes the Annual Award. . 4.2 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 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 U.S. 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. 4.3 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, 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 6 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 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. 7 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. 8 EX-10.(W) 10 k91832exv10wxwy.txt ANNUAL MANAGEMENT INCENTIVE COMPENSATION PLAN FOR CMS ENERGY EXHIBIT 10(W) ANNUAL MANAGEMENT INCENTIVE COMPENSATION PLAN FOR CMS ENERGY CORPORATION AND ITS SUBSIDIARIES Effective January 1, 2004 Approved by Committee on February 27, 2004 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 initial effective date of the Plan is January 1, 2004. The Plan as described herein, is amended and restated effective January 1, 2004. 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) "Disability" means that a participant has terminated employment with the Company or a Subsidiary and is entitled to disability payments under the Pension Plan. (h) "Earnings Per Share" (EPS) means the amount of ongoing net income per outstanding CMS Energy Share. (i) "GCR Recovery" means actual/forecast incremental GCR recovery during January and February calculated as actual/forecast GCR cycle billed sales times above budget GCR factor. (j) "Leave of Absence" for purposes of this MIC Plan means a leave of absence that has been approved by the Plan Administrator. 2 (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, 2004 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. 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 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 75% is achieved. Each Component as well as 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 2004 is set forth below. (a) EPS COMPONENT. EPS performance shall constitute 40% of the composite Plan Performance Factor. The 100% EPS goal for the 2004 performance year is $.85 per share, and the EPS component shall increase or decrease by 25% for each $.05 per share change in performance. (Mathematical extrapolation shall be used for actual results not shown in the table.) There will be no payout under the plan unless at least $.80 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 2004 performance year is $ (100) million, and the CFCF component shall increase or decrease by 25% for each $50 million change in performance. (Mathematical extrapolation shall be used for actual results not shown in the table.) COMPOSITE PERFORMANCE FACTORS FOR 2004 PERFORMANCE YEAR
CFCF COMPONENT (MILLIONS) $(150) $(100) $(50) $ 0 $50 $100 ---------- ------ ------ ------ ----- ----- ------ EPS COMPONENT ---------- ------ ------ ------ ----- ----- ------ $ .80 75% 90% 105% 120% 135% 150% $ .85 85% 100% 115% 130% 145% 160% $ .90 95% 110% 125% 140% 155% 170% $ .95 105% 120% 135% 150% 165% 180% $1.00 115% 130% 145% 160% 175% 190% $1.05 125% 140% 155% 170% 185% 200%
Notes: Mathematical extrapolation 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 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.
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 31st 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 election 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 5 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 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. 6 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 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.(X) 11 k91832exv10wxxy.txt ANNUAL EMPLOYEE INCENTIVE COMPENSATION PLAN FOR CMS ENERGY CORP. EXHIBIT 10(X) ANNUAL EMPLOYEE INCENTIVE COMPENSATION PLAN FOR CMS ENERGY CORPORATION AND ITS SUBSIDIARIES Effective January 1, 2004 Approved by Committee on February 27, 2004 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 initial effective date of the Plan is January 1, 2004. The Plan as described herein, is amended and restated effective January 1, 2004. 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) "Disability" means that a participant has terminated employment with the Company or a Subsidiary and is entitled to disability payments under the Pension Plan. (h) "Earnings Per Share" (EPS) means the amount of ongoing net income per outstanding CMS Energy Share. (i) "EIC Plan" means the Annual Employee Incentive Compensation Plan for CMS Energy Corporation and Its Subsidiaries, as effective January 1, 2004 and any amendments thereto. 2 (j) "Employee" means a regular fulltime or part time 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, calculated as actual/forecast GCR cycle billed sales times above budget GCR factor. (l) "Leave of Absence" for purposes of this EIC Plan means a leave of absence that has been approved by the Company or a Subsidiary. (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 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. (r) "Subsidiary" means any direct or indirect subsidiary of the Company. 1.4 ELIGIBILITY. Regular non-union U.S. employees who do not participate in a broad based incentive plan contingent upon objectives and performance unique to the employees' subsidiary, affiliate, site and/or business unit, 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 31st of the Performance Year, will approve performance goals for the Performance Year. (c) The Committee, no later than March 31st 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 3 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. 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 75% is achieved. Each Component as well as 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 2004 is set forth below. (a) EPS COMPONENT. EPS performance shall constitute 40% of the composite Plan Performance Factor. The 100% EPS goal for the 2004 performance year is $.85 per share, and the EPS component shall increase or decrease by 25% for each $.05 per share change in performance. (Mathematical extrapolation shall be used for actual results not shown in the table.) There will be no payout under the plan unless at least $.80 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 2004 performance year is $(100) million, and the CFCF component shall increase or decrease by 25% for each $50 million change in performance. (Mathematical extrapolation shall be used for actual results not shown in the table.) COMPOSITE PERFORMANCE FACTORS FOR 2004 PERFORMANCE YEAR
CFCF COMPONENT (MILLIONS) $(150) $(100) $(50) $ 0 $50 $100 ---------- ------ ------ ------ ----- ----- ------ EPS COMPONENT ---------- ------ ------ ------ ----- ----- ------ $ .80 75% 90% 105% 120% 135% 150% $ .85 85% 100% 115% 130% 145% 160% $ .90 95% 110% 125% 140% 155% 170% $ .95 105% 120% 135% 150% 165% 180% $1.00 115% 130% 145% 160% 175% 190% $1.05 125% 140% 155% 170% 185% 200%
Notes: Mathematical extrapolation 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 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.
YEAR FULLTIME PART TIME END STANDARD STANDARD SALARY AWARD AWARD POSITION GRADE AMOUNT AMOUNT -------- ----- -------- ---------- Sr. Consultants & Equivalent 8-10/C $1,000 $ 500 Consultants & Equivalent 5-7/B $ 750 $ 375 Advisors & Equivalent 1-4/A $ 625 $312.50 All Non-exempt Employees various $ 500 $ 250
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 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. 5.2 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) 12 k91832exv12wxay.txt STATEMENT REGARDING COMPUTATION OF CMS ENERGY RATIO OF EARNINGS 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 - ------------------------------------ 2004 2003 2002 2001 2000 ----- ---- ----- ----- ----- (b) (c) (d) (e) Earnings as defined (a) Pretax income from continuing operations $ 137 $ 16 $(433) $(428) $ (1) Exclude equity basis subsidiaries (88) (41) (39) 68 (171) Fixed charges as defined, adjusted to exclude capitalized interest of $(25), $9, $16, $35 and $48 million for the years ended December 31, 2004, 2003, 2002, 2001, and 2000, respectively (f) 649 605 518 577 561 ----- ---- ----- ----- ----- Earnings as defined $ 698 $580 $ 46 $ 217 $ 389 ===== ==== ===== ===== ===== Fixed charges as defined (a) Interest on long-term debt $ 560 $531 $ 404 $ 420 $ 420 Estimated interest portion of lease rental 4 7 10 11 11 Other interest charges 49 61 34 83 34 Preferred securities dividends and distributions 11 15 86 98 144 ----- ---- ----- ----- ----- Fixed charges as defined $ 624 $614 $ 534 $ 612 $ 609 ===== ==== ===== ===== ===== Ratio of earnings to fixed charges and preferred securities dividends and distributions 1.12 -- -- -- -- ===== ==== ===== ===== =====
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 $34 million. Earnings as defined include $95 million of asset impairment charges. (c) For the year ended December 31, 2002, fixed charges exceeded earnings by $488 million. Earnings as defined include $602 million of asset impairments charges. (d) For the year ended December 31, 2001, fixed charges exceeded earnings by $395 million. Earnings as defined include $323 million of asset impairments charges. (e) For the year ended December 31, 2000, fixed charges exceeded earnings by $220 million. Earnings as defined include a $329 million pretax impairment loss on the Loy Yang investment. (f) Fixed charges, adjusted as defined, excludes $25 million of previously capitalized interest that was expensed in the year ended December 31, 2004. Capitalized interest includes a $30.8 million reversal of previously recorded AFUDC/IDC on capital expenditures covered by Public Act 141. EX-12.(B) 13 k91832exv12wxby.txt STATEMENT REGARDING COMPUTATION OF CONSUMER'S RATIO OF EARNINGS Exhibit 12(b) CONSUMERS ENERGY COMPANY Ratio of Earnings to Combined Fixed Charges and Preferred Dividends (Millions of Dollars)
Years Ended December 31 2004 2003 2002 2001 2000 ----- ----- ----- ----- ----- Earnings as defined (a) Pretax income from continuing operations $ 439 $ 333 $ 543 $ 296 $ 421 Exclude equity basis subsidiaries (c) (1) (42) (53) (38) (57) Include equity basis dividends received (c) - 45 15 8 10 Fixed charges as defined, adjusted to exclude capitalized interest of $(25), $9, $12, $6 and $2 for years ended December 31, 2004, 2003, 2002, 2001, and 2000, respectively. (d) 373 255 225 241 231 ----- ----- ----- ----- ----- Earnings as defined $ 811 $ 591 $ 730 $ 507 $ 605 ===== ===== ===== ===== ===== Fixed charges as defined(a) Interest on long-term debt(b) $ 328 $ 241 $ 153 $ 151 $ 141 Estimated interest portion of lease rental 4 7 10 11 11 Other interest charges 13 13 27 41 44 Preferred securities dividends and distributions(b) 3 3 47 44 37 ----- ----- ----- ----- ----- Fixed charges as defined $ 348 $ 264 $ 237 $ 247 $ 233 ===== ===== ===== ===== ===== Ratio of earnings to fixed charges and preferred securities dividends and distributions 2.33 2.24 3.08 2.05 2.60 ====== ===== ===== ===== =====
NOTES: (a) Earnings and fixed charges as defined in instructions for Item 503 of Regulation S-K. (b) 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. (c) In 2004, we consolidated the MCV Partnership and the FMLP in accordance with Revised FASB Interpretation No. 46. (d) Fixed charges, adjusted as defined, excludes $25 million of previously capitalized interest that was expensed for the year ended December 31, 2004. Capitalized interest includes a $30.8 million reversal of previously recorded AFUDC/IDC on capital expenditures covered by Public Act 141. EX-18 14 k91832exv18.txt LETTER FROM ERNST & YOUNG LLP TO THE AUDIT COMMITTEE EXHIBIT 18 February 18, 2005 Audit Committee of the Board of Directors CMS Energy Corporation and Consumers Energy Company Dear Sirs: Note 7 to the consolidated financial statements of CMS Energy Corporation (CMS Energy) and Note 5 to the consolidated financial statements of Consumers Energy Company (a wholly-owned subsidiary of CMS Energy) (Consumers) included in CMS Energy's and Consumer's annual reports on Form 10-K for the year ended December 31, 2004 describes a change in the measurement date for its pension and other postretirement plans from December 31 to November 30. Management believes that the newly adopted accounting principle is preferable in the circumstances for various business reasons. In accordance with Management's request, we have reviewed and discussed with officials of CMS Energy and Consumers the circumstances and business judgment and planning upon which the decision to make this change in the method of accounting was based. With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, based on our review and discussion and with reliance on management's business judgment, we concur that the newly adopted method of accounting is preferable in your circumstances. Very truly yours, /s/ ERNST & YOUNG LLP EX-23.(A) 15 k91832exv23wxay.txt CONSENT OF ERNST & YOUNG LLP FOR CMS ENERGY Exhibit (23)(a) Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the following Registration Statements and in the related Prospectuses: (1) Registration Statements (Form S-3 No. 333-51932, No. 333-52560, No. 333-27849, No. 333-37241, No. 333-74958, No. 333-45556, No. 333-119255, No. 333-119256) of CMS Energy Corporation; (2) Registration Statement (Form S-4 No. 33-60007) of CMS Energy Corporation; (3) Registration Statements (Form S-8 No. 333-32229 and No. 333-58686) pertaining to the CMS Energy Corporation Performance Incentive Stock Plan and Executive Stock Option Plan, respectively, and (4) Registration Statement (Form S-8 No. 333-76347) pertaining to the Employee Savings and Incentive Plan of Consumers Energy Company; of our reports dated March 7, 2005, with respect to the consolidated financial statements and schedule of CMS Energy Corporation, CMS Energy Corporation management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of CMS Energy Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2004. /s/ Ernst & Young LLP Detroit, Michigan March 7, 2005 EX-23.(B) 16 k91832exv23wxby.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP FOR CMS ENERGY Exhibit (23)(b) CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos. 333-32229, 333-58686 and 333-76347), S-3 (Nos. 333-51932, 333-52560, 333-27849, 333-37241, 333-74958, 333-45556, 333-119255 and 333-119256) and S-4 (No. 33-60007) of CMS Energy Corporation of our report dated February 25, 2005 relating to the financial statements, management's assessment over financial reporting and the effectiveness of internal control over financial reporting of Midland Cogeneration Venture L.P. which appears in the CMS Energy Corporation Form 10-K for the year ended December 31, 2004. /s/ PricewaterhouseCoopers LLP Detroit, Michigan March 7, 2005 EX-23.(C) 17 k91832exv23wxcy.txt CONSENT OF ERNST & YOUNG LLP FOR CMS ENERGY: 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, 333-119256, 333-119255) and S-4 (No. 33-60007, 333-113556) of CMS Energy Corporation of our report dated February 11, 2005 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, 2004. /s/ Price Waterhouse Casablanca, Morocco March 9, 2005 EX-23.(D) 18 k91832exv23wxdy.txt CONSENT OF ERNST & YOUNG LLP FOR CONSUMERS Exhibit (23)(d) Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the following Registration Statements and in the related Prospectuses: (1) Registration Statement (Form S-3 No. 333-120611) of Consumers Energy Company; (2) Registration Statement (Form S-4 No. 333-122429) of Consumers Energy Company, and (3) Registration Statement (Form S-8 No. 333-76347) pertaining to Employee Savings and Incentive Plan of Consumers Energy Company; of our reports dated March 7, 2005, with respect to the consolidated financial statements and schedule of Consumers Energy Company, Consumers Energy Company management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Consumers Energy Company, included in this Annual Report (Form 10-K) for the year ended December 31, 2004. /s/ Ernst & Young LLP Detroit, Michigan March 7, 2005 EX-23.(E) 19 k91832exv23wxey.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP FOR CONSUMERS Exhibit (23)(e) CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 333-76347), S-3 (No. 333-120611) and S-4 (No. 333-122429) of Consumers Energy Company of our report dated February 25, 2005 relating to the financial statements, management's assessment over financial reporting and the effectiveness of internal control over financial reporting of Midland Cogeneration Venture L.P. which appears in the Consumers Energy Company Form 10-K for the year ended December 31, 2004. /s/ PricewaterhouseCoopers LLP Detroit, Michigan March 7, 2005 EX-24.(A) 20 k91832exv24wxay.txt POWER OF ATTORNEY FOR CMS ENERGY EXHIBIT 24(a) January 27, 2005 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, 2004 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/ K. Whipple /s/ W. U. Parfet - ------------------------------- ------------------------------ Kenneth Whipple William U. Parfet /s/ Merribel S. Ayres /s/ Percy A. Pierre - ------------------------------- ------------------------------ Merribel S. Ayres Percy A. Pierre /s/ Earl D. Holton /s/ S. Kinnie Smith Jr. - ------------------------------- ------------------------------ Earl D. Holton S. Kinnie Smith, Jr. /s/ D. W. Joos /s/ Kenneth L. Way - ------------------------------- ------------------------------ David W. Joos Kenneth L. Way /s/ M. T. Monahan /s/ John B. Yasinsky - ------------------------------- ------------------------------ Michael T. Monahan John B. Yasinsky /s/ Joseph F. Paquette, Jr. - ------------------------------- Joseph F. Paquette, Jr. EX-24.(B) 21 k91832exv24wxby.txt POWER OF ATTORNEY FOR CONSUMERS EXHIBIT 24(b) January 27, 2005 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, 2004 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/ K. Whipple /s/ W. U. Parfet - ------------------------------- ------------------------------ Kenneth Whipple William U. Parfet /s/ Merribel S. Ayres /s/ Percy A. Pierre - ------------------------------- ------------------------------ Merribel S. Ayres Percy A. Pierre /s/ Earl D. Holton /s/ S. Kinnie Smith Jr. - ------------------------------- ------------------------------ Earl D. Holton S. Kinnie Smith, Jr. /s/ D. W. Joos /s/ Kenneth L. Way - ------------------------------- ------------------------------ David W. Joos Kenneth L. Way /s/ M. T. Monahan /s/ John B. Yasinsky - ------------------------------- ------------------------------ Michael T. Monahan John B. Yasinsky /s/ Joseph F. Paquette, Jr. - ------------------------------- Joseph F. Paquette, Jr. EX-31.(A) 22 k91832exv31wxay.txt CMS ENERGY'S CERTIFICATION OF CEO PURSUANT TO SECTION 302 Exhibit 31(a) CERTIFICATION OF DAVID W. JOOS I, David W. Joos, 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 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)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 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 10, 2005 By: /s/ David W. Joos -------------------------------- David W. Joos President and Chief Executive Officer EX-31.(B) 23 k91832exv31wxby.txt CMS ENERGY'S CERTIFICATION OF CFO PURSUANT 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 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)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 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 10, 2005 By /s/ Thomas J. Webb --------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer EX-31.(C) 24 k91832exv31wxcy.txt CONSUMERS' CERTIFICATION OF CEO PURSUANT TO SECTION 302 Exhibit 31(c) CERTIFICATION OF DAVID W. JOOS I, David W. Joos, 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 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)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 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 10, 2005 By: /s/ David W. Joos -------------------------------- David W. Joos Chief Executive Officer EX-31.(D) 25 k91832exv31wxdy.txt CONSUMERS' CERTIFICATION OF CFO PURSUANT 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 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)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 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 10, 2005 By /s/ Thomas J. Webb --------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer EX-32.(A) 26 k91832exv32wxay.txt CMS ENERGY'S CERTIFICATIONS PURSUANT TO SECTION 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, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), David W. Joos, as President 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/ David W. Joos - ------------------------------ Name: David W. Joos Title: President and Chief Executive Officer Date: March 10, 2005 /s/ Thomas J. Webb - ------------------------------ Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer Date: March 10, 2005 EX-32.(B) 27 k91832exv32wxby.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, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), David W. Joos, as 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/ David W. Joos - ------------------------------- Name: David W. Joos Title: Chief Executive Officer Date: March 10, 2005 /s/ Thomas J. Webb - ------------------------------- Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer Date: March 10, 2005 EX-99.(A) 28 k91832exv99wxay.htm FINANCIAL STATEMENTS FOR MIDLAND COGENERATION VENTURE 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

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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.

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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

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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

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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

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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.

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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

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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,

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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.

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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.

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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) 29 k91832exv99wxby.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, 2004, 2003 and 2002 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, 2004, 2003, and 2002............... 2 Statement of Income For years ending December 31, 2004, 2003, and 2002.... 3 Statement of Stockholders' Equity For years ending December 31, 2004, 2003, and 2002.... 4 Statement of Cash Flows For years ending December 31, 2004, 2003, and 2002.... 5 Notes to US GAAP Financial Statements........................... 6-26
JORF LASFAR ENERGY COMPANY BALANCE SHEET
Note December 31, 2004 December 31, 2003 December 31, 2002 ---- ----------------- ----------------- ----------------- (000) U.S. Dollars (000) U.S. Dollars (000) U.S. Dollars ASSETS Current Assets Cash................................................ 3.1 69,800 65,611 46,683 Inventories......................................... 2.c & 4 59,318 38,548 40,615 Account Receivable.................................. 5 123,867 85,486 76,175 Prepayments......................................... 6 23,655 11,582 23,757 Recoverable VAT..................................... 8 1,540 0 0 Net investment from $ DFL model..................... 2.b & 17.3 9,644 38,461 20,206 Net investment from Euro DFL model.................. 2.b & 17.3 28,264 40,942 31,298 --------- --------- --------- Total current assets.......................... 316,088 280,629 238,734 Long Term Assets, net Restricted Cash..................................... 3.2 22,591 83,049 53,778 Fixed Assets........................................ 7 12,159 9,603 6,554 Net investment from $ DFL model..................... 2.b & 17.3 656,723 638,004 678,549 Net investment from Euro DFL model.................. 2.b & 17.3 437,791 411,100 374,509 $ Capacity Charges less than $ DFL model............ 13.1 0 713 0 Euro Capacity Charges less than Euro DFL model...... 13.2 0 0 0 Deferred Tax Asset.................................. 2.f 1,556 0 0 Other Long Term Assets.............................. 9 16,339 19,058 10,968 --------- --------- --------- Total Long Term Assets........................ 1,147,158 1,161,527 1,124,357 --------- --------- --------- Total assets.................................. 1,463,246 1,442,157 1,363,091 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable to third parties................... 10 89,031 51,258 38,824 Accounts payable to related parties................. 11 96,408 176,730 145,065 VAT Liability...................................... 8 0 3,972 2,871 Taxes payable....................................... 12 5,134 7,527 4,866 Current part of Long-term loans in US Dollars....... 15 25,749 25,749 25,749 Current part of Long-term loans in Euro............. 15 48,043 44,491 36,855 Other current liabilities........................... 14 9,363 7,739 7,955 --------- --------- --------- Total current liabilities..................... 273,727 317,466 262,186 Non-Current Liabilities Long-term loans in US Dollars....................... 15 186,677 212,426 238,174 Long-term loans in Euro............................. 15 348,314 367,052 340,912 $ Capacity Charges greater than $ DFL model......... 13.1 44 0 2,441 Euro Capacity Charges greater than Euro DFL model... 13.2 73 422 236 Deferred Tax Liability.............................. 2.f 0 0 13,005 Derivative Instrument Liability..................... 20 23,446 22,050 21,410 Unfunded Pension Obligations........................ 19.1 13,782 9,878 5,693 --------- --------- --------- Total non-current liabilities................. 572,336 611,828 621,872 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 .................................. 16.4 253,216 147,499 113,031 Other Comprehensive Income or (Loss ................ 20 (23,446) (22,050) (21,410) --------- --------- --------- Total stockholders' equity.................... 617,183 512,862 479,033 --------- --------- --------- Total liabilities and stockholders' equity.... 1,463,246 1,442,157 1,363,091
The accompanying Notes 1 to 22 are an integral part of these financial statements. Page 2 JORF LASFAR ENERGY COMPANY STATEMENT OF INCOME
January 1, 2004 January 1, 2003 January 1, 2002 to to to Note December 31, 2004 December 31, 2003 December 31, 2002 ---- ----------------- ----------------- ----------------- (000) U.S. Dollars (000) U.S. Dollars (000) U.S. Dollars REVENUE Lease Revenue from $ DFL model ..... 2.b.&.17.2 80,476 81,793 88,464 Lease Revenue from Euro DFL model... 2.b & 17.2 104,078 104,635 95,078 Energy Payments..................... 220,211 128,981 130,446 O&M Revenue......................... 49,187 45,066 42,930 Supplemental Capacity Charges....... 4,173 3,949 4,017 License Tax Reimbursement........... 2,864 4,102 0 Other............................... 844 352 3,337 ------- ------- ------- TOTAL REVENUE 461,833 368,878 364,272 OPERATING EXPENSES Coal Cost........................... 222,277 129,935 126,957 Fuel Oil Cost....................... 1,085 1,280 910 O&M Costs........................... 32,876 33,554 25,057 Operator's Incentive................ 4,281 2,784 3,721 Generator Costs..................... 13,977 11,994 11,397 License Tax Costs................... 2,864 4,102 0 Amortization of Major Maintenance... 9.1 2,564 1,935 1,128 Depreciation of Other Assets........ 2,966 2,093 1,624 Non-Current Pension Expense......... 2,989 2,902 5,427 ------- ------- ------- TOTAL OPERATING EXPENSES 285,879 190,580 176,222 OPERATING INCOME 175,954 178,299 188,050 FINANCIAL ITEMS Financial Income.................... 1,786 2,025 1,764 Exchange Gain (+) or Loss (-)....... 2.d 1,867 (8,605) (1,558) Financial Expenses.................. 18 (46,893) (49,425) (44,834) ------- ------- ------- TOTAL FINANCIAL ITEMS (43,239) (56,005) (44,628) INCOME BEFORE TAXES 132,715 122,293 143,422 Income Taxes Current ....................... 2.e 9,077 15,448 4,226 Deferred. ..................... 2.f (1,556) (13,005) 6,908 ------- ------- ------- NET INCOME 16.4 & 21 125,194 119,850 132,288
The accompanying Notes 1 to 22 are an integral part of these financial statements. Page 3 JORF LASFAR ENERGY COMPANY STATEMENT OF STOCKHOLDERS' EQUITY
January 1, 2004 January 1, 2003 January 1, 2002 to to to December 31, December 31, December 31, Note 2004 2003 2002 ---- ---- ---- ---- 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 201,425 201,425 201,425 Conversion of Convertible Stockholders' Securities to Preferred Stock 0 0 0 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 185,930 185,930 185,930 Conversion of Convertible Stockholders' Securities to Preferred Stock 0 0 0 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 147,499 113,031 187,672 Net income 125,194 119,850 132,288 Common stock dividend 0 (64,973) (184,891) Preferred stock dividend (9,349) (9,796) (9,942) Convertible stockholders' securities (10,128) (10,613) (12,096) ------- ------- ------- At end of period 16.4 253,216 147,499 113,031 OTHER COMPREHENSIVE INCOME (LOSS) (a) Derivative Instruments At beginning of period (22,050) (21,410) (10,665) Reclassification of gains (losses) included in net income 7,675 6,871 5,811 Unrealized gain (loss) on derivative instruments (9,072) (7,511) (16,556) ------- ------- ------- At end of period 20 (23,446) (22,050) (21,410) ------- ------- ------- 617,183 512,862 479,034 ======= ======= ======= (a) Disclosure of Comprehensive Income (Loss) Net income 125,194 119,850 132,288 Derivative instruments Reclassification of gains (losses) in net income 7,675 6,871 5,811 Unrealized gain (loss) on derivative instruments (9,072) (7,511) (16,556) ------- ------- ------- Total Comprehensive Income 123,797 119,211 121,543 ======= ======= =======
The accompanying Notes 1 to 22 are an integral part of these financial statements. Page 4 JORF LASFAR ENERGY COMPANY STATEMENT OF CASH FLOWS
January 1, 2004 January 1, 2003 January 1, 2002 to to to December 31, 2004 December 31, 2003 December 31, 2002 (000) U.S. (000) U.S. (000) U.S. Note Dollars Dollars Dollars ---- ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Payments received from ONE....................................... $ 526,880 $ 426,250 $ 471,044 Interest received................................................ 1,538 1,870 1,748 Rebates paid to ONE.............................................. (58,108) (5,376) (16,073) Corporate Income Tax Payments.................................... (12,795) (12,826) (5,150) Insurance Payments............................................... (2,927) (5,699) (5,665) Payments of Operating Costs...................................... (315,983) (214,865) (228,031) Cash Effect of Value Added Tax................................... (12,393) 2,463 (321) --------- --------- --------- Net cash provided (+) or used (-) by operating activities... 21 126,211 191,816 217,551 CASH FLOWS USED FOR INVESTING ACTIVITIES Net decrease (increase) in restricted cash....................... 60,795 (25,942) (36,638) Acquisition of fixed assets...................................... (6,379) (2,300) (3,957) Payment of Major Maintenance costs............................... 0 (6,261) (93) --------- --------- --------- Net cash provided (+) or used (-) by investing activities... 54,416 (34,503) (40,688) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from loans.............................................. 0 0 0 Proceeds of share capital payments............................... 0 0 0 Repayment of loans............................................... (69,900) (65,639) (57,964) Payment of Convertible Securities interest....................... (9,595) (11,417) (12,386) Payment of Preferred Stock dividend.............................. (8,857) (10,539) (10,181) Payment of Common Stock dividend................................. (89,703) (54,877) (121,933) 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 (+) or used (-) by financing activities... (178,055) (142,472) (202,464) Effect of exchange rate changes on cash.......................... 1,617 4,087 5,178 CASH AT BEGINNING OF PERIOD.......................................... 65,611 46,683 67,106 NET INCREASE (DECREASE) IN CASH DURING PERIOD........................ 4,188 18,928 (20,422) --------- --------- --------- CASH AT END OF PERIOD................................................ 3.1 $ 69,800 $ 65,611 $ 46,683 ========= ========= ========= SUPPLEMENTAL CASH FLOWS INFORMATION Cash paid during the year Interest 46,626 49,136 56,054 Income taxes 12,795 12,826 5,150
The accompanying Notes 1 to 22 are an integral part of these financial statements. Page 5 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 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 30 years, ending on September 13, 2027. 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. JLEC is scheduled to complete the repayment of all Project Loans on February 15, 2013. 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 6 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 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 equals 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 7 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 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 rate of 35% - - 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 13, 1997, June 10, 2000 and February 3, 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. F. DEFERRED INCOME TAX Starting September 13, 2002, the JLEC statutory tax rate on Units 1&2 is 17.5%. JLEC determines and books the current income tax (US$ 9,077,235 for 2004) as required by the tax laws and regulations of Morocco. Temporary differences between US GAAP and the CGNC balance sheets may create the need to record deferred income taxes. The main temporary differences result from the use of the Direct Financing Lease method under US GAAP, and the differences in the timing of the deductibility of pension liabilities. In particular, the treatment of Net Investment and revenue recognition (as disclosed in note 2.b above) under US GAAP are different from the treatment of these items under the tax laws and regulations of Morocco. The total of the deferred tax liability is $ 0 ($0 as of December 31, 2003 and $13,005,298 as of December 31, 2002). The total of the deferred tax asset amounts to $ 1,555,763 ($0 as of December 31, 2003 and $0 as of December 31, 2002) related to unfunded pension obligations. G. OFF BALANCE SHEET COMMITMENTS The Company discloses all off-balance sheet commitments, if any, on balance sheet dates. H. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual result could differ from these estimates and assumptions. Page 8 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 3. CASH 3.1 Cash The Company's cash as of December 31, 2004, includes the initial capital deposits of the Company's stockholders, as explained further in Note 16.1. Such cash is held in Moroccan Dirhams in accounts at CITIBANK MAGHREB, which is located at Zenith Millenium Immeuble 1, Lotissement Attaoufik, Sidi Maarouf, Casablanca Morocco. The remainder of the company's' cash is held by the Offshore Collateral Agent, Deutsche Bank Trust Company Americas in US$ and Euro, and by the Onshore Collateral Agent, BMCI - Banque Marocaine pour le Commerce et l'Industrie in Moroccan Dirhams and US$. The cash balances includes the following categories :
12/31/04 12/31/03 12/31/02 US$ US$ US$ ----------- ---------- ---------- Off-shore Revenue in US$ 19,658,389 24,426,875 22,666,875 Off-shore Revenue in Euro 6,471,506 6,590,224 5,331,124 ---------- ---------- ---------- Total Off-Shore Revenue 26,129,895 31,017,099 27,997,998 On-shore O&M Account - Generator 12,565,202 6,946,245 793,293 On-shore O&M Account - Operator 2,468,763 4,279,000 3,258,836 Off-shore O&M Accounts 4,742 4,546 10,607 ---------- ---------- --------- Total O&M Accounts 15,038,706 11,229,792 4,062,735 Fuel & Spare Part Accounts 18,388,897 12,929,694 5,289,381 Off-shore Debt Service Accrual Accounts in US$ 3,641,836 3,734,278 3,843,187 Off-shore Debt Service Accrual Accounts in Euro 6,489,135 6,637,737 5,433,301 ---------- ---------- --------- Total Debt Service Accrual Accounts 10,130,971 10,372,015 9,276,488 Distribution Account in US$ 44,489 0 0 Stockholder capital deposits 66,934 62,863 56,624 ---------- ---------- ---------- Total 69,799,893 65,611,462 46,683,227 ========== ========== ==========
3.2 Restricted Cash The Reserve Accounts are as follow : Major Maintenance Reserve Account in US$ 3.4 a 1,410,601 2,500,000 2,500,000 Fixed O&M Reserve Account in US$ 3.4 b 0 4,800,000 4,800,000 Debt Service Reserve Account in US$ 3.4 c 0 11,200,000 11,730,000 Super Reserve Account in US$ 3.4 d 20,913,300 45,600,000 18,100,000 ----------- ---------- ---------- Off-shore Reserve Accounts in US$ 22,323,901 64,100,000 37,130,000 Fixed O&M Reserve Account in Euro 267,002 243,656 197,262 Debt Service Reserve Account in Euro 3.4 e 0 18,705,220 16,450,805 ----------- ---------- ---------- Off-shore Reserve Accounts in Euro 267,002 18,948,876 16,648,067 ----------- ---------- ---------- Total Reserve Accounts 22,590,902 83,048,876 53,778,067 =========== ========== ==========

3.3 Total Cash Cash 3.1 69,799,893 65,611,462 46,683,227 Restricted Cash in Reserve Accounts 3.2 22,590,902 83,048,876 53,778,067 ----------- ----------- ----------- 92,390,795 148,660,339 100,461,294 =========== =========== ===========

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 :
12/31/04 12/31/03 12/31/02 ----------- ---------- ---------- a. Major Maintenance Reserve Account US$ 6,100,000 2,500,000 2,500,000 b. Fixed O&M Reserve Account US$ 9,600,000 4,800,000 4,800,000 c. Debt Service Reserve Account US$ 21,400,000 11,300,000 11,300,000 d. Super Reserve Account US$ 79,086,700 39,086,700 47,900,000 e. Debt Service Reserve Account Euro 28,200,000 15,000,000 15,000,000
Page 9 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 4. INVENTORIES The inventories are detailed as follows for the year ending:
12/31/04 12/31/03 12/31/02 US$ US$ US$ ---------- ---------- ---------- Stock of Coal 4.1 41,419,482 24,763,321 22,499,748 Stock of Fuel-oil 4.2 1,355,124 1,638,256 2,078,600 Stock of Spare Parts 4.3 15,386,680 10,940,862 15,081,606 Other Stocks (Chemicals, Oils,...) 1,156,676 1,205,566 954,692 ---------- ---------- ---------- 59,317,963 38,548,005 40,614,646 ========== ========== ==========
4.1 The stock of coal represents the value of 338,128 tones existing in the coal storage area plus 276,200 tones in transit to Jorf Lasfar, for a total inventory of 614,328 tones as of 4.1 December 31, 2004 (582,063 tones total as of December 31, 2003 and 606,115 tones total as of December 31, 2002). 4.2 The stock of fuel oil represents 7,654 m3 existing in the fuel tanks as of December 31, 2004 (9,471 m3 as of December 31, 2003 and 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, 2004, that were purchased after the close-out of the Net Investment on December 31, 2000. 5. RECEIVABLES The "Accounts Receivables" as of December 31, 2004 are detailed as follows :
12/31/04 12/31/03 12/31/02 US$ US$ US$ ----------- ---------- ---------- Account Receivable - ONE 5.1 123,770,898 85,214,510 76,098,673 Account Receivable - Others 5.2 96,570 271,345 76,097 ----------- ---------- ---------- 123,867,468 85,485,855 76,174,769 =========== ========== ==========
5.1 The account receivable - ONE includes November 2004 and December 2004 invoices 5.2 The other receivables include a) accrued interest earned by investment of JLEC's cash balances ($ 96,570). In addition, JLEC has invoiced AMCI a total of $8,599,483 under Coal Supply Agreement 720, representing JLEC's excess cost of purchasing 186,244 tons of coal from a third party after AMCI failed to fulfill its obligation to deliver 187,682 tons of coal to JLEC. AMCI has failed to pay JLEC's invoices when due; and therefore, JLEC has called on AMCI's performance bond of $1,500,000 and is seeking the remainder of $7,099,483 from AMCI through an UNCITRAL arbitration with uncertain outcome. 6. PREPAYMENTS The "Prepayments" as of December 31, 2004 are detailed as follows :
12/31/04 12/31/03 12/31/02 US$ US$ US$ ----------- ---------- ---------- Prepaid Insurance 524,479 3,599,349 3,582,404 Prepayments for Availability Rebate 15,696,844 3,443,569 13,326,626 Prepayments for Income Tax 6,754,801 3,929,580 5,194,869 Other Prepayments 678,455 609,277 1,653,537 ----------- ---------- ---------- 23,654,579 11,581,775 23,757,436 =========== ========== ==========
7. FIXED ASSETS The "Fixed Assets" are detailed as follows for year ending :
12/31/04 12/31/03 12/31/02 US$ US$ US$ ----------- ---------- ---------- Fixed Asset - Gross 16,493,623 11,694,954 7,455,511 Depreciation (4,753,714) (2,516,437) (1,884,137) Construction in Progress 418,708 424,902 982,455 ----------- ---------- ---------- 12,158,617 9,603,420 6,553,829 =========== ========== ==========
8. RECOVERABLE V.A.T The "Recoverable V.A.T" account represents the net amount of Value Added Tax as shown below :
12/31/04 12/31/03 12/31/02 US$ US$ US$ ----------- ---------- ---------- Value Added Tax received from ONE to be declared (13,463,427) (5,179,969) (4,805,614) Value Added Tax to be paid & declared 15,003,302 1,207,918 1,934,168 ----------- ---------- ---------- 1,539,875 -3,972,052 -2,871,446 =========== ========== ==========
In 2004 the Value Added Tax (VAT) became recoverable and was recorded as an asset while in 2003 and 2002 the VAT was a liability. 9. OTHER LONG TERM ASSETS The Other Long Term Assets are as follows :
12/31/04 12/31/03 12/31/02 US$ US$ US$ ---------- ---------- ----------- Long Term Receivables Loan 3,946,932 3,372,930 2,754,540 Long Term Ash Disposal Site 660,624 1,389,307 1,913,308 Major Maintenance capitalized during prior years 17,828,927 7,299,779 7,898,850 Major Maintenance capitalized during current year 0 10,529,148 0 Less :Amortization of Major Maintenance during prior years (3,533,479) (1,598,577) (470,170) 9.1 Less :Amortization of Major Maintenance in current year (2,564,485) (1,934,902) (1,128,407) ---------- ---------- ----------- 16,338,520 19,057,686 10,968,120 ========== ========== ===========
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 10 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 10. ACCOUNTS PAYABLE TO THIRD PARTIES The "Account Payable to Third Parties" includes the main suppliers of JLEC as of December 31, 2004 and are detailed as follows :
12/31/04 12/31/03 12/31/02 US$ US$ US$ ---------- ---------- ----------- Glencore (coal supplier) 22,932,140 20,030,571 2,187,744 BULK (coal supplier) 20,302,750 4,470,349 0 CARGILL (coal supplier) 10,197,420 0 0 BHP Billiton (coal supplier) 2,550,241 2,800,790 4,119,817 Anglo American (coal supplier) 0 6,320,391 2,245,218 RAG Trading (coal supplier) 0 0 4,499,958 Alstom Power 859,588 1,507,931 2,845,357 ONE - Availability Rebate 15,950,384 7,583,477 16,093,636 ONE - Fixed Rebate 8,687,506 0 0 Other suppliers 7,550,884 8,544,812 6,832,615 ---------- ---------- ----------- Total 89,030,912 51,258,320 38,824,345 ========== ========== ===========
11. RELATED PARTY TRANSACTIONS During the year 2004, JLEC has booked a number of related parties transactions as follows :
ABB ABB ABB CMS CMS CMS EV OTHERS MAROC MOPCO MOPCO RD & GEN Total Currencies US$ US$ MAD MAD MAD US$ US$ ------- --------- --------- ---------- ---------- -------- --------- Acc. Payable 12/31/03 90,007 36,608 0 4,757,590 29,319,976 0 2004 : Management Fees 32,195,453 Incentive Accrual 42,344,890 Other 256,323 1,077,929 1,460,976 5,066,894 Total Payments 2004 255,739 1,071,390 599,760 32,250,660 29,320,086 0 Acc. Payable 90,591 43,146 861,216 9,769,277 42,344,781 0 Acc. Pay. in US$ 90,591 43,146 104,486 1,185,247 5,137,433 0 6,560,903

Jorf Lasfar Jorf Lasfar Jorf Lasfar Tre Kronor Energiaktie- Power Energy Handels- Investment AB Cythere AB Cythere Common Stock bolag AB bolag AB 61 63 Total ------------ ------------ ----------- ---------- ---------- ------------- ------------- Currencies MAD MAD MAD MAD MAD MAD MAD ----------- ------------ ----------- ---------- ---------- ------------- ------------- Acc. Payable 12/31/03 214,928,711 197,734,415 17,194,297 43,438,991 2,369,384 1,040,159,631 1,515,825,428 Dividend Payable 0 0 0 0 0 0 0 Total Payments 2004 47,418,800 43,625,296 3,793,504 27,217,328 1,484,582 651,731,281 775,270,790 Acc. Payable 167,509,911 154,109,119 13,400,793 16,221,663 884,802 388,428,350 740,554,638 B/S FX Rate MAD/USD 8.2424 8.2424 8.2424 8.2424 8.2424 8.2424 8.2424 Acc. Pay. in US$ 20,322,953 18,697,117 1,625,836 1,968,075 107,348 47,125,637 89,846,967

Jorf Lasfar Jorf Lasfar Jorf Lasfar Tre Kronor Energiaktie- Power Energy Handels- Investment AB Cythere AB Cythere Preferred Stock & Convertible Securities bolag AB bolag AB 61 63 Total ------------ ------------ ----------- ---------- ---------- ---------- ----------- Currencies MAD MAD MAD MAD MAD MAD MAD ------------ ------------ ----------- ---------- ---------- ---------- ----------- Preferred Stock Dividend payable 0 0 0 0 186,316 81,861,977 82,048,293 Convertible Securities Interest payable 42,733,486 39,314,807 3,418,679 3,418,679 0 0 88,885,651 Total Payments 2004 42,733,486 39,314,807 3,418,679 3,418,679 186,316 81,861,977 170,933,944 Acc. Payable 0 0 0 0 0 0 0 B/S FX Rate MAD/USD 8.2424 8.2424 8.2424 8.2424 8.2424 8.2424 8.2424 Acc. Pay. in US$ 0 0 0 0 0 0 0 ----------- ------------ ----------- ---------- ---------- ---------- ----------- Total Accounts Payable to Related Partie 96,407,870 -----------
Page 11 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 11. RELATED PARTY TRANSACTIONS (CONTINUED) During the year 2003, JLEC has booked a number of related parties transactions as follows :
ABB ABB ABB CMS CMS CMS EV OTHERS MAROC MOPCO MOPCO RD & GEN Total Currencies US$ US$ MAD MAD MAD US$ US$ ------- ------ ------- ---------- ---------- -------- --------- Acc. Payable 12/31/02 105,764 0 125,880 -1,452,394 46,253,345 82,686 2003 : Management Fees 32,938,795 Incentive Accrual 29,320,319 Other 214,644 90,575 237,916 3,582,315 Total Payments 2003 230,400 53,967 363,796 30,311,126 46,253,688 82,686 Acc. Payable 90,007 36,608 0 4,757,590 29,319,976 0 Acc. Pay. in US$ 90,007 36,608 0 542,101 3,340,851 0 4,009,568

Jorf Lasfar Jorf Lasfar Jorf Lasfar Tre Kronor Energiaktie- Power Energy Handels- Investment AB Cythere AB Cythere Common Stock bolag AB bolag AB 61 63 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

Jorf Lasfar Jorf Lasfar Jorf Lasfar Tre Kronor Energiaktie- Power Energy Handels- Investment AB Cythere AB Cythere Preferred Stock & Convertible Securities bolag AB bolag AB 61 63 Total ------------ ------------ ----------- ---------- ---------- ---------- ----------- 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 176,729,587 -----------
During 2002, related party transactions consisted of the following:
ABB ABB ABB CMS CMS CMS Total EV OTHERS MAROC MOPCO MOPCO RD & GEN ------- ------ ------- ---------- ---------- -------- --------- Currencies US$ US$ MAD MAD MAD US$ US$ ------- ------ ------- ---------- ---------- -------- --------- Acc. Payable 12/31/01 137,581 36,275 78,576 7,726,314 44,598,493 76,753 Management Fees 35,654,033 Incentive Accrual 46,253,517 Other 207,059 26,381 778,086 -6,139,521 114,510 Total Payments 2002 238,876 62,657 730,782 38,693,220 44,598,665 108,577 Acc. Payable 12/31/02 105,764 0 125,880 -1,452,394 46,253,345 82,686 Acc. Pay. in US$ 12/31/02 105,764 0 12,345 -142,433 4,535,976 82,686 4,594,337

Jorf Lasfar Jorf Lasfar Jorf Lasfar Tre Kronor Energiaktie- Power Energy Handels- Investment AB Cythere AB Cythere Common Stock bolag AB bolag AB 61 63 Total ------------ ------------ ----------- ---------- ---------- ------------- ------------- 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

Jorf Lasfar Jorf Lasfar Jorf Lasfar Tre Kronor Energiaktie- Power Energy Handels- Investment AB Cythere AB Cythere Preferred Stock & Convertible Securities bolag AB bolag AB 61 63 Total ------------ ------------ ----------- ---------- ---------- ---------- ----------- 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 -----------
Page 12 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 12. TAXES PAYABLE : The "taxes payable" includes the following items as of December 31, 2004 :
12/31/04 12/31/03 12/31/02 US$ US$ US$ ----------- ----------- ---------- Value Added Tax on behalf of foreign suppliers 204,712 309,190 299,199 Income Tax 2002 0 0 4,226,098 Income Tax 2003 0 5,393,931 0 Income Tax 2004 4,568,726 0 0 Withholding Tax 100,984 260,841 155,281 Payroll Tax 259,164 237,358 185,575 Licence Tax 0 1,325,971 0 ----------- ----------- ---------- Total 5,133,586 7,527,291 4,866,153 =========== =========== ==========
13. CAPACITY CHARGES 2004
13.1 $ Capacity Charges greater than $ DFL Model Actual DFL model ------------- ------------ in November and December 2004 $ Capacity Min Lease ------------- ------------ Charges Payments Difference ------------- ------------ ----------- CGNC US GAAP US GAAP ------------- ------------ ----------- USD USD USD ------------- ------------ ----------- $ Capacity Charges 20,705,351 20,383,548 321,803 $ O.N.E Rebate (4,302,807) (4,025,187) (277,620) ------------- ------------ ----------- 2004 in USD 16,402,544 16,358,361 44,183 $ Capacity Charges greater than $ DFL Model 44,183 ----------- Actual DFL model ------------- ------------ 13.2 Euro Capacity Charges greater than Euro DFL Model Euro Capacity Min Lease ------------- ------------ in November and December 2004 Charges Payments Difference ------------- ------------ ----------- CGNC US GAAP US GAAP ------------- ------------ ----------- Euro Euro Euro/USD ------------- ------------ ----------- Euro Capacity Charges 20,032,963 19,721,611 311,353 Euro O.N.E Rebate (3,123,333) (2,865,480) (257,853) ------------- ------------ ----------- 2004 in Euro 16,909,630 16,856,131 53,499 B/S FX Rate X 1.36428 ----------- Euro Capacity Charges greater than Euro DFL Model in USD 72,988 -----------

2003 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 less 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
Page 13 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 13. CAPACITY CHARGES (CONTINUED) 2002
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
14. OTHER CURRENT LIABILITIES The "Other Current Liabilities" as of December 31, 2004 are detailed as follows:
12/31/04 12/31/03 12/31/02 US$ US$ US$ --------- --------- --------- Accrued Expenses: interest, swaps and fees 14.1 5,726,546 5,904,937 6,072,924 Accrued salaries expense 2,075,391 1,198,164 1,390,179 Liability for Compensated Absences 310,222 298,523 307,449 Coal Custom Duty Advances from ONE 671,924 0 0 Other Liabilities 578,504 337,780 184,470 --------- --------- --------- 9,362,588 7,739,404 7,955,022 ========= ========= =========
14.1 The accrued interests and fee expenses are detailed by loans as follows :
12/31/04 12/31/03 12/31/02 US$ US$ US$ --------- --------- --------- OPIC 648,818 728,141 807,914 SACE 1,597,674 1,586,760 1,522,740 WB 1,708,747 1,712,739 1,629,541 US EXIM 1,467,777 1,574,138 1,823,435 ERG 303,531 303,158 289,295 --------- --------- --------- 5,726,547 5,904,937 6,072,924 ========= ========= =========
Page 14 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 15. LONG TERM LOANS Long term loans are detailed as follows as of December 31, 2004 :
Interest Reimbursement Borrowing Principal ---------------- Interest --------------------------- Loan Date Currency Amount Type Rate Payment Maturity Periodicity - ----------- --------- -------- ----------- ----- ------- --------- ------------- ----------- US EXIM 9/12/02 US$ 161,756,869 Fixed 7.2000% Quarterly Feb. 15, 2013 Quarterly OPIC Note A 11/25/97 US$ 41,593,750 Fixed 10.2300% Quarterly Feb. 15, 2013 Quarterly OPIC Note B 02/11/98 US$ 9,075,000 Fixed 9.9200% Quarterly Feb. 15, 2013 Quarterly ----------- 50,668,750 ----------- Total L.T loan in US$ 212,425,619 ----------- Current part in USD 25,748,560 ----------- Non-Current part in USD 186,677,059 -----------

Interest Reimbursement Borrowing Principal ------------------ Interest --------------------------- Loan Date Currency Amount Type Rate Payment Maturity Periodicity - ---------- --------- -------- ----------- -------- -------- --------- ------------- ----------- SACE 11/15/04 Euro 159,945,585 Fixed 5.73000% Quarterly Feb. 15, 2013 Quarterly ERG 11/15/04 Euro 20,554,486 Variable 4.17013% Quarterly Feb. 15, 2013 Quarterly World Bank 11/15/04 Euro 110,023,622 Variable 3.92013% Quarterly Feb. 15, 2013 Quarterly ----------- Total L.T loan in Euro 290,523,693 ----------- B/S FX Rate Euro/USD 1.36429 ----------- Total L.T loan in USD 396,357,727 ----------- Current part in USD 48,043,360 ----------- Non-Current part in USD 348,314,367 -----------
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 2005 2006 2007 2008 2009 2005-2013 2005-2013 2005-2013 ------------ ------------ ------------ ------------ ------------ ----------- ----------- ---------- In USD US EXIM 19,606,893 19,606,893 19,606,893 19,606,893 19,606,893 49,522,500 0 0 OPIC A 5,041,667 5,041,666 5,041,666 5,041,666 5,041,666 18,079,169 0 0 OPIC B 1,100,000 1,100,000 1,100,000 1,100,000 1,100,000 3,825,014 0 0 ------------ ------------ ------------ ------------ ------------ ----------- ----------- ---------- Total in USD 25,748,560 25,748,559 25,748,559 25,748,559 25,748,559 71,426,684 0 0 ------------ ------------ ------------ ------------ ------------ ----------- ----------- ---------- In Euro SACE 19,387,344 19,387,344 19,387,344 19,387,344 19,387,344 39,511,596 0 0 ERG 2,491,452 2,491,452 2,491,452 2,491,452 2,491,452 3,799,644 3,811,035 0 WB 13,336,197 13,336,197 13,336,197 13,336,197 13,336,197 19,152,073 20,118,202 4,323,243 Total in Euro 35,214,993 35,214,993 35,214,993 35,214,993 35,214,993 62,463,313 23,929,237 4,323,243 B/S FX Rate Euro/USD 1.36429 1.36429 1.36429 1.36429 1.36429 1.36429 1.36429 1.36429 ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- Total in USD 48,043,360 48,043,360 48,043,360 48,043,360 48,043,360 85,217,892 32,646,350 5,898,145 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Page 15 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 15. LONG TERM LOANS (CONTINUED) 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 -----------
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 -----------
Page 16 JORF LASFAR ENERGY COMPANY NOTES to US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 15. LONG TERM LOANS (CONTINUED) PLEDGE 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 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 17 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 16. STOCKHOLDERS' EQUITY The composition of Stockholders' Equity as of December 31, 2004 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 61and 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 2004 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 18 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 16.3 PREFERRED STOCK In accordance with Section 3.01 par.(b) of the amended Company Loan Agreement (see npte 16.2 above). the Company has 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 Preffered Stock for each one hundred (100) MAD of such Company Loan principal converted in to Preffered 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 #REF! as shown in Note 16.4. 16.4 RECONCILIATION AND ALLOCATION OF RETAINED EARNINGS 16.4
2004 US$ ------ ----------- Retained Earnings as of December 31, 2003 147,498,955 Retained Earnings increase during 2004 125,193,694 Retained Earnings decrease during 2004 Convertible Securities interest payable as of January 1, 2004 (10,128,034) 88,885,651 Dirhams 8.7762 Dirhams per US Dollar Preferred Stock Dividend payable as of January 1, 2004 (9,348,954) 82,048,293 Dirhams 8.7762 Dirhams per US Dollar ----------- Total Retained Earnings 253,215,661
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 82,086,256 9,959,024 111,308,278 121,267,301 Jorf Lasfar Energiaktiebolag, Sweden........ 42,850,564 5,198,797 0 0 58,105,118 63,303,915 Jorf Lasfar Power Energy AB, Sweden......... 39,422,519 4,782,893 0 0 53,456,709 58,239,602 Tre Kronor Investment AB, Sweden........... 3,428,045 415,904 0 0 4,648,409 5,064,313 Jorf Lasfar Handelsbolag, Sweden............ 3,428,045 415,904 0 0 4,648,409 5,064,313 AB Cythere 61, Sweden....................... 0 0 186,827 22,667 253,550 276,216 ---------- ---------- ---------- ---------- ----------- ------------- Total 89,129,174 10,813,498 82,273,084 9,981,690 232,420,473 253,215,661
The allocations for Convertible Securities (89,129,174 Dirhams) and Preferred Stock (82,273,084 Dirhams) are scheduled for payment on May 16, 2005. Page 19 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 16.4 RECONCILIATION AND ALLOCATION OF RETAINED EARNINGS (CONTINUED)
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 a 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 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

US$ ------------ 2002 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 a 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
Page 20 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 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, 2004 17.1 LONG TERM RECEIVABLES AS OF DECEMBER 31, 2004
US$ Euro ------------- ------------- Units 1 to 4 Units 1 to 4 ------------- ------------- Total Minimum Lease Payments 17.4 2,197,963,436 1,152,862,047 Minimum Lease Payments for 2004 (113,505,779) (114,608,487) ------------- ------------- Total of Future Minimum Lease Payments 2,084,457,657 1,038,253,560 X 1.36428 ------------- ------------- Total of Future Minimum Lease Payments in US$ 17.3 2,084,457,657 1,416,475,939 ============= =============
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 - ------ -------------- --------------- 2005 98,902,331 95,705,089 2006 99,348,712 84,343,267 2007 94,266,264 83,270,646 2008 97,990,818 79,557,495 2009 97,756,285 76,945,799
17.2 UNEARNED INCOME AS OF DECEMBER 31, 2004
US$ Euro ------------- -------------- Units 1 to 4 Units 1 to 4 ------------- -------------- Total Unearned Income 17.4 1,498,566,597 780,404,581 ------------ Lease Revenue 2004 (80,475,863) (83,762,066) X 1.24254 104,077,762 ------------- -------------- ------------ 1,418,090,734 696,642,515 X 1.36428 ------------- -------------- Total Remaining Unearned Income in US$ 17.3 1,418,090,734 950,420,397 ============= ==============
The Lease Revenues under the US GAAP model for the next five years are as follows:
US$ Euro ------------- -------------- Year Units 1 to 4 Units 1 to 4 - ------ ------------- -------------- 2005 89,258,072 74,987,906 2006 87,703,727 71,512,790 2007 86,501,207 68,270,588 2008 85,143,123 64,820,922 2009 83,150,426 61,693,606
17.3 NET INVESTMENT IN DIRECT FINANCING LEASES AS OF DECEMBER 31, 2004
US$ Euro -------------- --------------- Units 1 to 4 Units 1 to 4 -------------- --------------- Total of Future Minimum Lease Payments in US$ 17.1 2,084,457,657 1,416,475,939 Total Remaining Unearned Income in US$ 17.2 (1,418,090,734) (950,420,397) -------------- --------------- Net investment in direct financing leases in US$ 666,366,923 466,055,542 ============== =============== Current part in US$ 9,644,259 28,264,185 Non-Current part in US$ 656,722,664 437,791,357
17.4 On November 8, 2004, Amendment No. 2 to the Power Purchase Agreement became effective, and JLEC updated our Direct Finance Lease models including an extension of such DFL models by 15 years until September 13, 2027. As a result, starting from January 1, 2004, the total minimum lease payments have increased from $1,181,954,019 to $2,197,963,436 and from Euro 834,803,410 to Euro 1,152,862,047. Likewise, JLEC's total unearned income under the updated and extended DFL models increased from $505,489,540 to $1,498,566,597 and from Euro 477,010,214 to Euro 780,404,581. Page 21 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 Direct Financing Lease - (D.F.L) AS OF DECEMBER 31, 2003 17.1 LONG TERM RECEIVABLES AS OF DECEMBER 31, 2003
US$ 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 Lease Revenues 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 22 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 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 Revenues 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 23 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 18. FINANCIAL EXPENSES
12/31/04 12/31/03 12/31/02 US$ US$ US$ ------------ ------------ ------------ The Financial Expenses are detailed as follows, for the year ending: Interest, Fees and Swaps incurred from inception to the year ending: Up-Front Fees 25,609,073 25,609,073 25,609,073 Interest Costs 324,780,552 287,290,576 246,526,514 Premiums 23,808,481 23,808,481 23,808,481 Commitment Fees 19,312,672 19,312,672 19,312,672 Arrangement Fees 2,396,273 2,396,273 2,396,273 Other Fees (acceptance fees, Agent fees...etc) 10,240,839 9,754,617 9,297,751 Guarantee Fees 22,035,847 20,598,822 19,101,732 Swaps 44,896,300 37,238,114 30,362,978 ------------ ------------ ------------ 473,080,038 426,008,628 376,415,474 Accrued Interest, Fees, Swaps (see Note 14.1) 5,726,546 5,904,937 6,072,924 ------------ ------------ ------------ Total Interest, Fees and Swaps 478,806,584 431,913,565 382,488,398 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, fees and swaps expensed - Total 267,857,221 220,964,202 171,539,035 Interest, fees and swaps expensed during prior years (220,964,202) (171,539,035) (126,704,796) ------------ ------------ ------------ Interest, fees and swaps expensed during current year 46,893,019 49,425,167 44,834,239 ============ ============ ============
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 (256 employees of 318, or 81%) plus 1 recent retiree and 2 surviving spouses 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 2004, 2003 and 2002, JLEC contributed to the CCR US$ 427,712, US$ 350,071 and US$ 291,036, respectively. As of December 31, 2004, JLEC is also paying benefits to 1 retiree plus 2 surviving spouses; and during 2004, such payments amount to $ 60,017 (USD 33,286 in 2003, and USD 23,783 in 2002). Benefits provided under this plan include pension and retiree health insurance. As of December 31, 2004, the benefit obligation totalled US$ 19,913,861 (MAD 164,138,005 / 8.2424). The fair value of assets contributed to the CCR was US$ 6,131,773 (MAD 50,540,529 / 8.2424) as of December 31, 2004. The net unfunded benefit obligation as of December 31, 2004 reflected in the accompanying balance sheet was US$ 13,782,087 (MAD 113,597,476 / 8.2424). The following assumptions were used to perform the actuarial valuations:
2004 2003 2002 ----- ----- ----- Discount rate 6.00% 6.00% 7.58% Rate of return on Plan assets 6.00% 6.00% 7.58% Rate of compensation increase 6.50% 6.50% 6.50% Rate of health care cost 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 7.08 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 2004, JLEC's contribution to that fund amounted to USD 173,073 (USD 145,677 in 2003, and USD 109,147 in 2002). Page 24 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 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, 2004, 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. 2004
Fixed Rate Current Current Settlement Forecast of Credit Swap Paid by Libor Paid Notional and Termination Remaining Valuation Facility Providers Currency JLEC to JLEC Amount Amortization Date Payments in Euro - ---------- --------- -------- ---------- ---------- ----------- ------------ ----------- ------------- ---------- World Bank BNP Euro 6.4115% 2.17025% 36,674,540 Quarterly 2/15/2013 6,705,625 4,867,269 ABN Euro 6.4175% 2.17025% 36,674,540 Quarterly 2/15/2013 6,715,112 4,857,758 CSFB Euro 6.4060% 2.17025% 36,674,540 Quarterly 2/15/2013 6,696,930 4,681,464 ----------- ---------- ---------- 110,023,620 20,117,667 14,406,491 ----------- ---------- ---------- ERG BNP Euro 6.4700% 2.17025% 6,851,496 Quarterly 2/15/2013 1,270,016 925,233 ABN Euro 6.4750% 2.17025% 6,851,496 Quarterly 2/15/2013 1,271,493 923,161 CSFB Euro 6.4680% 2.17025% 6,851,496 Quarterly 2/15/2013 1,269,426 930,588 ----------- ---------- ---------- 20,554,488 3,810,935 2,778,982 ----------- ---------- ---------- Total in Euro 17,185,473 ---------- B/S FX rate X 1.36429 Total in USD 23,445,919 ==========
2003
Fixed Rate Current Current Settlement Forecast of Credit Swap Paid by Libor Paid Notional and Termination Remaining Valuation Facility Providers Currency JLEC to JLEC Amount Amortization Date Payments in 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 Credit Swap Paid by Libor Paid Notional and Termination Remaining Valuation Facility Providers Currency JLEC to JLEC Amount Amortization Date Payments in 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 ==========
Page 25 JORF LASFAR ENERGY COMPANY NOTES TO US GAAP FINANCIAL STATEMENTS DATED DECEMBER 31, 2004 21. CASH FLOWS FOR 2004 Reconciliation of net income to net cash from operating activities under the Direct Method is as follows :
2004 2003 2002 US$ US$ US$ ------------ ------------ ------------ Net Income............................................................. 125,193,694 119,850,319 132,287,908 Adjustment to reconcile Net Income to cash provided from operating activities : Depreciation and amortization ..................................... 5,530,445 4,028,115 2,752,641 Deferred taxes .................................................... (1,555,763) (13,005,297) 6,908,298 Lease Revenue ..................................................... (184,553,625) (186,427,881) (183,541,585) Finance tariff cash revenue ....................................... 213,372,941 246,405,730 263,559,812 Changes in operating assets and liabilities: Inventories ....................................................... (20,769,958) 2,066,641 (8,855,387) Accounts receivable ............................................... (38,381,613) (9,311,086) 10,340,353 Prepayments ....................................................... (12,072,804) 12,175,661 (19,280,513) Accounts payable .................................................. 40,323,927 12,470,583 4,060,345 Unfunded pension obligation ....................................... 3,903,961 4,185,183 5,692,943 Other liabilities ................................................. (6,396,961) (2,445,519) (608,934) Effect of exchange rate changes ................................... 1,616,716 1,824,028 4,235,487 ----------- ----------- ----------- Net cash provided by operating activities ............................. 126,210,962 191,816,477 217,551,367
22. UNCERTAINTIES AS OF DECEMBER 31, 2004 JLEC's corporate tax return, payroll tax and VAT returns for the years 2001 to 2004 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. Page 26 EX-99.(C) 30 k91832exv99wxcy.txt REPRESENTATION REGARDING EMIRATES CMS POWER COMPANY Exhibit (99)(c) Pursuant to Regulation S-X, Rule 3-09, the financial statements for the fiscal years ended December 31, 2002, 2003 and 2004 for Emirates CMS Power Company, which is a foreign business, will be filed by June 30, 2005. EX-99.(D) 31 k91832exv99wxdy.txt REPRESENTATION REGARDING SCP INVESTMENTS Exhibit (99)(d) Pursuant to Regulation S-X, Rule 3-09, the financial statements for the fiscal years ended June 30, 2003, 2004 and 2005 for SCP Investments (1) PTY. LTD., which is a foreign business, will be filed by December 31, 2005. -----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	%