-----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, N82Q4cC963OyqBr+Q3135c3eobNwsFW2Qe1kJvh7N3mW6U+4RbkGaX0wre/YzZgT EwqMo3WuP9znptoJWu4qgQ== 0000950124-05-004682.txt : 20050804 0000950124-05-004682.hdr.sgml : 20050804 20050804154401 ACCESSION NUMBER: 0000950124-05-004682 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050804 DATE AS OF CHANGE: 20050804 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09513 FILM NUMBER: 05999363 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 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05611 FILM NUMBER: 05999364 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 10-Q 1 k97012e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2005 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. - ------------------------------------------------------------------------------- 1-9513 CMS ENERGY CORPORATION 38-2726431 (A Michigan Corporation) One Energy Plaza, Jackson, Michigan 49201 (517) 788-0550 1-5611 CONSUMERS ENERGY COMPANY 38-0442310 (A Michigan Corporation) One Energy Plaza, Jackson, Michigan 49201 (517) 788-0550 Indicate by check mark whether the Registrants (1) have 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 Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes |X| No Indicate by check mark whether the Registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act). CMS ENERGY CORPORATION: Yes [X] No [ ] CONSUMERS ENERGY COMPANY: Yes [ ] No |X| Number of shares outstanding of each of the issuer's classes of common stock at August 2, 2005: CMS ENERGY CORPORATION: CMS Energy Common Stock, $.01 par value 219,270,380 CONSUMERS ENERGY COMPANY, $10 par value, privately held by CMS Energy Corporation 84,108,789 ================================================================================ CMS ENERGY CORPORATION AND CONSUMERS ENERGY COMPANY QUARTERLY REPORTS ON FORM 10-Q TO THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION FOR THE QUARTER ENDED JUNE 30, 2005 This combined Form 10-Q is separately filed by CMS Energy Corporation and Consumers Energy Company. Information contained herein relating to each individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, Consumers Energy Company makes no representation as to information relating to any other companies affiliated with CMS Energy Corporation. TABLE OF CONTENTS
Page ---- Glossary................................................................... 4 PART I: FINANCIAL INFORMATION CMS Energy Corporation Management's Discussion and Analysis Executive Overview............................................... CMS - 1 Forward-Looking Statements and Risk Factors...................... CMS - 2 Results of Operations............................................ CMS - 4 Critical Accounting Policies..................................... CMS - 13 Capital Resources and Liquidity.................................. CMS - 18 Outlook.......................................................... CMS - 20 Implementation of New Accounting Standards....................... CMS - 28 New Accounting Standards Not Yet Effective....................... CMS - 29 Consolidated Financial Statements Consolidated Statements of Income ............................... CMS - 30 Consolidated Statements of Cash Flows............................ CMS - 33 Consolidated Balance Sheets...................................... CMS - 34 Consolidated Statements of Common Stockholders' Equity........... CMS - 36 Condensed Notes to Consolidated Financial Statements: 1. Corporate Structure and Accounting Policies................. CMS - 37 2. Asset Sales and Impairment Charges.......................... CMS - 39 3. Contingencies............................................... CMS - 40 4. Financings and Capitalization............................... CMS - 55 5. Earnings Per Share.......................................... CMS - 59 6. Financial and Derivative Instruments........................ CMS - 60 7. Retirement Benefits......................................... CMS - 66 8. Asset Retirements Obligations............................... CMS - 68 9. Equity Method Investments................................... CMS - 70 10. Reportable Segments ........................................ CMS - 71 11. Consolidation of Variable Interest Entities................. CMS - 72 12. Implementation of New Accounting Standards.................. CMS - 73
2 TABLE OF CONTENTS (CONTINUED)
Page ---- Consumers Energy Company Management's Discussion and Analysis Executive Overview................................................... CE - 1 Forward-Looking Statements and Risk Factors.......................... CE - 2 Results of Operations................................................ CE - 4 Critical Accounting Policies......................................... CE - 9 Capital Resources and Liquidity...................................... CE - 13 Outlook.............................................................. CE - 15 New Accounting Standards Not Yet Effective........................... CE - 22 Consolidated Financial Statements Consolidated Statements of Income.................................... CE - 24 Consolidated Statements of Cash Flows................................ CE - 25 Consolidated Balance Sheets.......................................... CE - 26 Consolidated Statements of Common Stockholder's Equity............... CE - 28 Condensed Notes to Consolidated Financial Statements: 1. Corporate Structure and Accounting Policies...................... CE - 29 2. Contingencies.................................................... CE - 30 3. Financings and Capitalization.................................... CE - 42 4. Financial and Derivative Instruments............................. CE - 45 5. Retirement Benefits.............................................. CE - 48 6. Asset Retirement Obligations..................................... CE - 50 7. Reportable Segments ............................................. CE - 51 8. Consolidation of Variable Interest Entities...................... CE - 52 9. New Accounting Standards Not Yet Effective....................... CE - 53 Quantitative and Qualitative Disclosures about Market Risk..................... CO - 1 Controls and Procedures........................................................ CO - 1 PART II: OTHER INFORMATION Item 1. Legal Proceedings................................................. CO - 1 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds....... CO - 5 Item 3. Defaults Upon Senior Securities................................... CO - 5 Item 4. Submission of Matters to a Vote of Security Holders............... CO - 5 Item 5. Other Information................................................. CO - 6 Item 6. Exhibits.......................................................... CO - 6 Signatures................................................................ CO - 7
3 GLOSSARY Certain terms used in the text and financial statements are defined below ALJ................................................ Administrative Law Judge Alliance RTO....................................... Alliance Regional Transmission Organization APB................................................ Accounting Principles Board APB Opinion No. 18................................. APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ARO................................................ Asset retirement obligation Articles........................................... Articles of Incorporation Attorney General................................... Michigan Attorney General Bay Harbor......................................... a residential/commercial real estate area located near Petoskey, Michigan. In 2002, CMS Energy sold its interest in Bay Harbor. 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 CEO................................................ Chief Executive Officer CFO................................................ Chief Financial Officer Clean Air Act...................................... Federal Clean Air Act, as amended CMS Energy......................................... CMS Energy Corporation, the parent of Consumers and Enterprises CMS Energy Common Stock or common stock..................................... Common stock of CMS Energy, par value $.01 per share CMS ERM............................................ CMS Energy Resource Management Company, formerly CMS MST, a subsidiary of Enterprises CMS Field Services................................. CMS Field Services, formerly a wholly owned subsidiary of CMS Gas Transmission. The sale of this subsidiary closed in July 2003. CMS Gas Transmission............................... CMS Gas Transmission Company, a subsidiary of Enterprises CMS Generation..................................... CMS Generation Co., a subsidiary of Enterprises CMS 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 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
4 Customer Choice Act................................ Customer Choice and Electricity Reliability Act, a Michigan statute enacted in June 2000 that allows all retail customers choice of alternative electric suppliers as of January 1, 2002, provides for full recovery of net stranded costs and implementation costs, establishes a five percent reduction in residential rates, establishes rate freeze and rate cap, and allows for Securitization Detroit Edison..................................... The Detroit Edison Company, a non-affiliated company DIG................................................ Dearborn Industrial Generation, LLC, a wholly owned subsidiary of CMS Generation DOE................................................ U.S. Department of Energy DOJ................................................ U.S. Department of Justice Dow................................................ The Dow Chemical Company, a non-affiliated company 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 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 Interpretation No. 46......................... FASB Interpretation No. 46, Consolidation of Variable Interest Entities FERC............................................... Federal Energy Regulatory Commission FMB................................................ First Mortgage Bonds FMLP............................................... First Midland Limited Partnership, a partnership that holds a lessor interest in the MCV facility FSP................................................ FASB Staff Position FTR................................................ Financial transmission right 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 GVK................................................ GVK Facility, a 250 MW gas fired power plant located in South Central India, in which CMS Generation formerly held a 33 percent interest
5 Health Care Plan................................... The medical, dental, and prescription drug programs offered to eligible employees of Consumers and CMS Energy IRS................................................ Internal Revenue Service Jorf Lasfar........................................ The 1,356 MW coal-fueled power plant in Morocco, jointly owned by CMS Generation and ABB Energy Ventures, Inc. kWh................................................ Kilowatt-hour LORB............................................... Limited Obligation Revenue Bonds 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 held a 50 percent ownership interest Ludington.......................................... Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison mcf................................................ Thousand cubic feet MCV Facility....................................... A natural gas-fueled, combined-cycle cogeneration facility operated by the MCV Partnership MCV Partnership.................................... Midland Cogeneration Venture Limited Partnership in which Consumers has a 49 percent interest through CMS Midland MCV PPA............................................ The Power Purchase Agreement between Consumers and the MCV Partnership with a 35-year term commencing in March 1990, as amended, and as interpreted by the Settlement Agreement dated as of January 1, 1999 between the MCV Partnership and Consumers. MD&A............................................... Management's Discussion and Analysis MDEQ............................................... Michigan Department of Environmental Quality 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 MISO............................................... Midwest Independent System Operator Moody's............................................ Moody's Investors Service, Inc. MPSC............................................... Michigan Public Service Commission MSBT............................................... Michigan Single Business Tax MTH................................................ Michigan Transco Holdings, Limited Partnership MW................................................. Megawatts NEIL............................................... Nuclear Electric Insurance Limited, an industry mutual insurance company owned by member utility companies NMC................................................ Nuclear Management Company, LLC, formed in 1999 by Northern States Power Company (now Xcel Energy Inc.), Alliant Energy, Wisconsin Electric Power Company, and Wisconsin Public Service Company to operate and manage nuclear generating facilities owned by the four utilities NOL................................................ Net Operating Loss NRC................................................ Nuclear Regulatory Commission NYMEX.............................................. New York Mercantile Exchange
6 OPEB............................................... Postretirement benefit plans other than pensions for retired employees Palisades.......................................... Palisades nuclear power plant, which is owned by Consumers 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. PCB................................................ Polychlorinated biphenyl Pension Plan....................................... The trusteed, non-contributory, defined benefit pension plan of Panhandle, Consumers and CMS Energy 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 PURPA.............................................. Public Utility Regulatory Policies Act of 1978 RCP................................................ Resource Conservation Plan ROA................................................ Retail Open Access RRP................................................ Renewable Resources Program RTO................................................ Regional Transmission Organization S&P................................................ Standard & Poor's Rating Group, a division of the McGraw Hill Companies, Inc. SEC................................................ U.S. Securities and Exchange Commission 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.S., 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. 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. 98........................................ SFAS No. 98, "Accounting for Leases" SFAS No. 106....................................... SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" SFAS No. 115....................................... SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
7 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" 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 Special Committee.................................. A special committee of independent directors, established by CMS Energy's Board of Directors, to investigate matters surrounding round-trip trading Stranded Costs..................................... Costs incurred by utilities in order to serve their customers in a regulated monopoly environment, which may not be recoverable in a competitive environment because of customers leaving their systems and ceasing to pay for their costs. These costs could include owned and purchased generation and regulatory assets. Superfund.......................................... Comprehensive Environmental Response, Compensation and Liability Act Taweelah........................................... Al Taweelah A2, a power and desalination plant of Emirates CMS Power Company, in which CMS Generation holds a 40 percent interest 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
8 (This page intentionally left blank) 9 CMS Energy Corporation 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. This MD&A has been prepared in accordance with the instructions to Form 10-Q and Item 303 of Regulation S-K. This MD&A should be read in conjunction with the MD&A contained in CMS Energy's Form 10-K for the year ended December 31, 2004. 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, electric distribution, 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 retain. 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 us 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. As a result of Michigan's Customer Choice Act, which allows alternative electric suppliers to sell electric power directly to our customers, we have lost industrial and commercial customers. As of July 2005, alternative electric suppliers provide 811 MW, or 11 percent, of our electric load. Based on current trends, we predict total load loss by the end of 2005 to be in the range of 900 MW to 950 MW. However, we cannot assure that the actual load loss will fall within that range. 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. Natural gas prices have increased substantially in recent years. Because the price the MCV Partnership can charge the utility for energy has not increased to reflect current natural gas prices, the MCV Partnership's financial performance has been impacted negatively. In 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 CMS-1 CMS Energy Corporation Facility and thereby improve the financial performance of the MCV Partnership without increased costs to customers. 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 2005, we retired higher-interest rate debt through the use of proceeds from the issuance of $150 million of CMS Energy senior notes, $550 million of Consumers' FMB, and $150 million of Consumers' senior insured quarterly notes. We also issued 23 million shares of common stock and infused $550 million into Consumers in 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. FORWARD-LOOKING STATEMENTS AND RISK FACTORS This Form 10-Q 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, - 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 including: - recovery of future Stranded Costs incurred due to customers choosing alternative energy suppliers, CMS-2 CMS Energy Corporation - 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 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 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 adverse impacts of the new Midwest Energy Market upon power supply and transmission costs, - 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 certain electric energy contracts at CMS ERM as derivatives, - the GAAP requirement that we utilize mark-to-market accounting on certain 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, CMS-3 CMS Energy Corporation - 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, - 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. For additional information regarding these and other uncertainties, see Note 3, Contingencies. RESULTS OF OPERATIONS CMS ENERGY CONSOLIDATED RESULTS OF OPERATIONS
In Millions (except for per share amounts) - -------------------------------------------------------------------------------- Three months ended June 30 2005 2004 Change - -------------------------------------------------------------------------------- Net Income Available to Common Stockholders $ 27 $ 16 $ 11 Basic Earnings Per Share $ 0.12 $ 0.10 $ 0.02 Diluted Earnings Per Share $ 0.12 $ 0.10 $ 0.02 - -------------------------------------------------------------------------------- Electric Utility $ 46 $ 27 $ 19 Gas Utility (3) 1 (4) Enterprises 29 37 (8) Corporate Interest and Other (45) (49) 4 - -------------------------------------------------------------------------------- CMS Energy Net Income Available to Common Stockholders $ 27 $ 16 $ 11 ================================================================================
For the three months ended June 30, 2005, our net income available to common stockholders was $27 million, up from $16 million for the three months ended June 30, 2004. The increase reflects non-recurring tax benefits associated with the American Jobs Creation Act of 2004 and an improvement at our electric utility, primarily due to weather driven higher than normal residential electric utility sales in June and the collection of an electric surcharge related to the recovery of costs incurred in the transition to customer choice. Partially offsetting these increases were the reduction of mark-to-market impacts associated with gas contracts at the MCV Partnership and changes in mark-to-market adjustments on interest rate swaps associated with our investment in Taweelah. Further offsetting the increase was a reduction in net income at our gas utility, as higher operating and maintenance costs exceeded the benefits derived from increased deliveries and the increase in revenue resulting from the MPSC gas rate surcharge authorized in October of 2004. CMS-4 CMS Energy Corporation Specific changes to net income available to common stockholders for the three months ended June 30, 2005 versus the same period in 2004 are:
In Millions - -------------------------------------------------------------------------------- - non-recurring income tax benefit recorded at Enterprises resulting from the American Jobs Creation Act of 2004, $ 24 - increase at our electric utility primarily due to increased deliveries driven by higher than normal electric utility sales in June and the collection of an electric surcharge related to the recovery of security costs, Stranded Costs, and costs incurred in the transition to customer choice, offset partially by increased operating expenses and power supply costs in excess of the amount which we are allowed to recover from our residential customers, whose rates are capped, 19 - reduction in corporate and other interest expenses primarily due to lower average debt levels and a 47 basis point reduction in the average rate of interest, 4 - change in mark-to-market valuation adjustments associated with our investment in Taweelah, as losses on interest rate swaps in the current period replaced the gains recorded on these instruments in the same period of 2004, (22) - reduction in income from our ownership interest in the MCV Partnership primarily due to the settlement of certain gas contracts and mark-to-market adjustments on financial hedges and the remaining gas contracts, and (10) - decrease in net income from our gas utility primarily due to increases in benefit costs and safety, reliability and customer service expenses offset partially by increased deliveries and increased revenue associated with the gas rate surcharge authorized by the MPSC in October of 2004. (4) - -------------------------------------------------------------------------------- Total Change $ 11 ================================================================================
In Millions (except for per share amounts) - -------------------------------------------------------------------------------- Six months ended June 30 2005 2004 Change - -------------------------------------------------------------------------------- Net Income Available to Common Stockholders $ 177 $ 7 $ 170 Basic Earnings Per Share $ 0.86 $ 0.04 $ 0.82 Diluted Earnings Per Share $ 0.82 $ 0.04 $ 0.78 - -------------------------------------------------------------------------------- Electric Utility $ 79 $ 75 $ 4 Gas Utility 55 57 (2) Enterprises 134 (23) 157 Corporate Interest and Other (91) (98) 7 Discontinued Operations - (2) 2 Accounting Changes - (2) 2 - -------------------------------------------------------------------------------- CMS Energy Net Income Available to Common Stockholders $ 177 $ 7 $ 170 ================================================================================
For the six months ended June 30, 2005, our net income available to common stockholders was $177 million, up from $7 million for the six months ended June 30, 2004. The improvement reflects the favorable effect of mark-to-market adjustments recorded at the MCV Partnership, non-recurring tax benefits from the American Jobs Creation Act of 2004, reduced corporate interest expense, and the absence in 2005 of impairment charges recorded in 2004. Also contributing to the improvement was the positive impact of an increase in the collection of an electric surcharge related to the recovery of costs incurred in the transition to customer choice, increased regulatory return on capital expenditures, and weather driven higher than CMS-5 CMS Energy Corporation normal residential electric utility sales in June 2005. Partially offsetting these increases were changes in mark-to-market adjustments on interest rate swaps associated with our investment in Taweelah and a decrease in net income at our gas utility due to higher operating, MSBT and depreciation expenses. Specific changes to net income available to common stockholders for the six months ended June 30, 2005 versus the same period in 2004 are:
In Millions - -------------------------------------------------------------------------------- - the absence in 2005 of an $81 million after-tax impairment charge related to the sale of our Loy Yang investment that was recorded in 2004, $ 81 - increase in earnings from our ownership interest in the MCV Partnership primarily due to the increase in mark-to-market adjustments of certain long-term gas contracts and financial hedges, 53 - non-recurring income tax benefit recorded at Enterprises resulting from the American Jobs Creation Act of 2004, 24 - reduction in corporate interest expenses primarily due to lower average debt levels and a 53 basis point reduction in the average rate of interest, 12 - earnings from our investment in Shuweihat, as the business achieved commercial operation in the fourth quarter of 2004, 9 - increase in income from our electric utility, primarily due to higher than normal electric utility sales in June 2005, the return on capital expenditures in excess of our depreciation base as allowed by the Customer Choice Act, and the collection of an electric surcharge related to the recovery of security costs, Stranded Costs, and costs incurred in the transition to customer choice. These increases were offset partially by increased operating expenses, customers choosing alternative suppliers, and power supply purchase costs exceeding power supply revenue, 4 - reduction in other corporate expenses, 3 - the absence in 2005 of a loss related to accounting changes, 2 - the absence in 2005 of net losses associated with discontinued operations, 2 - change in mark-to-market valuation adjustments associated with our investment in Taweelah, as losses on interest rate swaps in the current period replaced the gains recorded on these instruments in the same period of 2004, (10) - the absence in 2005 of the settlement agreement that DIG and CMS MST entered into with the purchasers of electric power and steam from DIG, and (8) - decrease in net income from our gas utility, as increases in operation and maintenance cost, MSBT expense, and depreciation expense outpaced the increase in gas rates authorized by the MPSC in October of 2004. (2) - -------------------------------------------------------------------------------- Total Change $ 170 ================================================================================
CMS-6 CMS Energy Corporation ELECTRIC UTILITY RESULTS OF OPERATIONS
In Millions - ----------------------------------------------------------------------------------------------------- June 30 2005 2004 Change - ----------------------------------------------------------------------------------------------------- Three months ended $ 46 $ 27 $ 19 Six months ended $ 79 $ 75 $ 4 =====================================================================================================
Three Months Ended Six Months Ended Reasons for the change: June 30, 2005 vs. 2004 June 30, 2005 vs. 2004 - ----------------------------------------------------------------------------------------------------- Electric deliveries $ 34 $ 38 Power supply costs and related revenue (2) (11) Other operating expenses, other income, and non- commodity revenue (8) (31) Regulatory return on capital expenditures 6 13 General taxes (1) (4) Fixed charges 1 2 Income taxes (11) (3) -------------------------------------------------- Total change $ 19 $ 4 =====================================================================================================
ELECTRIC DELIVERIES: For the three months ended June 30, 2005, electric deliveries increased 0.5 billion kWh or 5.1 percent versus the same period in 2004. For the six months ended June 30, 2005, electric deliveries increased 0.1 billion kWh or 0.4 percent versus the same period in 2004. The corresponding increases in electric delivery revenue for both periods were due to increased sales to residential customers due to warmer weather and increased surcharge revenue, offset partially by reduced electric delivery revenue from customers choosing alternative electric suppliers. On July 1, 2004, Consumers started collecting a surcharge related to the recovery of costs incurred in the transition to customer choice. This surcharge increased electric delivery revenue by $6 million for the three months ended June 30, 2005 and $11 million for the six months ended June 30, 2005. Surcharge revenue related to the recovery of security costs and Stranded Costs increased electric delivery revenue by an additional $3 million for the three months ended June 30, 2005 and $6 million for the six months ended June 30, 2005. POWER SUPPLY COSTS AND RELATED REVENUE: Our recovery of power supply costs is capped for our residential customers. For the three months ended June 30, 2005, our underrecovery of power costs allocated to these capped customers increased by $6 million versus the same period in 2004. For the six months ended June 30, 2005, our underrecovery of power costs allocated to these capped customers increased by $20 million versus the same period in 2004. Power supply-related costs increased in 2005 primarily due to higher coal costs and higher priced purchased power to replace the generation loss from outages at our Palisades and Campbell 3 generating plants. Partially offsetting these underrecoveries are transmission and nitrogen oxide allowance expenditures related to our capped customers, which we have deferred for future recovery. For the three months ended June 30, 2005, we deferred $4 million of these costs. For the six months ended June 30, 2005, we deferred $9 million of these costs. CMS-7 CMS Energy Corporation OTHER OPERATING EXPENSES, OTHER INCOME, AND NON-COMMODITY REVENUE: For the three months ended June 30, 2005, other operating expenses increased $14 million, other income increased $4 million, and non-commodity revenue increased $2 million versus the same period in 2004. For the six months ended June 30, 2005, other operating expenses increased $39 million, other income increased $4 million, and non-commodity revenue increased $4 million versus the same period in 2004. The increase in other operating expenses reflects higher depreciation and amortization expense, and higher pension and benefit expense. Depreciation and amortization expense increased due to higher plant in service and greater amortization of certain regulatory assets. Pension and benefit expense increased primarily due to changes in actuarial assumptions and the remeasurement of our pension and OPEB plans to reflect the new collective bargaining agreement between the Utility Workers Union of America and Consumers. Benefit expense also reflects the reinstatement of the employer matching contribution to our 401(k) plan. In addition, the increase in other operating expenses reflects increased underrecovery expense related to the MCV PPA, offset partially by our direct savings from the RCP. In 1992, a liability was established for estimated future underrecoveries of power supply costs under the MCV PPA. In 2004, a portion of the cash underrecoveries continued to reduce this liability until its depletion in December. In 2005, all cash underrecoveries are expensed directly to income. Partially offsetting this increased operating expense were the savings from the RCP approved by the MPSC in January 2005. The RCP allows us to dispatch the MCV Facility on the basis of natural gas 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. The MCV Facility's fuel cost savings are first used to offset the cost of replacement power and fund a renewable energy program. Remaining savings are split between the MCV Partnership and us. Our direct savings are shared 50 percent with customers in 2005 and 70 percent thereafter. The cost associated with the MCV PPA cash underrecoveries, net of our direct savings from the RCP, increased operating expense $2 million for the three months ended June 30, 2005 and $4 million for the six months ended June 30, 2005 versus the same periods in 2004. The increase in other income is primarily due to higher interest income on short-term cash investments, offset partially by expenses associated with the early retirement of debt in 2005. The increase in non-commodity revenue is primarily due to higher transmission services revenue. REGULATORY RETURN ON CAPITAL EXPENDITURES: The return on capital expenditures in excess of our depreciation base as allowed by the Customer Choice Act increased income by $6 million for the three months ended June 30, 2005 and $13 million for the six months ended June 30, 2005 versus the same periods in 2004. GENERAL TAXES: For the three and six months ended June 30, 2005, general taxes increased versus the same periods in 2004 primarily due to higher MSBT expense. FIXED CHARGES: For the three months ended June 30, 2005, fixed charges reflect a 36 basis point reduction in the average rate of interest on our debt and higher average debt levels versus the same period in 2004. For the six months ended June 30, 2005, fixed charges reflect a 32 basis point reduction in the average rate of interest on our debt and higher average debt levels versus the same period in 2004. INCOME TAXES: For the three and six months ended June 30, 2005, income taxes increased versus the same periods in 2004 primarily due to higher earnings by the electric utility. CMS-8 CMS Energy Corporation GAS UTILITY RESULTS OF OPERATIONS
In Millions - ------------------------------------------------------------------------------------------------- June 30 2005 2004 Change - ------------------------------------------------------------------------------------------------- Three months ended $ (3) $ 1 $ (4) Six months ended $ 55 $ 57 $ (2) =================================================================================================
Reasons for the change: Three Months Ended Six Months Ended June 30, 2005 vs. 2004 June 30, 2005 vs. 2004 - ------------------------------------------------------------------------------------------------- Gas deliveries $ 2 $ (1) Gas rate increase 5 21 Gas wholesale and retail services, other gas revenues and other income 1 (1) Operation and maintenance (12) (17) General taxes and depreciation (2) (3) Fixed charges - (2) Income taxes 2 1 -------------------------------------------------- Total change $ (4) $ (2) =================================================================================================
GAS DELIVERIES: For the three months ended June 30, 2005, higher gas delivery revenues reflect increased deliveries to our residential, commercial, and industrial customers versus the same period in 2004. Gas deliveries, including miscellaneous transportation to end-use customers, increased 1.4 bcf or 3.1 percent. For the six months ending June 30, 2005, lower gas delivery revenues reflect decreased deliveries to our residential and industrial transportation customers. Gas deliveries, including miscellaneous transportation to end-use customers, decreased 2.0 bcf or 1.0 percent. 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 annual increase of $58 million through a two-year surcharge. As a result of these orders, gas revenues increased $5 million for the three months ended June 30, 2005 and $21 million for the six months ended June 30, 2005 versus the same periods in 2004. GAS WHOLESALE AND RETAIL SERVICES, OTHER GAS REVENUES AND OTHER INCOME: For the three months ended June 30, 2005, other income increased $1 million primarily due to higher interest income on short-term cash investments versus the same period in 2004. For the six months ended June 30, 2005, gas wholesale and retail services revenue decreased primarily due to decreases in miscellaneous transportation and storage revenue. OPERATION AND MAINTENANCE: For the three and six months ended June 30, 2005, operation and maintenance expenses increased primarily due to increases in benefit costs and additional safety, reliability, and customer service expense. Pension and benefit expense increased primarily due to changes in actuarial assumptions and the remeasurement of our pension and OPEB plans to reflect the new collective bargaining agreement between the Utility Workers Union of America and Consumers. Benefit expense also reflects the reinstatement of the employer matching contribution to our 401(k) plan. CMS-9 CMS Energy Corporation GENERAL TAXES AND DEPRECIATION: For the three and six months ended June 30, 2005, general tax expense increased primarily due to higher MSBT expense. Depreciation expense increased due to higher plant in service. FIXED CHARGES: For the six months ended June 30, 2005, fixed charges reflect a 32 basis point reduction in the average rate of interest on our debt and higher average debt levels versus the same period in 2004. INCOME TAXES: For the three and six months ended June 30, 2005, income taxes decreased primarily due to lower earnings by the gas utility. ENTERPRISES RESULTS OF OPERATIONS
In Millions - -------------------------------------------------------------------------------------------------- June 30 2005 2004 Change - -------------------------------------------------------------------------------------------------- Three months ended $ 29 $ 37 $ (8) Six months ended $ 134 $ (23) $ 157 ==================================================================================================
Three Months Ended Six Months Ended Reasons for the change: June 30, 2005 vs. 2004 June 30, 2005 vs. 2004 - ------------------------------------------------------------------------------------------------- Operating revenues $ 39 $ 32 Cost of gas and purchased power (76) 120 Earnings from equity method investees (19) (7) Gain on sale of assets 2 4 Operation and maintenance (5) (3) General taxes, depreciation, and other income 3 3 Asset impairment charges - 136 Fixed charges 5 12 Minority interest 15 (87) Income taxes 28 (53) ------------------------------------------------- Total change $ (8) $ 157 =================================================================================================
OPERATING REVENUES AND COST OF GAS AND PURCHASED POWER: For the three months ended June 30, 2005, operating revenues increased $39 million versus the same period in 2004 and the related cost of gas and purchased power increased $76 million versus the same period in 2004. These increases were primarily due to the impact of increased customer demand on deliveries, fuel costs, and purchased power primarily at our South American subsidiaries and increased wholesale power and gas sales at CMS ERM. Also contributing to the increase in cost of gas and purchase power were mark-to-market losses at the MCV Partnership. For the six months ended June 30, 2005, operating revenues increased $32 million versus the same period in 2004 due to increased demand at our South American subsidiaries and an increase in wholesale power and gas sales at CMS ERM. Related cost of gas and purchased power decreased $120 million versus the same period in 2004, primarily due to mark-to-market gains at the MCV Partnership. This decrease was partially offset by increased fuel cost and increased purchase power associated with higher demand at our South American subsidiaries, and higher wholesale power and gas costs at CMS ERM. EARNINGS FROM EQUITY METHOD INVESTEES: Earnings from equity method investees decreased $19 million for the three months ended June 30, 2005 versus the same period in 2004. The decrease was primarily due CMS-10 CMS Energy Corporation to a $22 million change in mark-to-market adjustments associated with our investment in Taweelah as losses on interest rate swaps in the current period replaced the gains recorded on these instruments in the same period of 2004. Also contributing to the decrease was a $3 million reduction in earnings from our investment in Jorf Lasfar primarily due to higher operating and maintenance costs, the absence of $3 million of earnings from Goldfields, which we sold in August of 2004, and $2 million of other decreases in earnings. These decreases were offset partially by a $7 million increase in earnings from GasAtacama, as the Argentine Government lifted its natural gas export restrictions in the third quarter of 2004 and $4 million of earnings from Shuweihat, which achieved commercial operation in the fourth quarter of 2004. Earnings from equity method investees decreased $7 million for the six months ended June 30, 2005 versus the same period in 2004. The decrease was primarily due to a $10 million change in mark-to-market adjustments associated with our investment in Taweelah as losses on interest rate swaps in the current period replaced the gains recorded on these instruments in the same period of 2004. Also contributing to the decrease was the absence of $6 million in earnings from Goldfields, which we sold in August of 2004, $5 million in lower earnings at Neyveli primarily due to costs associated with refinancing, and $3 million of other decreases in earnings. These decreases were offset partially by $9 million in earnings from Shuweihat, which achieved commercial operation in the fourth quarter of 2004 and an $8 million increase in earnings from GasAtacama, as the Argentine Government lifted its natural gas export restrictions in the third quarter of 2004. GAIN ON SALE OF ASSETS: For the three months ended June 30, 2005, gains on asset sales were $2 million due to the gain on the sale of our investment in the SLAP Fund in 2005. There were no significant gains or losses on asset sales during this period in 2004. For the six months ended June 30, 2005, gains on asset sales increased $4 million versus the same period in 2004. This is due to a $3 million gain on the sale of GVK and a $2 million gain on the sale of the SLAP Fund in 2005 versus a $1 million gain on the sale of the Bluewater Pipeline in 2004. OPERATION AND MAINTENANCE: For the three months ended June 30, 2005, operation and maintenance expenses increased $5 million versus the same period in 2004. The increase was primarily due to maintenance expense on a turbine shaft at T.E.S. Filer City Station Limited Partnership and profit sharing payments made to union employees at our CPEE subsidiary. For the six months ended June 30, 2005, operation and maintenance expenses increased $3 million versus the same period in 2004. The increase was primarily due to costs related to higher electrical production and higher professional fees at our South American subsidiaries, offset partially by lower legal fees in connection with an arbitration in Argentina. GENERAL TAXES, DEPRECIATION AND OTHER INCOME: For the three months ended June 30, 2005, the net of general tax expense, depreciation and other income increased operating income primarily as a result of net positive foreign exchange activity. For the six months ended June 30, 2005, the net of general tax expense, depreciation and other income increased operating income primarily as a result of the reversal of a contingent liability at our gas storage facility at Leonard Field and net positive foreign exchange activity. ASSET IMPAIRMENT CHARGES: For the six months ended June 30, 2005, asset impairment charges decreased $136 million versus the same period in 2004. The decrease relates to the absence, in 2005, of the Loy Yang impairment recorded in 2004. FIXED CHARGES: For the three and six months ended June 30, 2005, fixed charges decreased versus the same CMS-11 CMS Energy Corporation periods in 2004 primarily due to lower expenses at the MCV Partnership. MINORITY INTEREST: For the three months ended June 30, 2005, earnings attributed to minority interest owners in our subsidiaries decreased versus the same periods in 2004, primarily due to the impact of mark-to-market losses at the MCV Partnership. For the six months ended June 30, 2005, earnings attributed to minority interest owners in our subsidiaries increased versus the same periods in 2004, primarily due to the impact of mark-to-market gains at the MCV Partnership. INCOME TAXES: For the three months ended June 30, 2005, income tax expense decreased versus the same period in 2004. The decrease was due to non-recurring income tax benefits related to the American Jobs Creation Act of 2004. For the six months ended June 30, 2005, income tax expense increased versus the same period in 2004. The increase was due to higher earnings in 2005, and the absence of tax benefits recorded in 2004 related to the Loy Yang impairment. This increase was offset partially by non-recurring income tax benefits related to the American Jobs Creation Act of 2004. CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS
In Millions - ------------------------------------------------------------------------------ June 30 2005 2004 Change - ------------------------------------------------------------------------------ Three months ended $ (45) $ (49) $ 4 Six months ended $ (91) $ (98) $ 7 ==============================================================================
For the three months ended June 30, 2005, corporate interest and other net expenses were $45 million, a decrease of $4 million versus the same period in 2004. The decrease reflects a $4 million reduction in corporate interest primarily due to lower average debt levels and a 47 basis point reduction in the average rate of interest. For the six months ended June 30, 2005, corporate interest and other net expenses were $91 million, a decrease of $7 million versus the same period in 2004. The decrease reflects a $12 million reduction in corporate interest primarily due to lower average debt levels and a 53 basis point reduction in the average rate of interest as well as a $4 million reduction in other interest expenses allocated from the utilities. These decreases were offset partially by a $1 million increase in other expenses and the absence in 2005 of an $8 million benefit from the reversal of a currency translation adjustment related to the sale of Loy Yang that was recorded in 2004. DISCONTINUED OPERATIONS: For the three and six months ended June 30, 2005, we had no activity from operations accounted for as discontinued. For the six months ended June 30, 2004, our net loss from Discontinued Operations was $2 million. 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 of our benefit plans. CMS-12 CMS Energy Corporation CRITICAL 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. 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 the history and 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 liabilities, 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, and 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 provided adequately 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. 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. There have been no material changes to the accounting for financial instruments since the year ended December 31, 2004. For details on financial instruments, see Note 6, Financial and Derivative Instruments. DERIVATIVE INSTRUMENTS: We use SFAS No. 133 to account for derivatives. Except as noted within this section, there have been no material changes to the accounting for derivative instruments since the year ended December 31, 2004. The MISO began operating the Midwest Energy Market on April 1, 2005. The Midwest Energy Market provides day-ahead and real-time energy market information and centralized generation dispatch for market participants. At this time, we believe that the commencement of this market does not constitute the development of an active energy market in Michigan. However, as we gain additional experience with the Midwest Energy Market, we will continue to evaluate whether or not the activity level within this market leads to the conclusion that an active energy market exists. If an active market develops in the future, certain of our electric purchases and sales contracts may qualify as derivatives. However, we believe that we will be able to apply the normal purchases and sales exception to the majority of these contracts (including the MCV PPA), which would not require us to mark these contracts to market. Also as part of the Midwest Energy Market, FTRs were established. FTRs are financial instruments CMS-13 CMS Energy Corporation established to manage price risk relating to electricity transmission congestion. An FTR entitles the holder to receive compensation (or remit payment) for certain congestion-related transmission charges that arise when the transmission grid is congested. We presently hold FTRs for certain areas on the transmission grid within the MISO's market area. FTRs are derivative instruments and are required to be recognized on our Consolidated Balance Sheets as assets or liabilities at their fair values, with any subsequent changes in fair value recognized in earnings. As of June 30, 2005, we recorded an asset of $1 million associated with the fair value of FTRs on our Consolidated Balance Sheets. 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 our Consolidated Balance Sheets. Due to the implementation of the RCP in January 2005, the MCV Partnership 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 are accounted for as derivatives, with changes in fair value recorded in earnings each quarter. Additionally, the financial hedges associated with these contracts no longer qualify as cash flow hedges. Thus, as of January 2005, any changes in the fair value of these financial hedges are recorded in earnings each quarter. The MCV Partnership expects future earnings volatility on both the gas fuel derivative contracts and the related financial hedges, since gains and losses will be recorded each quarter. For the six months ended June 30, 2005, we recorded a $170 million gain associated with the increase in fair value of these instruments on our Consolidated Statements of Income, resulting in a cumulative mark-to-market gain through June 30, 2005 of $226 million. The majority of this mark-to-market gain is expected to reverse through earnings during 2005 and 2006 as the gas is purchased and the financial hedges settle, with the remainder reversing between 2007 and 2011. 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 June 30, 2005, we assumed market-based interest rates ranging between 3.34 percent and 4.22 percent (depending on the term of the contract) and monthly volatility rates ranging between 25 percent and 42 percent to calculate the fair value of the gas fuel contracts held by the MCV Partnership. Also, at June 30, 2005, we assumed a market-based interest rate of 3.00 percent and monthly volatility rates ranging between 35 percent and 39 percent to calculate the fair value of our gas options. 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. There have been no material changes to the accounting for CMS ERM's contracts since the year ended December 31, 2004. 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 at June 30, 2005: CMS-14 CMS Energy Corporation
In Millions - ---------------------------------------------------------------------------------------------------------- Non- Trading Trading Total - ---------------------------------------------------------------------------------------------------------- Fair value of contracts outstanding at December 31, 2004 $ (199) $ 201 $ 2 Fair value of new contracts when entered into during the period (a) - 2 2 Changes in fair value attributable to changes in valuation techniques and assumptions - - - Contracts realized or otherwise settled during the period 31 (35) (4) Other changes in fair value (b) (105) 116 11 - ---------------------------------------------------------------------------------------------------------- Fair value of contracts outstanding at June 30, 2005 $ (273) $ 284 $ 11 ==========================================================================================================
(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 June 30, 2005 In Millions - ------------------------------------------------------------------------------------------------------------------ Total Maturity (in years) Source of Fair Value Fair Value Less than 1 1 to 3 4 to 5 Greater than 5 - ------------------------------------------------------------------------------------------------------------------ Prices actively quoted $ - $ - $ - $ - $ - Prices obtained from external sources or based on models and other valuation methods (273) (73) (130) (61) (9) - ------------------------------------------------------------------------------------------------------------------ Total $ (273) $ (73) $ (130) $ (61) $ (9) ==================================================================================================================
Fair Value of Trading Contracts at June 30, 2005 In Millions - ------------------------------------------------------------------------------------------------------------------ Total Maturity (in years) Source of Fair Value Fair Value Less than 1 1 to 3 4 to 5 Greater than 5 - ------------------------------------------------------------------------------------------------------------------ Prices actively quoted $ (44) $ (7) $ (27) $ (10) $ - Prices obtained from external sources or based on models and other valuation methods 328 92 158 69 9 - ------------------------------------------------------------------------------------------------------------------ Total $ 284 $ 85 $ 131 $ 59 $ 9 ==================================================================================================================
MARKET RISK INFORMATION: The following is an update of our risk sensitivities since the year ended December 31, 2004. These 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 SENSITIVITY ANALYSIS (assuming a 10 percent adverse change in market interest rates):
In Millions - ------------------------------------------------------------------------------------------------------------------ June 30, 2005 December 31, 2004 - ------------------------------------------------------------------------------------------------------------------ Variable-rate financing - before-tax annual earnings exposure $ 1 $ 2 Fixed-rate financing - potential loss in fair value (a) 216 216 ==================================================================================================================
(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 CMS-15 CMS Energy Corporation be included in the sensitivity analysis, but can have an impact on financial results. COMMODITY PRICE RISK SENSITIVITY ANALYSIS (assuming a 10 percent adverse change in market prices):
In Millions - ------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - ------------------------------------------------------------------------------- Potential REDUCTION in fair value: Gas supply option contracts $ - $ 1 FTRs - - CMS ERM electric and gas forward contracts 12 10 Derivative contracts associated with the MCV Partnership: Gas fuel contracts (a) 38 17 Gas fuel futures and swaps 47 41 ===============================================================================
(a) The increased potential reduction in fair value for the MCV Partnership's gas fuel contracts is due to an increased number of contracts accounted for as derivatives. This is a result of the implementation of the RCP, at which time the MCV Partnership determined that a significant portion of its gas fuel contracts no longer qualify as normal purchases and must now be accounted for as derivatives. TRADING ACTIVITY COMMODITY PRICE RISK SENSITIVITY ANALYSIS (assuming a 10 percent adverse change in market prices):
In Millions - ------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - ------------------------------------------------------------------------------- Potential REDUCTION in fair value: Electricity-related option contracts $ - $ - Gas-related option contracts 1 3 Gas-related swaps and futures 13 7 ===============================================================================
INVESTMENT SECURITIES PRICE RISK SENSITIVITY ANALYSIS (assuming a 10 percent adverse change in market prices):
In Millions - ------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - ------------------------------------------------------------------------------- Potential REDUCTION in fair value of available-for-sale equity securities (primarily SERP investments) $ 5 $ 5 ===============================================================================
Consumers maintains trust funds, as required by the NRC, which may only be used to fund certain costs of nuclear plant decommissioning. These funds are 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-16 CMS Energy Corporation INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY Argentina: As part of its energy privatization incentives, Argentina directed CMS Gas Transmission to calculate tariffs in U.S. dollars then convert them to pesos at the prevailing exchange rate, and to adjust tariffs every six months to reflect changes in inflation. Starting in early 2000, Argentina suspended the inflation adjustments. 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 Government of Argentina to renegotiate such tariffs. CMS Gas Transmission began arbitration with the International Centre for the Settlement of Investment Disputes (ICSID) in mid-2001, citing breaches by Argentina under the Argentine - U.S. Bilateral Investment Treaty. In May 2005, an ICSID tribunal concluded, among other things, that Argentina's economic emergency did not excuse Argentina from liability. The ICSID tribunal found in favor of CMS Gas Transmission, and awarded damages of U.S. $133 million, plus interest. Under the rules of the ICSID Convention, either party may seek an annulment of the award from a newly constituted tribunal. Argentina has indicated its intent to seek such an annulment. 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. On September 1, 2005, we will implement the Defined Company Contribution Plan. The Defined Company Contribution Plan will provide an employer cash contribution of 5 percent of base pay to the existing Employees' Savings Plan. No employee contribution is required to receive the plan's employer contribution. All employees hired on and after September 1, 2005 will participate in this plan as part of their retirement benefit program. Cash balance pension plan participants will also participate in the Defined Company Contribution Plan on September 1, 2005. Additional pay credits under the cash balance pension plan will be discontinued as of that date. We use SFAS No. 87 to account for pension costs. 401(k): We resumed the employer's match on our 401(k) Savings Plan on January 1, 2005. The plan provides for an employer match of 50 percent on eligible contributions up to the first six percent of an employee's wages. Effective September 1, 2005, employees enrolled in the company's 401(k) Savings Plan will have the employer match increased from 50 percent to 60 percent. 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 CMS-17 CMS Energy Corporation - anticipated health care costs. Any change in these assumptions can change significantly the liability and associated expenses recognized in any given year. The following table provides an estimate of our pension cost, OPEB cost, and cash contributions for the next three years:
In Millions - ----------------------------------------------------------------------------- Expected Costs Pension Cost OPEB Cost Contributions - ----------------------------------------------------------------------------- 2006 $ 95 $ 38 $ 82 2007 104 34 184 2008 99 30 112 =============================================================================
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. For additional details on postretirement benefits, see Note 7, Retirement Benefits. OTHER Other accounting policies that are important to an understanding of our results of operations and financial condition include: - accounting for long-lived assets and equity method investments, - accounting for the effects of industry regulation, - accounting for asset retirement obligations, and - accounting for nuclear decommissioning costs. There have been no material changes to these accounting policies since they the year ended December 31, 2004. 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 require additional liquidity due to the timing of the cost recoveries as gas prices increase. 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 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 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. CMS-18 CMS Energy Corporation CASH POSITION, INVESTING, AND FINANCING Our operating, investing, and financing activities meet consolidated cash needs. At June 30, 2005, $1.080 billion consolidated cash was on hand, which includes $67 million of restricted cash and $214 million from the entities consolidated pursuant to FASB Interpretation No. 46. For additional details, see Note 11, Consolidation of Variable Interest Entities. Our primary ongoing source of cash is dividends and other distributions from our subsidiaries. For the six months ended June 30, 2005, Consumers paid $167 million in common stock dividends to CMS Energy. SUMMARY OF CASH FLOWS:
In Millions - ------------------------------------------------------------------------------- Six months ended June 30 2005 2004 - ------------------------------------------------------------------------------- Net cash provided by (used in): Operating activities $ 506 $ 478 Investing activities (136) (403) --------------- Net cash provided by operating and investing activities 370 75 Financing activities (27) (276) Effect of exchange rates on cash 1 (1) --------------- Net increase (decrease) in cash and cash equivalents $ 344 $ (202) ===============================================================================
OPERATING ACTIVITIES: For the six months ended June 30, 2005, net cash provided by operating activities increased $28 million versus the same period in 2004 due to decreases in inventory from lower volumes of gas purchased and other timing differences. INVESTING ACTIVITIES: For the six months ended June 30, 2005, net cash used in investing activities decreased $267 million primarily due to a net increase in short-term investment proceeds of $301 million, offset by an increase in capital expenditures of $43 million. FINANCING ACTIVITIES: For the six months ended June 30, 2005, net cash used in financing activities decreased $249 million primarily due to net proceeds from the issuance of common stock of $283 million, offset by a decrease of $34 million in net proceeds from borrowings. For additional details on long-term debt activity, see Note 4, Financings and Capitalization. OBLIGATIONS AND COMMITMENTS REVOLVING CREDIT FACILITIES: For details on revolving credit facilities, see Note 4, Financings and Capitalization. OFF-BALANCE SHEET ARRANGEMENTS: There have been no material changes in off-balance sheet arrangements since the year ended December 31, 2004. For 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." DIVIDEND RESTRICTIONS: For details on dividend restrictions, see Note 4, Financings and Capitalization. OTHER: CMS ERM is a party to a certain gas supply contract whose performance is backed by a bond issued by American Home Assurance Co. (AHA), a subsidiary of American International Group, Inc. (AIG), as a jointly liable surety. AHA currently has a surety obligation of $130 million pursuant to this contract. This amount amortizes monthly. The gas supply contract requires that the surety maintain CMS-19 CMS Energy Corporation minimum credit ratings of AA- or better from S&P and Aa3 or better from Moody's. On March 30, 2005, the credit ratings of AIG and AHA were downgraded by S&P from AAA to AA+ with negative watch. On June 3, 2005, S&P downgraded AIG further from AA+ to AA. On March 31, 2005, Moody's lowered its long-term senior debt ratings on AIG and AHA from Aaa to Aa1. On May 2, 2005, Moody's again lowered their long-term senior debt ratings on AIG and AHA from Aa1 to Aa2 and placed their ratings on review for possible further downgrade. On May 31, 2005, Moody's confirmed the Aa2 rating for AIG and revised its outlook to stable. AHA remained under review for possible downgrade. We cannot predict whether these ratings will further decline; however, we have several alternatives in the event that AHA no longer meets the minimum rating requirements. These alternatives include obtaining a letter of credit under our existing revolving credit agreement, seeking an alternative letter of credit arrangement or posting available cash as collateral. These alternatives may have a negative impact on our liquidity. BOND REPURCHASE: In July and through August 4, 2005, we have purchased in the open market $73 million principal amount of our 9.875 percent senior notes due 2007. OUTLOOK CORPORATE OUTLOOK During 2005, we will continue 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 retain. The percentage of our future earnings relating to our larger equity method investments may increase and our total future earnings may depend more significantly upon the performance of those investments. For additional details, see Note 9, 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 us 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 2005, we project electric deliveries to grow approximately three percent. This short-term outlook for 2005 assumes a stronger economy than in 2004 and normal weather conditions during the remainder of 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 or contraction of manufacturing facilities. 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 establish a reserve margin target to address various scenarios and contingencies so that the probability of interrupting service to retail customers because of a supply shortage is no greater than an industry-recognized standard. However, even with the reserve margin target, additional spot purchases during periods when electric prices are high may be required. 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 100 percent from our electric generating plants and long-term CMS-20 CMS Energy Corporation power purchase contracts, and approximately 11 percent from short-term contracts, options for physical deliveries, and other agreements. We have purchased capacity and energy contracts covering the estimated reserve margin requirements for 2005 and covering partially the estimated reserve margin requirements for 2006 through 2007. As a result, we have recognized an asset of $12 million for unexpired capacity and energy contracts at June 30, 2005. COAL DELIVERY DISRUPTIONS: In May 2005, western coal rail carriers experienced derailments and significant service disruptions due to heavy snow and rain conditions. These disruptions affected all shippers of western coal from Wyoming mines as well as coal producers from May 2005 through June 2005. We received notification that, under contractual Force Majeure provisions, the coal tonnage not delivered during this period will not be made up. According to recent announcements, rail repairs will extend through November 2005. Although we expect some impact on coal shipments during the repair period, and as a result our coal inventories may drop below historical levels this winter, based on our current delivery experience, projections, and inventory, we believe we will have adequate coal supply to allow for normal dispatch of our coal-fired generating units. However, we are unable to predict other potential industry-wide shortages, which could affect the ability of our suppliers to deliver on their commitments. TRANSMISSION MARKET DEVELOPMENT: The MISO began operating the Midwest Energy Market on April 1, 2005. The Midwest Energy Market includes a day-ahead and real-time energy market and centralized generation dispatch for market participants. We are a participant in this energy market. The intention of these changes is to meet load requirements in the region reliably and efficiently, to improve management of congestion on the grid, and to centralize dispatch of generation throughout the region. The MISO is now responsible for the reliability and economic dispatch in the entire MISO area, which covers parts of 15 states and Manitoba, including our service territory. We are presently evaluating what financial impact, if any, these changes are having on our operations. RENEWABLE RESOURCES PROGRAM: In January 2005, in collaboration with the MPSC, we established a renewable resources program. Under the RRP, we will purchase energy from approved renewable sources, which include solar, wind, geothermal, biomass, and hydroelectric. Customers will be able to participate in the RRP in accordance with tariffs approved by the MPSC. The MPSC has authorized recovery of costs for the RRP by establishing a fund that consists of an annual contribution from savings generated by the RCP, a surcharge imposed by the MPSC, and contributions from customers. In February 2005, the Attorney General filed appeals of the MPSC orders providing funding for the RRP in the Michigan Court of Appeals. In March 2005, we issued a request for proposal for long-term renewable energy supply contracts. We are in negotiations with certain respondents to this request. 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 load migration to alternative electric suppliers, increased system maintenance and improvement costs, Clean Air Act-related expenditures, and employee pension costs. In April 2005, we filed updated debt and equity information in this case. In June 2005, the MPSC Staff filed its position in this case, recommending a base rate increase of $98 million. The MPSC Staff also recommended an 11.25 percent return on equity to establish rates and recognized all of our projected equity investment (infusions and retained earnings) in 2006. We expect a final order from the MPSC 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, CMS-21 CMS Energy Corporation 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 under discussion in a few municipalities in our service territory. If incurred, we would seek recovery of these costs from our customers located in the municipality affected, subject to MPSC approval. This case has potentially broad ramifications for the electric utility industry in Michigan. In a similar matter, in May 2005, we filed a request with the MPSC that asks the MPSC to rule that the City of East Grand Rapids, Michigan must pay for the relocation of electric utility facilities required by an ordinance adopted by the city. At this time, we cannot predict the outcome of these matters. 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. 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 Nitrogen Oxide State Implementation Plan requires significant reductions in nitrogen oxide emissions. To comply with the regulations, we expect to incur capital expenditures totaling $815 million. The key assumptions 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 8.3 percent. As of June 2005, we have incurred $563 million in capital expenditures to comply with these regulations and anticipate that the remaining $252 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, of which 90 percent have been purchased. The cost of the allowances is estimated to average $8 million per year for 2005-2006. The estimated costs are based on the average cost of the purchased, allocated, and swapped allowances. The need for allowances will decrease after year 2006 with the installation of selective catalytic 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 recently adopted a Clean Air Interstate Rule that requires additional coal-fired electric plant emission controls for nitrogen oxides and sulfur dioxide. The rule involves a two-phase program to reduce emissions of sulfur dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The final rule will require that we run our Selective Catalytic Reduction units year round beginning in 2009 and may require that we purchase additional nitrogen oxide credits beginning in 2009. In addition to the selective catalytic reduction control technology installed to meet the Nitrogen Oxide State Implementation Plan, our current plan includes installation of flue gas desulfurization scrubbers. The scrubbers are to be installed by 2014 to meet the phase I reduction requirements of the Clean Air Interstate Rule at a cost near that of the Nitrogen Oxide State Implementation Plan. CMS-22 CMS Energy Corporation In March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial reductions of mercury emissions from coal-fired electric power plants by 2010 and further reductions by 2018. While the industry has not reached a consensus on the technical methods for curtailing mercury emissions, our capital and operating costs for mercury emissions reductions are expected to be significantly less than what is required for nitrogen oxide compliance. 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 sector. 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 uncertain 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 2007. We are currently performing the required studies 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: 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 July 2005, alternative electric suppliers are providing 811 MW of generation supply to ROA customers. This amount represents a decrease of 5 percent compared to July 2004, and 11 percent of our total distribution load. Several customers notified us of their intent to return to our service after a notification period that ended in June 2005 and July 2005. Customers representing 106 MW returned to our service during this period. Based on this and other current trends, we predict that total load loss by the end of 2005 will be in the range of 900 MW to 950 MW. However, we cannot assure that the actual load loss will fall within that range. Implementation Costs: In June 2005, the MPSC issued an order that authorizes us to recover implementation costs incurred during 2002 and 2003 totaling $6 million, plus the cost of money through the period of collection. We are also pursuing authorization at the FERC for the MISO to reimburse us for Alliance RTO development costs. Included in this amount is $2 million that the MPSC did not approve as part of our 2002 implementation costs application. The FERC denied our request for reimbursement and we are appealing the FERC ruling at the United States Court of Appeals for the District of Columbia. We cannot predict the amount, if any, the FERC will approve as recoverable. CMS-23 CMS Energy Corporation Section 10d(4) Regulatory Assets: 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. 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 in Section 10d(4) costs, which includes the cost of money through the period of collection. In June 2005, the ALJ issued a proposal for decision recommending the MPSC approve recovery of the same Section 10d(4) costs recommended by the MPSC Staff. However, we may have the opportunity to recover certain costs included in our application alternatively in other cases pending before the MPSC. We cannot predict the amount, if any, the MPSC will approve as recoverable. 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." OTHER ELECTRIC UTILITY BUSINESS UNCERTAINTIES 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. 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 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 MCV PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amounts that we collect 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 15, 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 MCV 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. Natural gas prices have increased substantially in recent years. NYMEX forward natural gas prices through 2010 recently were approximately $2 per mcf higher than they were at year-end 2004. Because the price the MCV Partnership can charge us for energy has not increased to reflect current natural gas prices, the MCV Partnership's financial performance has been impacted negatively. If forward gas prices for 2010 and beyond do not decline to the $4 to $6 per mcf range currently anticipated by various government and private natural gas price forecasts, and remain in that range for the remaining life of the MCV PPA, the economics of operating the MCV Facility would be adverse enough to require the MCV Partnership to recognize a substantial impairment of its property, plant and equipment, which are included in our Consolidated Balance Sheets. However, forecasting future natural gas prices is extremely difficult and there are currently differing views among forecasters as to whether such prices will increase, decrease or remain at current levels over any period of time. At present, some of the forecasts indicate natural gas prices in excess of the $4 to $6 per mcf range during the years after 2010. At June 30, 2005, the net book value of the MCV Partnership's property, plant CMS-24 CMS Energy Corporation and equipment was $1.396 billion. Several other factors could alter significantly the MCV Partnership's future impairment analyses including, but not limited to, energy payments to the MCV Partnership, which are based on the cost of coal burned at our coal plants, and any reduction in payments to the MCV Partnership subsequent to September 15, 2007 due to underrecovery of contract costs by Consumers from its customers as a result of past or future actions by the MPSC. Any such impairment would be required to be recognized in the period when management's analysis of the factors described above meets the accounting standards for impairment recognition. We will continue to monitor the current and long-term trends in natural gas prices and their effect on the economics of operating the MCV Facility. For additional details on the MCV Partnership, see Note 3, Contingencies, "Other Consumers' Electric Utility Contingencies - The Midland Cogeneration Venture." 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 by early 2007. We expect a 30-acre area containing eight casks loaded with spent nuclear fuel and other high-level radioactive waste material to be returned to a natural state within two years from the date the DOE begins removing the spent nuclear fuel from Big Rock. Palisades: In March 2005, the NRC completed its end-of-cycle plant performance assessment of Palisades, which covered the calendar year 2004. The NRC determined that Palisades was operated in a manner that preserved public health and safety and met all of the NRC's specific "cornerstone objectives." As of June 2005, 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 September 2006. The amount of spent nuclear fuel at Palisades exceeds the plant's temporary onsite wet storage pool capacity. We are using dry casks for temporary onsite dry storage to supplement the wet storage pool capacity. As of June 2005, 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." Palisades' current license from the NRC expires in 2011. In March 2005, NMC, which operates the Palisades plant, applied for a 20-year license renewal for the plant on behalf of Consumers. The NRC typically takes 22-30 months to review a license renewal application. A decision is expected in 2007. Palisades, like many other nuclear plants, has experienced cracking in reactor head nozzle penetrations. Repairs to two nozzles were made in 2004. We have authorized the purchase of a replacement reactor vessel closure head. The replacement head is being manufactured and is scheduled to be installed in 2007. The replacement head nozzles will be manufactured from materials less susceptible to cracking and should minimize inspection and repair costs. 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. In March 2005, an MPSC ALJ recommended that the complaint be dismissed. Exceptions to CMS-25 CMS Energy Corporation this proposal for decision have been filed, and the matter is now before the MPSC for a decision. 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, - the price of competing energy sources or fuels, - gas consumption per customer, and - changes 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. We started construction of the pipeline in June 2005 and it is expected to be completed and in service by November 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. On July 8, 2005, the Administrative Law Judge hearing the case issued a proposal for decision supporting the project as filed. 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. GAS ENVIRONMENTAL ESTIMATES: We expect to incur investigation and remedial action costs at a number of sites, including 23 former manufactured gas plant sites. For additional details, see Note 3, Contingencies, "Consumers' Gas Utility Contingencies - Gas Environmental Matters." GAS TITLE TRACKING FEES AND SERVICES: There has been no material change in the Gas Title Tracking Fees and Services matter since the year ended December 31, 2004. 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. For additional details on gas cost recovery, see Note 3, Contingencies, "Consumers' Gas Utility Rate Matters -- Gas Cost Recovery." 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. CMS-26 CMS Energy Corporation In October and December 2004, the MPSC issued Opinions and Orders in our gas depreciation case, which reaffirmed the previously ordered $34 million reduction in our depreciation expense. The October 2004 order also required 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. The MPSC has directed us to file our next gas depreciation case within 90 days after the latter of: - the removal cost study filing or - the MPSC issuance of a final order in the pending case related to ARO accounting. The MPSC order on the pending case related to ARO accounting is expected in the first quarter of 2006. We proposed to incorporate the results of the gas depreciation case into gas general rates using a surcharge mechanism if the depreciation case order was not issued concurrently with a gas general rate case order. 2005 GAS RATE CASE: In July 2005, we filed an application with the MPSC seeking a 12 percent authorized return on equity along with a $132 million annual increase in our gas delivery and transportation rates. The primary reasons for the request are recovery of new investments, carrying costs on natural gas inventory related to higher gas prices, system maintenance, employee benefits, and low-income assistance. If approved, the request would add approximately 5 percent to the typical residential customer's average monthly bill. The increase would also affect commercial and industrial customers. As part of this filing, we also requested interim rate relief of $75 million. OTHER CONSUMERS' OUTLOOK COLLECTIVE BARGAINING AGREEMENTS: Approximately 46 percent of our employees are represented by the Utility Workers Union of America. 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 expired on June 1, 2005. In April 2005, a new Operating, Maintenance, and Construction Agreement was reached between the Utility Workers Union of America and Consumers. The Union membership voted to ratify this agreement. The collective bargaining agreement with the Union for our call center employees expired on August l, 2005. In July 2005, Consumers and the Union reached and ratified a new collective bargaining agreement for our call center employees. ENTERPRISES OUTLOOK We plan to continue restructuring our Enterprises 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 not consistent with this focus. SENECA operates an electric utility on Margarita Island, Venezuela under a Concession Agreement with the Venezuelan Ministry of Energy and Mines, now the Ministry of Energy and Petroleum (MEP). The Concession Agreement provides for semi-annual customer tariff adjustments for the effects of inflation and foreign exchange variations. The last tariff adjustment occurred in December 2003. It was less than the amount required by the Concession Agreement and no tariff increases have been granted since then. In July 2003, the MEP approved a fuel subsidy for SENECA to offset partially the effects of its lower tariff revenues. The fuel subsidy expired on December 31, 2004. SENECA has sent several letters to the MEP indicating that the economic circumstances that required the implementation of the fuel subsidy persist. In the letters, SENECA has informed the MEP that, unless it objects, SENECA will continue to apply the fuel subsidy as a credit against a portion of its fuel bills from its fuel supplier, Deltaven, a governmental body CMS-27 CMS Energy Corporation regulated by the MEP. SENECA has not received any response to the letters from the MEP; therefore, SENECA is taking the fuel subsidy as a credit against billings from Deltaven. We are informed that the government is considering whether to grant financial relief to SENECA pursuant to its Concession Agreement obligations. The outcome is uncertain since all alternatives are still being explored. If timely financial relief is not approved, the liquidity of SENECA and the value of our investment in SENECA would be impacted adversely. 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 taxes or 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, - changes in available gas supplies or Argentine government regulations that could restrict natural gas exports to our GasAtacama generating plant, and - impact of indemnity and environmental remediation obligations at Bay Harbor. 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. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS 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 (calendar year 2005 for CMS Energy). In June 2005, we decided on a plan to repatriate $79 million of foreign earnings during the remainder of 2005. Historically, we recorded deferred taxes on these earnings. Since this planned repatriation is expected to qualify for the tax benefit, we reversed $24 million of our deferred tax liability. This adjustment was recorded as a component of income from continuing operations in the second quarter of 2005. We may repatriate additional amounts that may qualify for the repatriation tax benefit during the remainder of 2005. If successful, our current estimate is that additional amounts could range between $50 million and $150 million. The amount of additional repatriation remains uncertain because it is based on future foreign CMS-28 CMS Energy Corporation subsidiary operations, cash flows, financings, and repatriation limitations. This potential additional repatriation could reduce our recorded deferred tax liability by $15 million to $45 million. We expect to be in a position to finalize our assessment regarding any potential repatriation, which may be higher or lower, in the fourth quarter of 2005. NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE SFAS NO. 123R, SHARE-BASED PAYMENT: This Statement requires companies to use the fair value of employee stock options and similar awards at the grant date to value the awards. Companies must expense this amount over the vesting period of the awards. This 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. 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 cash inflows from financing activities rather than as a reduction of taxes paid in operating activities. Excess tax benefits are recorded as adjustments to additional paid-in capital. This Statement is effective for us as of the beginning of 2006. We adopted the fair value method of accounting for share-based awards effective December 2002. Therefore, we do not expect this statement to have a significant impact on our results of operations when it becomes effective. FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS: This Interpretation clarifies the term "conditional asset retirement obligation" as used in SFAS No. 143. The term refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred. This Interpretation also clarifies when an entity would have sufficient information to estimate reasonably the fair value of an asset retirement obligation. For us, this Interpretation is effective no later than December 31, 2005. We are in the process of determining the impact this Interpretation will have on our financial statements upon adoption. CMS-29 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 2005 2004 2005 2004 - -------------------------------------------------------------------------------------------------------------------------------- In Millions, Except Per Share Amounts OPERATING REVENUE $ 1,241 $ 1,093 $ 3,086 $ 2,847 EARNINGS FROM EQUITY METHOD INVESTEES 21 41 52 60 OPERATING EXPENSES Fuel for electric generation 178 184 355 362 Fuel costs mark-to-market at MCV 39 - (170) (6) Purchased and interchange power 113 80 208 157 Cost of gas sold 334 263 1,173 1,024 Other operating expenses 257 224 491 442 Maintenance 58 65 116 122 Depreciation, depletion and amortization 122 108 278 252 General taxes 66 62 141 136 Asset impairment charges - - - 125 ----------------------------------------------------- 1,167 986 2,592 2,614 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 95 148 546 293 OTHER INCOME (DEDUCTIONS) Accretion expense (5) (6) (10) (12) Gain on asset sales, net 2 1 5 3 Interest and dividends 15 7 25 14 Regulatory return on capital expenditures 15 9 31 18 Foreign currency losses, net (3) (3) (4) (6) Other income 10 6 18 9 Other expense (5) (2) (12) (4) ----------------------------------------------------- 29 12 53 22 - -------------------------------------------------------------------------------------------------------------------------------- FIXED CHARGES Interest on long-term debt 121 126 243 256 Interest on long-term debt - related parties 6 14 16 29 Other interest 6 7 10 12 Capitalized interest (1) (1) (2) (3) Preferred dividends of subsidiaries 1 1 2 2 ----------------------------------------------------- 133 147 269 296 - -------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE MINORITY INTERESTS (9) 13 330 19 MINORITY INTERESTS (14) 1 99 12 ----------------------------------------------------- INCOME BEFORE INCOME TAXES 5 12 231 7 INCOME TAX EXPENSE (BENEFIT) (25) (7) 49 (10) ----------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 30 19 182 17 LOSS FROM DISCONTINUED OPERATIONS, NET OF $- AND $1 TAX BENEFIT IN 2004 - - - (2) ----------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING 30 19 182 15 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR RETIREMENT BENEFITS, NET OF $1 TAX BENEFIT IN 2004 - - - (2) ----------------------------------------------------- NET INCOME 30 19 182 13 PREFERRED DIVIDENDS 3 3 5 6 ----------------------------------------------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 27 $ 16 $ 177 $ 7 ================================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CMS-30
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------------------ In Millions, Except Per Share Amounts CMS ENERGY NET INCOME Net Income Available to Common Stockholders $ 27 $ 16 $ 177 $ 7 ==================================================== BASIC EARNINGS PER AVERAGE COMMON SHARE Income from Continuing Operations $ 0.12 $ 0.10 $ 0.86 $ 0.06 Loss from Discontinued Operations - - - (0.01) Loss from Changes in Accounting - - - (0.01) ---------------------------------------------------- Net Income Attributable to Common Stock $ 0.12 $ 0.10 $ 0.86 $ 0.04 ==================================================== DILUTED EARNINGS PER AVERAGE COMMON SHARE Income from Continuing Operations $ 0.12 $ 0.10 $ 0.82 $ 0.06 Loss from Discontinued Operations - - - (0.01) Loss from Changes in Accounting - - - (0.01) ---------------------------------------------------- Net Income Attributable to Common Stock $ 0.12 $ 0.10 $ 0.82 $ 0.04 ==================================================== DIVIDENDS DECLARED PER COMMON SHARE $ - $ - $ - $ - - ------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CMS-31 (This page intentionally left blank) CMS-32 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30 2005 2004 - -------------------------------------------------------------------------------------------------------------------------------- In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 182 $ 13 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $3 per period) 278 252 Regulatory return on capital expenditures (31) (18) Minority interest 99 12 Fuel costs mark-to-market at MCV (170) (6) Asset impairment charges - 125 Capital lease and debt discount amortization 21 14 Accretion expense 10 12 Distributions from related parties less than earnings (16) (44) Gain on the sale of assets (5) (3) Cumulative effect of accounting changes - 2 Changes in other assets and liabilities: Increase in accounts receivable and accrued revenues (78) (112) Decrease in inventories 112 81 Increase in accounts payable 29 61 Increase (decrease) in accrued expenses (50) 5 Deferred income taxes and investment tax credit 58 44 Decrease in other current and non-current assets 11 37 Increase in other current and non-current liabilities 56 3 -------------------------- Net cash provided by operating activities $ 506 $ 478 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) $ (280) $ (237) Cost to retire property (44) (37) Restricted cash (20) (12) Investments in nuclear decommissioning trust funds (3) (3) Proceeds from nuclear decommissioning trust funds 24 23 Proceeds from short-term investments 295 1,072 Purchase of short-term investments (186) (1,264) Maturity of MCV restricted investment securities held-to-maturity 222 300 Purchase of MCV restricted investment securities held-to-maturity (223) (300) Proceeds from sale of assets 59 66 Other investing 20 (11) -------------------------- Net cash used in investing activities $ (136) $ (403) - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes, bonds, and other long-term debt $ 900 $ 9 Issuance of common stock 283 - Retirement of bonds and other long-term debt (1,169) (274) Payment of preferred stock dividends (6) (6) Payment of capital lease obligations (5) (5) Debt issuance costs and financing fees (30) - -------------------------- Net cash used in financing activities $ (27) $ (276) - -------------------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATES ON CASH 1 (1) - -------------------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 344 $ (202) CASH AND CASH EQUIVALENTS FROM EFFECT OF REVISED FASB INTERPRETATION NO. 46 CONSOLIDATION - 174 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 669 532 -------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,013 $ 504 ================================================================================================================================
CMS-33 CMS ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
JUNE 30 2005 DECEMBER 31 (UNAUDITED) 2004 - ------------------------------------------------------------------------------------------------------------- In Millions PLANT AND PROPERTY (AT COST) Electric utility $ 8,044 $ 7,967 Gas utility 3,028 2,995 Enterprises 3,360 3,517 Other 27 28 ----------------------------- 14,459 14,507 Less accumulated depreciation, depletion and amortization 6,115 6,135 ----------------------------- 8,344 8,372 Construction work-in-progress 490 370 ----------------------------- 8,834 8,742 - ------------------------------------------------------------------------------------------------------------- INVESTMENTS Enterprises 698 729 Other 13 23 ----------------------------- 711 752 - ------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents at cost, which approximates market 1,013 669 Restricted cash 67 56 Short-term investments at cost, which approximates market - 109 Accounts receivable, notes receivable and accrued revenue, less allowances of $32 and $38, respectively 601 528 Accounts receivable and notes receivable - related parties 47 53 Inventories at average cost Gas in underground storage 738 856 Materials and supplies 89 90 Generating plant fuel stock 91 84 Price risk management assets 131 91 Regulatory assets - postretirement benefits 19 19 Derivative instruments 241 96 Deferred property taxes 139 167 Prepayments and other 117 181 ----------------------------- 3,293 2,999 - ------------------------------------------------------------------------------------------------------------- NON-CURRENT ASSETS Regulatory Assets Securitized costs 583 604 Additional minimum pension 466 372 Postretirement benefits 128 139 Abandoned Midland Project 10 10 Other 636 552 Price risk management assets 283 214 Nuclear decommissioning trust funds 555 575 Goodwill 27 23 Notes receivable - related parties 205 217 Notes receivable 168 178 Other 562 495 ----------------------------- 3,623 3,379 - ------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 16,461 $ 15,872 =============================================================================================================
CMS-34 STOCKHOLDERS' INVESTMENT AND LIABILITIES
JUNE 30 2005 DECEMBER 31 (UNAUDITED) 2004 - -------------------------------------------------------------------------------------------------------------- In Millions CAPITALIZATION Common stockholders' equity Common stock, authorized 350.0 shares; outstanding 219.2 shares and 195.0 shares, respectively $ 2 $ 2 Other paid-in capital 4,422 4,140 Accumulated other comprehensive loss (333) (336) Retained deficit (1,557) (1,734) ------------------------------ 2,534 2,072 Preferred stock of subsidiary 44 44 Preferred stock 261 261 Long-term debt 6,516 6,444 Long-term debt - related parties 307 504 Non-current portion of capital and finance lease obligations 315 315 ------------------------------ 9,977 9,640 - -------------------------------------------------------------------------------------------------------------- MINORITY INTERESTS 844 733 - -------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Current portion of long-term debt, capital and finance leases 343 296 Current portion of long-term debt - related parties - 180 Accounts payable 412 391 Accounts payable - related parties - 1 Accrued interest 159 145 Accrued taxes 256 312 Price risk management liabilities 118 90 Current portion of gas supply contract obligations 34 32 Deferred income taxes 33 19 Other 266 289 ------------------------------ 1,621 1,755 - -------------------------------------------------------------------------------------------------------------- NON-CURRENT LIABILITIES Regulatory Liabilities Regulatory liabilities for cost of removal 1,084 1,044 Income taxes, net 365 357 Other regulatory liabilities 173 173 Postretirement benefits 440 275 Deferred income taxes 713 671 Deferred investment tax credit 77 79 Asset retirement obligation 434 439 Price risk management liabilities 285 213 Gas supply contract obligations 156 176 Other 292 317 ------------------------------ 4,019 3,744 - -------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Notes 3, 4 and 6) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 16,461 $ 15,872 ==============================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CMS-35 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------------------------------------------------- In Millions In Millions COMMON STOCK At beginning and end of period $ 2 $ 2 $ 2 $ 2 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER PAID-IN CAPITAL At beginning of period 4,147 3,846 4,140 3,846 Common stock reacquired - (1) - (1) Common stock issued 275 3 281 3 Common stock reissued - - 1 - ---------------------------------------------- At end of period 4,422 3,848 4,422 3,848 - ----------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Minimum Pension Liability At beginning of period (17) - (17) - Minimum pension liability adjustments (a) (9) - (9) - ---------------------------------------------- At end of period (26) - (26) - ---------------------------------------------- Investments At beginning of period 8 9 9 8 Unrealized gain (loss) on investments (a) - (1) (1) - ---------------------------------------------- At end of period 8 8 8 8 ---------------------------------------------- Derivative Instruments At beginning of period 1 (13) (9) (8) Unrealized gain (loss) on derivative instruments (a) (6) 22 12 19 Reclassification adjustments included in net income (a) 2 (3) (6) (5) ---------------------------------------------- At end of period (3) 6 (3) 6 ---------------------------------------------- Foreign Currency Translation At beginning of period (315) (313) (319) (419) Loy Yang sale - - - 110 Other foreign currency translations (a) 3 (14) 7 (18) ---------------------------------------------- At end of period (312) (327) (312) (327) ---------------------------------------------- At end of period (333) (313) (333) (313) - ----------------------------------------------------------------------------------------------------------------------------------- RETAINED DEFICIT At beginning of period (1,584) (1,853) (1,734) (1,844) Net income (a) 30 19 182 13 Preferred stock dividends declared (3) (3) (5) (6) ---------------------------------------------- At end of period (1,557) (1,837) (1,557) (1,837) ---------------------------------------------- TOTAL COMMON STOCKHOLDERS' EQUITY $ 2,534 $ 1,700 $ 2,534 $ 1,700 =================================================================================================================================== (A) DISCLOSURE OF OTHER COMPREHENSIVE INCOME: Minimum Pension Liability Minimum pension liability adjustments, net of tax benefit of $(5), $-, $(5) and $-, respectively $ (9) $ - $ (9) $ - Investments Unrealized gain (loss) on investments, net of tax of $-, $-, $- and $-, respectively - (1) (1) - Derivative Instruments Unrealized gain (loss) on derivative instruments, net of tax of $4, $2, $13 and $7, respectively (6) 22 12 19 Reclassification adjustments included in net income, net of tax benefit of $-, $(2), $(6) and $(3), respectively 2 (3) (6) (5) Foreign currency translation, net 3 (14) 7 92 Net income 30 19 182 13 ---------------------------------------------- Total Other Comprehensive Income $ 20 $ 23 $ 185 $ 119 ==============================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CMS-36 CMS Energy Corporation CMS ENERGY CORPORATION CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) These interim Consolidated Financial Statements have been prepared by CMS Energy in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Certain prior year amounts have been reclassified to conform to the presentation in the current year. In management's opinion, the unaudited information contained in this report reflects all adjustments of a normal recurring nature necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. The Condensed Notes to Consolidated Financial Statements and the related Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained in CMS Energy's Form 10-K for the year ended December 31, 2004. Due to the seasonal nature of CMS Energy's operations, the results as presented for this interim period are not necessarily indicative of results to be achieved for the fiscal year. 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, electric distribution, 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 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. 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. We eliminate intercompany transactions and balances. 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. INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY: 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 CMS-37 CMS Energy Corporation or losses that result from this process are shown in the stockholders' equity section on our Consolidated Balance Sheets. 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. Argentina: At June 30, 2005, 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 2.895 pesos per U.S. dollar was $262 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. 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 $16.461 billion at June 30, 2005, 58 percent represent long-lived assets and equity method investments that are subject to this type of analysis. OTHER INCOME AND OTHER EXPENSE: The following tables show the components of Other income and Other expense:
In Millions - ------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended ---------------------------------------------------- June 30 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------ Other income Interest and dividends - related parties $ 3 $ 1 $ 5 $ 2 Electric restructuring return 3 1 4 3 Return on stranded costs 1 - 2 - Return on security costs 1 1 1 1 Nitrogen oxide allowance sales 1 - 1 - Investment sale gain - 1 - 1 Reversal of contingent liability - - 3 - All other 1 2 2 2 - ------------------------------------------------------------------------------------------------------------------ Total other income $ 10 $ 6 $ 18 $ 9 ==================================================================================================================
In Millions - ------------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended ---------------------------------------------------- June 30 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------ Other expense Investment write-down $ - $ - $ (1) $ - Loss on SERP investment (1) (1) (1) (1) Loss on reacquired debt (1) - (6) - Plant maintenance shut-down (2) - (2) - Civic and political expenditures - - (1) (1) All other (1) (1) (1) (2) - ------------------------------------------------------------------------------------------------------------------ Total other expense $ (5) $ (2) $ (12) $ (4) ==================================================================================================================
CMS-38 CMS Energy Corporation RECLASSIFICATIONS: Certain prior year amounts have been reclassified for comparative purposes. These reclassifications did not affect consolidated net income for the years presented. 2: ASSET SALES AND IMPAIRMENT CHARGES ASSET SALES Gross cash proceeds received from the sale of assets totaled $59 million for the six months ended June 30, 2005 and $66 million for the six months ended June 30, 2004. The impacts of these sales are included in Gain on assets sales, net on our Consolidated Statements of Income. For the six months ended June 30, 2005, we sold the following assets:
In Millions - -------------------------------------------------------------------------------------------------------------- Pretax After-tax Date sold Business/Project Gain Gain - -------------------------------------------------------------------------------------------------------------- February GVK $ 3 $ 2 April Scudder Latin American Power Fund 2 1 April Gas turbine and auxiliary equipment - - - -------------------------------------------------------------------------------------------------------------- Total gain on asset sales $ 5 $ 3 ==============================================================================================================
For the six months ended June 30, 2004, we sold the following assets:
In Millions - -------------------------------------------------------------------------------------------------------------- Pretax After-tax Date sold Business/Project Gain Gain - -------------------------------------------------------------------------------------------------------------- February Bluewater Pipeline $ 1 $ 1 April Loy Yang - - May American Gas Index fund 1 1 Various Other 1 - - -------------------------------------------------------------------------------------------------------------- Total gain on asset sales $ 3 $ 2 ==============================================================================================================
Although much of our asset sales program is complete, we still may sell certain remaining businesses that are not strategic to us. ASSET IMPAIRMENT CHARGES 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. There were no asset impairments recorded for the six months ended June 30, 2005. In the first quarter of 2004, an impairment charge of $125 million ($81 million, net of tax) was recorded to recognize the reduction in fair value as a result of the sale of Loy Yang. The impairment included a cumulative net foreign currency translation loss of approximately $110 million. The sale of Loy Yang was completed in April 2004. CMS-39 CMS Energy Corporation 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, 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 nor denied the order's findings. The settlement resolved the SEC investigation involving CMS Energy and CMS MST. Also in March 2004, the SEC filed an action against three former employees related to round-trip trading by CMS MST. One of the individuals has settled with the SEC. CMS Energy is currently advancing legal defense costs for the remaining two individuals, in accordance with existing indemnification policies. SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of complaints were filed against CMS Energy, Consumers, and certain officers and directors of CMS Energy and its affiliates, including but not limited to Consumers which, while established, operated and regulated as a separate legal entity and publicly traded company, shares a parallel Board of Directors with CMS Energy. 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 running from May 2000 through March 2003. The cases were consolidated into a single lawsuit. The consolidated lawsuit 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. In January 2005, a motion was granted dismissing Consumers and three of the individual defendants, but the court denied the motions to dismiss for CMS Energy and the 13 remaining individual defendants. Plaintiffs filed a motion for class certification on April 15, 2005 and an amended motion for class certification on June 20, 2005. CMS Energy and the individual defendants will defend themselves vigorously in this litigation but cannot predict its outcome. PROPOSED SETTLEMENT OF 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 was 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. CMS-40 CMS Energy Corporation 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. On July 7, 2005, CMS Energy filed with the court a Stipulation of Settlement that was signed by all parties as well as the special litigation committee. Under the terms of the settlement, CMS Energy will receive $12 million under its directors and officers liability insurance program, $7 million of which will be used to pay costs associated with the securities class action lawsuits. CMS Energy may use the remaining $5 million to pay attorneys' fees and expenses arising out of the derivative proceeding. The terms of the settlement are subject to court approval and the hearing for final approval is scheduled for August 26, 2005. The impact of this settlement is not material to our June 30, 2005 consolidated financial statements. ERISA LAWSUITS: CMS Energy is a named defendant, along with Consumers, CMS MST, and certain named and unnamed officers and directors, in two lawsuits brought as purported class actions on behalf of participants and beneficiaries of the CMS Employees' Savings and Incentive Plan (the Plan). The two cases, filed in July 2002 in United States District Court for the Eastern District of Michigan, were consolidated by the trial judge and an amended consolidated complaint was filed. Plaintiffs allege breaches of fiduciary duties under ERISA and seek restitution on behalf of the Plan with respect to a decline in value of the shares of CMS Energy Common Stock held in the Plan. Plaintiffs also seek other equitable relief and legal fees. In March 2004, the judge granted in part, but denied in part, CMS Energy's motion to dismiss the complaint. The judge has conditionally granted plaintiffs' motion for class certification. A trial date has not been set, but is expected to be no earlier than mid-2006. CMS Energy and Consumers will defend themselves vigorously in this litigation but cannot predict its outcome. 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 Commodity Futures Trading Commission 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 developed on the site of a discontinued cement plant 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 (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 interest 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 CMS-41 noncompliance (NON), after finding high pH-seep water in Lake Michigan adjacent to the property. The MDEQ also found higher than acceptable levels of heavy metals, including mercury, in the seep water. 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 Order on Consent (AOC) to address problems at Bay Harbor. In February 2005, the EPA executed an AOC, upon the consent of CMS Land Company and CMS Capital, LLC, subsidiaries of Enterprises. 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 "removal action work 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. CMS Energy has submitted a draft removal action work plan, which is under review by the EPA. In June and July 2005, the EPA approved the removal action work plan insofar as it provided for fencing of affected beachfront areas and the installation of an underground leachate collection system, among other elements. The EPA's approvals also specify that a backup "containment and isolation system," involving dams or barriers, could be required in certain areas if the collection system is ineffective. The EPA approved the balance of the work plan on July 28, 2005. CMS Energy continues to have discussions with the EPA over the implementation of the work plan. 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. Several landowners have threatened litigation in the event their demands are not met. 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 has entered into negotiations with several landowners at Bay Harbor for access as necessary to implement remediation measures, and will defend vigorously any property damage and personal injury claims or lawsuits. Based on initial 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 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. CMS-42 CMS Energy Corporation 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: Compliance with the federal Clean Air Act and resulting regulations has been, and will continue to be, a significant focus for us. The Nitrogen Oxide State Implementation Plan requires significant reductions in nitrogen oxide emissions. To comply with the regulations, we expect to incur capital expenditures totaling $815 million. The key assumptions 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 8.3 percent. As of June 2005, we have incurred $563 million in capital expenditures to comply with these regulations and anticipate that the remaining $252 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, of which 90 percent have been purchased. The cost of the allowances is estimated to average $8 million per year for 2005-2006. The estimated costs are based on the average cost of the purchased, allocated, and swapped allowances. The need for allowances will decrease after year 2006 with the installation of selective catalytic 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 recently adopted a Clean Air Interstate Rule that requires additional coal-fired electric plant emission controls for nitrogen oxides and sulfur dioxide. The rule involves a two-phase program to reduce emissions of sulfur dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The final rule will require that we run our Selective Catalytic Reduction units year round beginning in 2009 and may require that we purchase additional nitrogen oxide credits beginning in 2009. In addition to the selective catalytic reduction control technology installed to meet the Nitrogen Oxide State Implementation Plan, our current plan includes installation of flue gas desulfurization scrubbers. The scrubbers are to be installed by 2014 to meet the phase I reduction requirements of the Clean Air Interstate Rule at a cost near that of the Nitrogen Oxide State Implementation Plan. In March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial reductions of mercury emissions from coal-fired electric power plants by 2010 and further reductions by 2018. While the industry has not reached a consensus on the technical methods for curtailing mercury emissions, our capital and operating costs for mercury emissions reductions are expected to be significantly less than what is required for nitrogen oxide compliance. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seeking 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 CMS-43 CMS Energy Corporation fines. Additionally, the viability of certain plants remaining in operation could be called into question. 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. At June 30, 2005, 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. MCV Environmental Issue: On July 12, 2004, the MDEQ, Air Control Division, issued the MCV Partnership a Letter of Violation asserting that the MCV Facility violated its Air Use Permit to Install (PTI) by exceeding the carbon monoxide emission limit on the Unit 14 GTG duct burner and failing to maintain certain records in the required format. On July 13, 2004, the MDEQ, Water Division, issued the MCV Facility a Notice Letter asserting the MCV Facility violated its National Pollutant Discharge Elimination System (NPDES) Permit by discharging heated process wastewater into the storm water system, failure to document inspections, and other minor infractions (alleged NPDES violations). The MCV Partnership has declared five of the six duct burners in the MCV Facility as unavailable for operational use (which reduces the generation capability of the MCV Facility by approximately 100 MW), is assessing the duct burner issue and has begun other corrective action to address the MDEQ's assertions. The one available duct burner was tested in April 2005 and its emissions met permitted levels due to the unique configuration of that particular unit. The MCV Partnership disagrees with certain of the MDEQ's assertions. The MCV Partnership filed responses to these MDEQ letters in July and August 2004. On December 13, 2004, the MDEQ informed the MCV Partnership that it was pursuing an escalated enforcement action against the MCV Partnership regarding the alleged violations of the MCV Facility's PTI. The MDEQ also stated that the alleged violations are deemed federally significant and, as such, placed the MCV Partnership on the EPA's High Priority Violators List (HPVL). The MDEQ and the MCV Partnership are pursuing voluntary settlement of this matter, which will satisfy state and federal requirements and remove the MCV Partnership from the HPVL. Any such settlement is likely to involve a fine, but at this time, the MDEQ has not stated what, if any, fine they will seek to impose. At this time, the MCV Partnership management cannot predict the financial impact or outcome of these issues, however, the MCV Partnership believes it has resolved all issues associated with the alleged NPDES violations and does not expect any further MDEQ actions on this NPDES matter. LITIGATION: In October 2003, a group of eight PURPA qualifying facilities, which sell 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. CMS-44 CMS Energy Corporation The eight plaintiff qualifying facilities have appealed the dismissal of the circuit court case to the Michigan Court of Appeals. The qualifying facilities have also appealed the February 2005 MPSC order in the 2004 PSCR plan case to the Michigan Court of Appeals, and have initiated separate legal actions in federal district court and at the FERC concerning the energy charge calculation issue. In June 2005, the FERC issued a notice of intent not to act on this issue. We cannot predict the outcome of these appeals or the remaining legal action. CONSUMERS' ELECTRIC UTILITY RESTRUCTURING MATTERS ELECTRIC ROA: We cannot predict the total amount of electric supply load that may be lost to alternative electric suppliers. As of July 2005, alternative electric suppliers are providing 811 MW of generation supply to ROA customers. This amount represents a decrease of 5 percent compared to July 2004, and 11 percent of our total distribution load. 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 Requested Proceeding Filed Covered 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, plus the cost of money through the period of collection. Implementation 1999-2004 1997-2003 $91 million (b) The MPSC allowed $68 million for Costs the years 1997-2001, plus the cost of money through the period of collection. The MPSC allowed $6 million for the years 2002-2003, plus the cost of money through the period of collection. Section 10d(4) 2004 2000-2005 $628 million Application 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. CMS-45 CMS Energy Corporation 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, we accrue and defer for recovery a portion of our Section 10d(4) Regulatory Assets. In March 2005, the MPSC Staff filed testimony recommending the MPSC approve recovery of approximately $323 million in Section 10d(4) costs, which includes the cost of money through the period of collection. In June 2005, the ALJ issued a Proposal for Decision recommending that the MPSC approve recovery of the same Section 10d(4) costs recommended by the MPSC Staff. However, we may have the opportunity to recover certain costs included in our application alternatively in other cases pending before the MPSC. We cannot predict the amount, if any, the MPSC will approve as recoverable. At June 30, 2005, total recorded Section 10d(4) Regulatory Assets were $179 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 load migration to alternative electric suppliers, increased system maintenance and improvement costs, Clean Air Act-related expenditures, and employee pension costs. In April 2005, we filed updated debt and equity information in this case. In June 2005, the MPSC Staff filed its position in this case, recommending a base rate increase of $98 million. The MPSC Staff also recommended an 11.25 percent return on equity to establish rates and recognized all of our projected equity investment (infusions and retained earnings) in 2006. We expect a final order from the MPSC 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 CMS-46 CMS Energy Corporation 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 covering the estimated reserve margin requirements for 2005 and covering partially the estimated reserve margin requirements for 2006 through 2007. As a result, we have recognized an asset of $12 million for unexpired capacity and energy contracts at June 30, 2005. As of July 2005, we expect the total premium cost of electric capacity and energy contracts for 2005 to be approximately $8 million. PSCR: The PSCR process assures recovery of all reasonable and prudent power supply costs that we actually incur. 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 power supply costs from commercial and industrial customers and, subject to the overall rate caps, from other customers. In January 2005, we self-implemented the proposed 2005 PSCR charge. In June 2005, the MPSC issued an order that approves our 2005 PSCR plan. The revenues from the PSCR charges are subject to reconciliation after review of actual costs for reasonableness and prudence. In March 2005, we submitted our 2004 PSCR reconciliation filing to the MPSC. 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. 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 11, Consolidation of Variable Interest Entities. Our consolidated retained earnings include undistributed earnings from the MCV Partnership of $292 million at June 30, 2005 and $246 million at June 30, 2004. The cost that we incur under the MCV 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 =========================================================================
Of the 2005 estimate, we expensed $29 million for the six months ended June 30, 2005. After September 15, 2007, we expect to claim relief under the regulatory out provision in the MCV PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amount that we collect from our customers. The MCV Partnership has indicated that it may take issue with our exercise of the regulatory out clause after September 15, 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 MCV 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. Natural gas prices have increased substantially in recent years. NYMEX forward natural gas prices through 2010 recently were approximately $2 per mcf higher than they were at year-end 2004. Because the price the MCV CMS-47 CMS Energy Corporation Partnership can charge us for energy has not increased to reflect current natural gas prices, the MCV Partnership's financial performance has been impacted negatively. If forward gas prices for 2010 and beyond do not decline to the $4 to $6 per mcf range currently anticipated by various government and private natural gas price forecasts, and remain in that range for the remaining life of the MCV PPA, the economics of operating the MCV Facility would be adverse enough to require the MCV Partnership to recognize a substantial impairment of its property, plant and equipment, which are included in our Consolidated Balance Sheets. However, forecasting future natural gas prices is extremely difficult and there are currently differing views among forecasters as to whether such prices will increase, decrease or remain at current levels over any period of time. At present, some of the forecasts indicate natural gas prices in excess of the $4 to $6 per mcf range during the years after 2010. At June 30, 2005, the net book value of the MCV Partnership's property, plant and equipment was $1.396 billion. Several other factors could alter significantly the MCV Partnership's future impairment analyses including, but not limited to, energy payments to the MCV Partnership, which are based on the cost of coal burned at our coal plants, and any reduction in payments to the MCV Partnership subsequent to September 15, 2007 due to underrecovery of contract costs by Consumers from its customers as a result of past or future actions by the MPSC. Any such impairment would be required to be recognized in the period when management's analysis of the factors described above meets the accounting standards for impairment recognition. We will continue to monitor the current and long-term trends in natural gas prices and their effect on the economics of operating the MCV Facility. 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 reduces the MCV Facility's annual production of electricity and, as a result, reduces 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 are first used to offset fully the cost of replacement power. Second, $5 million annually, funded jointly by Consumers and the MCV Partnership, are contributed to our RRP. Remaining savings are split between the MCV Partnership and Consumers. Consumers' direct savings are shared 50 percent with its customers in 2005 and 70 percent in 2006 and beyond. Consumers' direct savings from the RCP, after allocating a portion to customers, are 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 MCV PPA. However, either party may terminate that agreement under certain conditions. In February 2005, a group of intervenors in the RCP case filed for rehearing of the MPSC order. The Attorney General also filed an appeal with the Michigan Court of Appeals. We cannot predict the outcome of these matters. 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 decision was 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 estimates that the 1997 through 2004 tax year cases will result in a refund to the MCV Partnership of approximately $77 million inclusive of interest. The MCV Partnership cannot predict the outcome of these proceedings; therefore, this refund has not been recognized in earnings. CMS-48 CMS Energy Corporation 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 decommissioning, 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 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, in 2007, of radiological decommissioning work, seek recovery of such expenditures at the MPSC. We cannot predict how the MPSC will rule on our request. Palisades: Excluding additional nuclear fuel storage costs due to the DOE's failure to accept spent fuel on schedule, we concluded, based on the costs estimates filed in March 2004, that the existing surcharge for Palisades needed to be increased to $25 million annually, beginning January 1, 2006, and continuing 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 would 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 involved in the proceeding. 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 contested settlement, but cannot predict the outcome. In March 2005, NMC, which operates the Palisades plant, applied for a 20-year license renewal for the plant on behalf of Consumers. The NRC typically takes 22-30 months to review a license renewal application. A decision is expected in 2007. At this time, we cannot determine what impact this will have on decommissioning costs or the adequacy of funding. NUCLEAR MATTERS: 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. At June 30, 2005, we have recorded a liability to the DOE of $143 million, including interest, which is payable prior to 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. 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 CMS-49 CMS Energy Corporation 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. On April 29, 2005, the court ruled on various cross-motions for summary judgment previously filed by the DOE and us. The court denied the DOE's motions to dismiss Counts I and II of the complaint and its motion seeking recovery of a one-time fee that is due to be paid by us prior to delivery of the spent nuclear fuel. The court, however, granted the DOE's motion to recoup the one-time fee against any award of damages to us. The court further granted our motion for summary judgment on liability and our motion to dismiss the DOE's affirmative defense alleging our failure to satisfy a condition precedent. We filed a motion for reconsideration of the portion of the Court's order dealing with recoupment, which the Court denied. In a related case, a judge in one of many spent nuclear fuel cases now pending in the United States Court of Claims issued a decision and order suggesting that the standard contract between the utilities and the DOE should be held void because of mutual mistake and impossibility of performance and that restitution of all waste fees paid by utilities should be made from the Nuclear Waste Fund. The judge ordered the utility in that case and the DOE to file briefs addressing the court's views and invited any interested party to file an amicus brief. We have filed an amicus brief opposing holding the standard contract void. If our litigation against the DOE is successful, we plan to use any 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 energy 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. This requirement will end December 31, 2007. CMS-50 CMS Energy Corporation 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 remediation 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. In 2003, we estimated our remaining costs to be between $37 million and $90 million, based on 2003 discounted 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. We have expended $12 million on these sites since the 2003 estimates were made. At June 30, 2005, we have a liability of $36 million, net of $46 million of expenditures incurred to date, and a regulatory asset of $63 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. 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 the proceedings follow the table.
Gas Cost Recovery Reconciliation - ------------------------------------------------------------------------------------------------------------------ Net Over GCR Year Date Filed Order Date Recovery Status - ------------------------------------------------------------------------------------------------------------------ 2003-2004 June 2004 February 2005 $31 million The net overrecovery includes $1 million and $5 million GCR net overrecoveries from prior GCR years and interest accrued through March 2004 2004-2005 June 2005 Pending $2 million ==================================================================================================================
Net overrecoveries 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 overrecovery, plus $3 million interest, using a roll-in refund methodology. The roll-in methodology incorporates a GCR over/underrecovery in the next GCR plan year. CMS-51 CMS Energy Corporation GCR 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. Actual gas costs and revenues are subject to an annual reconciliation proceeding, which was filed in June 2005. We proposed to refund to our customers $2 million using a roll-in methodology. The $2 million reflects an underrecovery of $1 million, offset by interest owed to customers of $3 million. The roll-in methodology incorporates a GCR over/underrecovery in the next GCR plan year. 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. The current ceiling price for 2005 is $7.61 per mcf. Actual gas costs and revenues will be subject to an annual reconciliation proceeding. In June 2005, four of the five parties filed a settlement agreement; the fifth party filed a statement of non-objection. The settlement agreement includes a GCR ceiling price adjustment contingent upon future events. 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, which reaffirmed the previously ordered $34 million reduction in our depreciation expense. The October 2004 order also required 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. The MPSC has directed us to file our next gas depreciation case within 90 days after the latter of: - the removal cost study filing or - the MPSC issuance of a final order in the pending case related to ARO accounting. The MPSC order on the pending case related to ARO accounting is expected in the first quarter of 2006. We proposed to incorporate the results of the gas depreciation case into gas general rates using a surcharge mechanism if the depreciation case order was not issued concurrently with a gas general rate case order. CMS-52 CMS Energy Corporation 2005 GAS RATE CASE: In July 2005, we filed an application with the MPSC seeking a 12 percent authorized return on equity along with a $132 million annual increase in our gas delivery and transportation rates. The primary reasons for the request are recovery of new investments, carrying costs on natural gas inventory related to higher gas prices, system maintenance, employee benefits, and low-income assistance. If approved, the request would add approximately 5 percent to the typical residential customer's average monthly bill. The increase would also affect commercial and industrial customers. As part of this filing, we also requested interim rate relief of $75 million. 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 Energy 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. CMS Energy cannot predict the outcome of this matter. FORMER CMS OIL AND GAS OPERATIONS: A Michigan trial judge granted Star Energy, Inc. and White Pine Enterprises, LLC a declaratory judgment in an action filed in 1999 that claimed Terra Energy Ltd., a former CMS Oil and Gas subsidiary, violated an oil and gas lease and other arrangements by failing to drill wells it had committed to drill. A jury then awarded the plaintiffs a $7.6 million award. Terra appealed this matter to the Michigan Court of Appeals. The Michigan Court of Appeals reversed the trial court judgment with respect to the appropriate measure of damages and remanded the case for a new trial on damages. The trial judge reinstated the judgment against Terra and awarded Terra title to the minerals. Terra appealed this judgment. The court of appeals heard arguments on May 19, 2005 and issued an opinion on May 26, 2005 remanding the case to the trial court for a new trial on damages. Enterprises has an indemnity obligation with regard to losses to Terra that might result from this litigation. CMS-53 CMS Energy Corporation 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 Overseas Private Investment Corporation (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 estimates 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 arbitration on the matter, to be administered by the International Chamber of Commerce. IRS RULING: On August 2, 2005, the IRS issued Revenue Ruling 2005-53 and regulations to provide guidance with respect to the use of the "simplified service cost" method of tax accounting. We use this tax accounting method, generally allowed by the IRS under Section 263A of the Internal Revenue Code, with respect to the allocation of certain corporate overheads to the tax basis of self-constructed utility assets. We are studying the IRS guidance to determine its effect on us. We cannot predict the impact of this ruling on future earnings, cash flows, or our present NOL carryforwards. OTHER: CMS Generation does not currently expect to incur material 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 future results of operations. CMS-54 CMS Energy Corporation 4: FINANCINGS AND CAPITALIZATION Long-term debt is summarized as follows:
In Millions - ------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - ------------------------------------------------------------------------------- CMS ENERGY CORPORATION Senior notes $ 2,325 $ 2,175 Other long-term debt 4 225 ------- ------- Total - CMS Energy Corporation 2,329 2,400 ------- ------- CONSUMERS ENERGY COMPANY First mortgage bonds 3,000 2,300 Senior notes, bank debt and other 938 1,436 Securitization bonds 384 398 ------- ------- Total - Consumers Energy Company 4,322 4,134 ------- ------- OTHER SUBSIDIARIES 200 208 ------- ------- TOTAL PRINCIPAL AMOUNTS OUTSTANDING 6,851 6,742 Current amounts (314) (267) Net unamortized discount (21) (31) - ------------------------------------------------------------------------------- Total Long-term debt $ 6,516 $ 6,444 ===============================================================================
FINANCINGS: The following is a summary of significant long-term debt issuances and retirements during the six months ended June 30, 2005:
- ------------------------------------------------------------------------------------------------------------------ Principal Interest Rate Issue/Retirement (In millions) (%) Date Maturity Date - ------------------------------------------------------------------------------------------------------------------ DEBT ISSUANCES: CMS ENERGY Senior notes $ 150 6.30 January 2005 February 2012 CONSUMERS FMB 250 5.15 January 2005 February 2017 FMB 300 5.65 March 2005 April 2020 FMB insured quarterly notes 150 5.65 April 2005 April 2035 LORB 35 Variable April 2005 April 2035 - ------------------------------------------------------------------------------------------------------------------ Total $ 885 ================================================================================================================== DEBT RETIREMENTS: CMS ENERGY General term notes $ 220 Various January and February Various 2005 CONSUMERS Long-term bank debt 60 Variable January 2005 November 2006 Long-term debt - related parties 180 9.25 January 2005 December 2029 Long-term debt - related parties 73 8.36 February 2005 December 2015 Long-term debt - related parties 124 8.20 February 2005 September 2027 Senior notes 332 6.25 April and May 2005 September 2006 Senior insured quarterly notes 141 6.50 May 2005 October 2028 - ------------------------------------------------------------------------------------------------------------------ Total $ 1,130 ==================================================================================================================
CMS-55 CMS Energy Corporation CAPITALIZATION: In April 2005, we issued 23 million shares of our common stock at a price of $12.25 per share. We realized net proceeds of $272 million. REGULATORY AUTHORIZATION FOR FINANCINGS: In April 2005, the FERC issued an authorization to permit Consumers to issue up to an additional $1.0 billion ($2.0 billion in total) of long-term securities for refinancing or refunding purposes, and up to an additional $1.0 billion ($2.5 billion in total) of long-term securities for general corporate purposes during the period ending June 30, 2006. Combined with remaining availability from previously issued FERC authorizations, Consumers can now issue up to: - $1.001 billion of long-term securities for refinancing or refunding purposes, - $1.209 billion of long-term securities for general corporate purposes, and - $1.935 billion of long-term FMB to be issued solely as collateral for other long-term securities. REVOLVING CREDIT FACILITIES: The following secured revolving credit facilities with banks are available at June 30, 2005:
In Millions - ---------------------------------------------------------------------------------------------------------------------- Outstanding Amount of Amount Letters-of- Amount Company Expiration Date Facility Borrowed Credit Available - ---------------------------------------------------------------------------------------------------------------------- CMS Energy May 18, 2010 $ 300 $ - $ 102 $ 198 Consumers May 18, 2010 500 - 31 469 MCV Partnership August 27, 2005 50 - 3 47 ======================================================================================================================
CMS Energy and Consumers amended their credit facilities in May 2005. The amendments extended the terms of the agreements to 2010, reduced certain fees and interest margins, and reduced CMS Energy's restriction on payment of common stock dividends. CAPITAL AND FINANCE LEASE OBLIGATIONS: Our capital leases are comprised mainly of leased service vehicles and office furniture. At June 30, 2005, capital lease obligations totaled $54 million. 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. At June 30, 2005, finance lease obligations totaled $290 million, which represents the third-party portion of the MCV Partnership's finance lease obligation. SALE OF ACCOUNTS RECEIVABLE: Under a revolving accounts receivable sales program, we currently sell certain accounts receivable to a wholly owned, consolidated, bankruptcy remote special purpose entity. In turn, the special purpose entity may sell an undivided interest in up to $325 million of the receivables. The special purpose entity sold no receivables as of June 30, 2005 and $304 million as of December 31, 2004. Consumers continues 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 no right to any receivables not sold. Consumers has not recorded a gain or loss on the receivables sold or retained interest in the receivables sold. CMS-56 CMS Energy Corporation Certain cash flows under our accounts receivable sales program are shown in the following table:
In Millions - ------------------------------------------------------------------------------------------------------------- Six months ended June 30 2005 2004 - ------------------------------------------------------------------------------------------------------------- Net cash flow as a result of accounts receivable financing $ (304) $ (297) Collections from customers $ 2,787 $ 2,645 =============================================================================================================
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 $150 million, dependent on the aggregate amounts of unrestricted cash and unused commitments under the facility. Under the provisions of its articles of incorporation, at June 30, 2005, Consumers had $479 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. For the six months ended June 30, 2005, we received $167 million of common stock dividends from Consumers. FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: The Interpretation requires the guarantor, upon issuance of a guarantee, to recognize a liability for the fair value of the obligation it undertakes 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 corporations under common control, although disclosure of these guarantees is required. The disclosure requirements in this Interpretation are effective for interim and annual financial statements issued after December 15, 2002. The following table describes our guarantees at June 30, 2005:
In Millions - -------------------------------------------------------------------------------------------------------------------------- Issue Expiration Maximum Carrying Recourse Guarantee Description Date Date Obligation Amount Provision (b) - -------------------------------------------------------------------------------------------------------------------------- Indemnifications from asset sales and other agreements(a) Various Various $ 1,192 $ 1 $ - Standby letters of credit Various Various 65 - - Surety bonds and other indemnifications Various Various 25 - - Other guarantees Various Various 225 - - Subsidiary guarantee of parent debt May 2005 May 2010 102 - - 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) Recourse provision indicates the approximate recovery from third parties including assets held as collateral. CMS-57 CMS Energy Corporation The following table provides additional information regarding our guarantees:
Events That Would Require Guarantee Description How Guarantee Arose Performance - ----------------------------------------------------------------------------------------------------------------------- Indemnifications from asset sales and Stock and asset sales agreements Findings of misrepresentation, other agreements breach of warranties, and other specific events or circumstances - ----------------------------------------------------------------------------------------------------------------------- Standby letters of credit Normal operations of coal power Noncompliance with environmental plants regulations and inadequate response to demands for corrective action Natural gas transportation Nonperformance Self-insurance requirement Nonperformance Nuclear plant closure Nonperformance - ----------------------------------------------------------------------------------------------------------------------- Surety bonds and other indemnifications Normal operating activity, permits Nonperformance and license - ----------------------------------------------------------------------------------------------------------------------- Other guarantees Normal operating activity Nonperformance or non-payment by a subsidiary under a related contract - ----------------------------------------------------------------------------------------------------------------------- Subsidiary guarantee of parent's debt Loan agreement Non-payment by CMS Energy and CMS Enterprises of obligations under the loan agreement - ----------------------------------------------------------------------------------------------------------------------- Nuclear insurance retrospective premiums Normal operations of nuclear plants Call by NEIL and Price-Anderson Act for nuclear incident =======================================================================================================================
In the ordinary course of business, we enter into agreements containing tax and other indemnification provisions in connection with a variety of transactions including transactions for the sale of subsidiaries and assets, equipment leasing, and financing agreements. While we cannot estimate our maximum exposure under these indemnities, we consider the probability of liability remote. We have guaranteed payment of obligations through indemnities, surety bonds, and other guarantees of unconsolidated affiliates and related parties of $417 million at June 30, 2005. We monitor 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: In June 2005, the $11.87 trigger price contingency was met for our $250 million 4.50 percent contingently convertible preferred stock and the $12.81 trigger price contingency was met for our $150 million 3.375 percent contingently convertible senior notes. The contingency was met since the price of our common stock remained at or above the applicable trigger price for 20 of 30 consecutive trading days ended on the last trading day of the calendar quarter. As a result, these securities are convertible at the option of the security holders, with the principal or par amount payable in cash, for the three months ended September 30, 2005. Once the 3.375 percent contingently convertible senior notes became convertible, they held the characteristics of a current liability. Therefore, in June 2005, we reclassified the 3.375 percent contingently convertible senior notes from Long-term debt to Current portion of long-term debt, where they will remain during the period that they are outstanding and convertible. As of July 2005, none of the security holders have notified us of their intention to convert these securities. CMS-58 CMS Energy Corporation 5: EARNINGS PER SHARE The following tables present the basic and diluted earnings per share computations:
In Millions, Except Per Share Amounts - ---------------------------------------------------------------------------------------------- Three Months Ended June 30 2005 2004 - ---------------------------------------------------------------------------------------------- EARNINGS AVAILABLE TO COMMON STOCK Income from Continuing Operations $ 30 $ 19 Less Preferred Dividends (3) (3) ----------------------------------- Income from Continuing Operations Available to Common Stock - Basic and Diluted $ 27 $ 16 =================================== AVERAGE COMMON SHARES OUTSTANDING APPLICABLE TO BASIC AND DILUTED EPS Average Shares - Basic 217.9 161.2 Add dilutive impact of Contingently Convertible Securities 10.2 (a) 2.5 (a) Add dilutive Stock Options and Warrants 0.8 (b) 0.5 (b) ----------------------------------- Average Shares - Diluted 228.9 164.2 =================================== EARNINGS PER AVERAGE COMMON SHARE AVAILABLE TO COMMON STOCK Basic $ 0.12 $ 0.10 Diluted $ 0.12 $ 0.10 ==============================================================================================
In Millions, Except Per Share Amounts - ---------------------------------------------------------------------------------------------- Six Months Ended June 30 2005 2004 - ---------------------------------------------------------------------------------------------- EARNINGS AVAILABLE TO COMMON STOCK Income from Continuing Operations $ 182 $ 17 Less Preferred Dividends (5) (6) ----------------------------------- Income from Continuing Operations Available to Common Stock - Basic and Diluted $ 177 $ 11 =================================== AVERAGE COMMON SHARES OUTSTANDING APPLICABLE TO BASIC AND DILUTED EPS Average Shares - Basic 206.7 161.2 Add dilutive impact of Contingently Convertible Securities 8.2 (a) - (c) Add dilutive Stock Options and Warrants 0.8 (b) 0.5 (b) ----------------------------------- Average Shares - Diluted 215.7 161.7 =================================== EARNINGS PER AVERAGE COMMON SHARE AVAILABLE TO COMMON STOCK Basic $ 0.86 $ 0.06 Diluted $ 0.82 $ 0.06 ==============================================================================================
CMS-59 CMS Energy Corporation (a) Our contingently convertible securities dilute EPS to the extent that the conversion value, which is based on the average market price of our common stock, exceeds the principal or par value. (b) Since the exercise price was greater than the average market price of our common stock, there was no impact to diluted EPS for options and warrants to purchase 3.4 million shares of common stock for the three months ended June 30, 2005, and 5.4 million shares of common stock for the three months ended June 30, 2004. There was also no impact to diluted EPS for options and warrants to purchase 3.5 million shares of common stock for the six months ended June 30, 2005, and 5.1 million shares of common stock for the six months ended June 30, 2004. (c) Since the conversion price was greater than the average market price of our common stock, there was no impact to diluted EPS from our contingently convertible securities for the six months ended June 30, 2004. Due to antidilution, the following impacts from our 7.75 percent convertible subordinated debentures were not reflected in diluted EPS: - an additional 4.2 million shares of common stock for the three and six months ended June 30, 2004 and the three and six months ended June 30, 2005, - a $2 million reduction of interest expense, net of tax, for the three months ended June 30, 2005 and the three months ended June 30, 2004, and - a $4 million reduction of interest expense, net of tax, for the six months ended June 30, 2005 and the six months ended June 30, 2004. We can revoke the conversion rights if certain conditions are met. In April 2005, we issued 23 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. CMS-60 CMS Energy Corporation The cost and fair value of our long-term financial instruments are as follows:
In Millions - ---------------------------------------------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - ---------------------------------------------------------------------------------------------------------------------- Fair Unrealized Fair Unrealized Cost Value Gain (Loss) Cost Value Gain (Loss) - ---------------------------------------------------------------------------------------------------------------------- Long-term debt, $ 6,830 $ 7,287 $ (457) $ 6,711 $ 7,052 $ (341) including current amounts Long-term debt - related parties 307 286 21 684 653 31 Available-for-sale securities: SERP: Equity securities 34 47 13 33 47 14 Debt securities 19 19 - 20 20 - Nuclear decommissioning investments: Equity securities 132 246 114 136 262 126 Debt securities 284 294 10 291 302 11 ======================================================================================================================
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 in Other Comprehensive Income if the derivative qualifies for cash flow hedge accounting treatment and in earnings if the derivative does not qualify for such 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 CMS-61 CMS Energy Corporation 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. Our coal purchase contracts are not accounted for as derivatives due to the lack of an active market for the coal that we purchase. Similarly, certain of our electric capacity and energy contracts are not accounted for as derivatives due to the lack of an active energy market in 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. If active markets for these commodities develop in the future, we may be required to account for these contracts as derivatives. For our coal purchase contracts, the resulting mark-to-market impact on earnings could be material to our financial statements. For our electric capacity and energy contracts, we believe that we will be able to apply the normal purchases and sales exception to the majority of these contracts (including the MCV PPA), which would not require us to mark these contracts to market. The MISO began operating the Midwest Energy Market on April 1, 2005. The Midwest Energy Market provides day-ahead and real-time energy market information and centralized generation dispatch for market participants. At this time, we believe that the commencement of this market does not constitute the development of an active energy market in Michigan. However, as we gain additional experience with the Midwest Energy Market, we will continue to evaluate whether or not the activity level within this market leads to the conclusion that an active energy market exists. Also as part of the Midwest Energy Market, FTRs were established. FTRs are financial instruments established to manage price risk relating to electricity transmission congestion. An FTR entitles the holder to receive compensation (or remit payment) for certain congestion-related transmission charges that arise when the transmission grid is congested. We presently hold FTRs for certain areas on the transmission grid within the MISO's market area. FTRs are derivative instruments and are required to be recognized on our Consolidated Balance Sheets as assets or liabilities at their fair values, with any subsequent changes in fair value recognized in earnings. As of June 30, 2005, we recorded an asset of $1 million associated with the fair value of FTRs on our Consolidated Balance Sheets. CMS-62 CMS Energy Corporation 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:
In Millions - ----------------------------------------------------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - ----------------------------------------------------------------------------------------------------------------------------- Fair Unrealized Fair Unrealized Derivative Instruments Cost Value Gain (Loss) Cost Value Gain (Loss) - ----------------------------------------------------------------------------------------------------------------------------- Non-trading: Gas contracts $ - $ - $ - $ 2 $ - $ (2) Interest rate risk contracts - - - - (1) (1) FTRs - 1 1 - - - Derivative contracts associated with the MCV Partnership: Gas fuel contracts - 181 181 - 56 56 Gas fuel futures and swaps - 145 145 - 64 64 CMS ERM contracts: Non-trading electric / gas contracts - (273) (273) - (199) (199) Trading electric / gas contracts - 284 284 (4) 201 205 Derivative contracts associated with equity investments in: Shuweihat - (32) (32) - (25) (25) Taweelah (35) (25) 10 (35) (24) 11 Jorf Lasfar - (11) (11) - (11) (11) =============================================================================================================================
The fair value of our non-trading gas contracts, interest rate risk contracts, FTRs, and the derivative contracts associated with 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 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 June 30, 2005, we had purchased a fixed-priced gas supply call option and had sold a fixed-priced gas supply put option. We held no fixed-priced weather-based gas supply call 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 Other Comprehensive Income 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. CMS-63 CMS Energy Corporation The following table reflects the outstanding floating-to-fixed interest rates swaps:
In Millions - ----------------------------------------------------------------------------------------------------------------- Floating to Fixed Notional Maturity Fair Interest Rate Swaps Amount Date Value - ----------------------------------------------------------------------------------------------------------------- June 30, 2005 $ 24 2005-2006 $ - December 31, 2004 25 2005-2006 (1) =================================================================================================================
Notional amounts reflect the principal amount of variable debt being fixed but do not represent the principal 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 7.3 percent at June 30, 2005 and 7.4 percent at December 31, 2004. There was no ineffectiveness associated with any of the interest rate swaps that qualified for hedge accounting treatment. At June 30, 2005, 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 June 30, 2005 and December 31, 2004, 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 Other Comprehensive Income. DERIVATIVE CONTRACTS ASSOCIATED WITH 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 gas contracts qualify as normal purchases under SFAS No. 133, and therefore, these contracts were not recognized at fair value on our Consolidated Balance Sheets at June 30, 2005. The MCV Partnership also held certain long-term gas contracts that did not qualify as normal purchases at June 30, 2005, because these contracts contained volume optionality. In addition, due to the implementation of the RCP in January 2005, the MCV Partnership 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, all of these contracts are accounted for as derivatives, with changes in fair value recorded in earnings each quarter. Additionally, the financial hedges associated with these contracts no longer qualify as cash flow hedges. Thus, as of January 2005, any changes in the fair value of these financial hedges are recorded in earnings each quarter. The MCV Partnership expects future earnings volatility on both the gas fuel derivative contracts and the related financial hedges, since gains and losses will be recorded each quarter. For the six months ended June 30, 2005, we recorded a $170 million gain associated with the increase in fair value of these instruments in Fuel costs mark-to-market at MCV on our Consolidated Statements of Income, resulting in a cumulative mark-to-market gain through June 30, 2005 of $226 million. This cumulative amount consists of a $181 million gain related to gas fuel derivative contracts. The remaining gain of $45 million relates to the financial hedges associated with these contracts, which is included in the Gas CMS-64 CMS Energy Corporation fuel futures and swaps amount in the Derivative Instruments table above. The majority of this mark-to-market gain is expected to reverse through earnings during 2005 and 2006 as the gas is purchased and the financial hedges settle, with the remainder reversing between 2007 and 2011. For further details on the RCP, see Note 3, Contingencies, "Other Consumers' Electric Utility Contingencies - - The Midland Cogeneration Venture." 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 June 30, 2005, 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 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. There was no ineffectiveness associated with any of the gas contracts that qualified for hedge accounting treatment. At June 30, 2005, we have recorded a cumulative net gain of $32 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 July 2005 to December 2009, of which $6 million of this gain is expected to be reclassified as an increase to earnings during the next 12 months as the contracts settle, offsetting the costs of gas purchases. In addition, for the six months ended June 30, 2005, we recorded a net gain of $22 million in earnings from hedging activities related to natural gas requirements for the MCV Facility operations. 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 in 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). CMS-65 CMS Energy Corporation 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 June 30, 2005 and December 31, 2004, 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 June 30, 2005, the total foreign currency translation adjustment was a net loss of $312 million, which included a net hedging loss of $26 million, net of tax, related to settled contracts. At June 30, 2005, both Shuweihat and Taweelah, two of our equity method investees, held foreign exchange contracts that hedged the foreign currency risk associated with payments to be made under operating and maintenance service agreements. The contract held by Shuweihat qualified as a cash flow hedge, and therefore, we record our proportionate share of the change in fair value of the contract in Other Comprehensive Income. The contract held by Taweelah did not qualify as a cash flow hedge. As such, we record our proportionate share of the change in the fair value of this 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, - a defined company contribution plan for employees hired on or after September 1, 2005, - 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 current employees, the employees of our subsidiaries, and Panhandle, a former subsidiary. The Pension Plan's assets are not distinguishable by company. On September 1, 2005, we will implement the Defined Company Contribution Plan. The Defined Company Contribution Plan will provide an employer contribution of 5 percent of base pay to the existing Employees' Savings Plan. No employee contribution is required to receive the plan's employer contribution. All employees hired on and after September 1, 2005 will participate in this plan as part of their retirement benefit program. Cash balance pension plan participants will also participate in the Defined Company Contribution Plan on September 1, 2005. Additional pay credits under the cash balance pension plan will be discontinued as of that date. OPEB: 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 CMS-66 CMS Energy Corporation for anticipated recovery in utility rates. 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 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. Costs: The following table recaps the costs incurred in our retirement benefits plans:
In Millions - ----------------------------------------------------------------------------------------------------------- Pension Three Months Ended Six Months Ended 2005 2004 2005 2004 - ---------------------------------------------------------------------------------------------------------- Service cost $ 15 $ 9 $ 25 $ 19 Interest expense 30 18 49 36 Expected return on plan assets (38) (27) (63) (54) Amortization of: Net loss 7 4 14 7 Prior service cost 3 2 4 3 --------------------------------------- Net periodic pension and postretirement benefit cost $ 17 $ 6 $ 29 $ 11 ==========================================================================================================
In Millions - ----------------------------------------------------------------------------------------------------------- OPEB Three Months Ended Six Months Ended 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------------------------- Service cost $ 5 $ 5 $ 11 $ 10 Interest expense 16 14 32 29 Expected return on plan assets (14) (12) (28) (24) Amortization of: Net loss 5 3 9 5 Prior service cost (2) (2) (4) (5) ---------------------------------------- Net periodic pension and postretirement benefit cost $ 10 $ 8 $ 20 $ 15 ===========================================================================================================
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 MCV Partnership's net periodic postretirement health care cost for the six months ended June 30, 2005 was less than $1 million. We remeasured our Pension and OPEB obligations as of April 30, 2005 to incorporate the effects of the collective bargaining agreement reached between the Utility Workers Union of America and Consumers. The Pension plan remeasurement increased our accumulated benefit obligation (ABO) by $127 million. Net periodic pension cost increased $4 million for the six months ended June 30, 2005, with an expected total increase in net periodic pension costs of $14 million for 2005. The Pension plan remeasurement resulted in an unfunded accumulated benefit obligation of $208 million. The unfunded accumulated benefit obligation is the amount by which the ABO exceeds the fair value of the plan assets. SFAS No. 87 states that the pension liability shown on the balance sheet must be at least CMS-67 CMS Energy Corporation equal to the unfunded accumulated benefit obligation. As such, we increased our additional minimum liability by $145 million to $564 million at June 30, 2005. Consistent with MPSC guidance, Consumers recognized the cost of its minimum pension liability adjustment as a regulatory asset. This adjustment increased our regulatory assets by $94 million and intangible assets by $38 million and reduced accumulated other comprehensive income by $9 million (net of income taxes). The OPEB plan remeasurement increased our accumulated postretirement benefit obligation by $50 million, with an expected total increase in benefit costs of $3 million for 2005. 8: ASSET RETIREMENT OBLIGATIONS SFAS NO. 143: This standard 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. The following tables describe our assets that have legal obligations to be removed at the end of their useful life:
June 30, 2005 In Millions - --------------------------------------------------------------------------------------------------------------------- In Service Trust ARO Description Date Long Lived Assets Fund - --------------------------------------------------------------------------------------------------------------------- Palisades-decommission plant site 1972 Palisades nuclear plant $ 529 Big Rock-decommission plant site 1962 Big Rock nuclear plant 26 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 - =====================================================================================================================
CMS-68 CMS Energy Corporation
In Millions - ------------------------------------------------------------------------------------------------------------------------------ ARO ARO Liability Cash flow Liability ARO Description 12/31/04 Incurred Settled Accretion Revisions 6/30/05 - ------------------------------------------------------------------------------------------------------------------------------ Palisades-decommission $ 350 $ - $ - $ 12 $ - $ 362 Big Rock-decommission 30 - (25) 7 - 12 JHCampbell intake line - - - - - - Coal ash disposal areas 54 - (1) 2 - 55 Wells at gas storage fields 1 - - - - 1 Indoor gas services relocations 1 - - - - 1 Natural gas-fired power plant 1 - - - - 1 Close gas treating plant and gas wells 2 - - - - 2 -------------------------------------------------------------------------------- Total $ 439 $ - $ (26) $ 21 $ - $ 434 ==============================================================================================================================
On October 14, 2004, the MPSC issued a generic proceeding to review SFAS No. 143, FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing Requirements for Asset Retirement Obligations, and their accounting and ratemaking issues. Utilities responded to the Order in March 2005; MPSC Staff and intervenor filed responses in May 2005. We consider the proceeding a clarification of accounting and reporting issues that relate to all Michigan utilities. CMS-69 CMS Energy Corporation 9: 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 $14 million for the three months ended June 30, 2005 and $38 million for the three months ended June 30, 2004 and $16 million for the six months ended June 30, 2005 and $44 million for the six months ended June 30, 2004. The most significant of these investments are: - our 50 percent interest in Jorf Lasfar, and - our 40 percent interest in Taweelah. Summarized financial information for these equity method investments is as follows: Income Statement Data
In Millions - ------------------------------------------------------------------------------------------------------------------- JORF LASFAR Three Months Ended Six Months Ended - ------------------------------------------------------------------------------------------------------------------- June 30 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------- Operating revenue $ 129 $ 102 $ 259 $ 212 Operating expenses (90) (56) (173) (121) ---------------------------------------------------------- Operating income 39 46 86 91 Other expense, net (14) (14) (28) (29) ---------------------------------------------------------- Net income $ 25 $ 32 $ 58 $ 62 ===================================================================================================================
Income Statement Data
In Millions - ------------------------------------------------------------------------------------------------------------------- TAWEELAH Three Months Ended Six Months Ended - ------------------------------------------------------------------------------------------------------------------- June 30 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------------------- Operating revenue $ 26 $ 26 $ 50 $ 48 Operating expenses (15) (12) (19) (22) ---------------------------------------------------------- Operating income 11 14 31 26 Other income (expense), net (23) 33 (24) 8 ---------------------------------------------------------- Net income (loss) $ (12) $ 47 $ 7 $ 34 ===================================================================================================================
CMS-70 CMS Energy Corporation 10: REPORTABLE SEGMENTS Our reportable segments consist of 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 three reportable segments: electric utility, gas utility, and enterprises. The "Other" segment includes corporate interest and other, discontinued operations, and the cumulative effect of accounting changes. The following table shows our financial information by reportable segment:
In Millions - ----------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended - ----------------------------------------------------------------------------------------------------------------------- June 30 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------------------------------------- Operating Revenue Electric utility $ 644 $ 611 $ 1,272 $ 1,241 Gas utility 355 300 1,347 1,205 Enterprises 242 182 467 401 - ----------------------------------------------------------------------------------------------------------------------- Total Operating Revenue $ 1,241 $ 1,093 $ 3,086 $ 2,847 ======================================================================================================================= Net Income Available to Common Stockholders Electric utility $ 46 $ 27 $ 79 $ 75 Gas utility (3) 1 55 57 Enterprises 29 37 134 (23) Other (45) (49) (91) (102) - ----------------------------------------------------------------------------------------------------------------------- Total Net Income Available to Common Stockholders $ 27 $ 16 $ 177 $ 7 =======================================================================================================================
In Millions - ----------------------------------------------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - ----------------------------------------------------------------------------------------------------------------------- Assets Electric utility (a) $ 7,646 $ 7,289 Gas utility (a) 3,209 3,187 Enterprises 5,084 4,980 Other 522 416 - ----------------------------------------------------------------------------------------------------------------------- Total Assets $ 16,461 $ 15,872 =======================================================================================================================
(a) Amounts include a portion of our other common assets attributable to both the electric and gas utility businesses. CMS-71 CMS Energy Corporation 11: CONSOLIDATION OF VARIABLE INTEREST ENTITIES 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. Therefore, we consolidated these partnerships into our consolidated financial statements for all periods presented. These partnerships have third-party obligations totaling $586 million at June 30, 2005. Property, plant, and equipment serving as collateral for these obligations has a carrying value of $1.396 billion at June 30, 2005. The creditors of these partnerships do not have recourse to the general credit of CMS Energy. We are the primary beneficiary of three other 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 for all periods presented. These partnerships have third-party obligations totaling $111 million at June 30, 2005. Property, plant, and equipment serving as collateral for these obligations has a carrying value of $165 million at June 30, 2005. 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. Additionally, we hold interests in variable interest entities in which we are not the primary beneficiary. The following chart details our involvement in these entities at June 30, 2005:
- ------------------------------------------------------------------------------------------------------------------------- Investment Operating Total Name (Ownership Nature of the Involvement Balance Agreement with Generating Interest) Entity Country Date (In Millions) CMS Energy Capacity - ------------------------------------------------------------------------------------------------------------------------- Taweelah (40%) Generator United Arab 1999 $ 68 Yes 777 MW Emirates Jubail (25%) Generator Saudi Arabia 2001 $ - Yes 250 MW United Arab Shuweihat (20%) Generator Emirates 2001 $ 40 Yes 1,500 MW - ------------------------------------------------------------------------------------------------------------------------- Total $ 108 2,527 MW =========================================================================================================================
Our maximum exposure to loss through our interests in these variable interest entities is limited to our investment balance of $108 million, and letters of credit, guarantees, and indemnities relating to Taweelah and Shuweihat totaling $86 million. CMS-72 CMS Energy Corporation 12: IMPLEMENTATION OF NEW ACCOUNTING STANDARDS 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 (calendar year 2005 for CMS Energy). In June 2005, we decided on a plan to repatriate $79 million of foreign earnings during the remainder of 2005. Historically, we recorded deferred taxes on these earnings. Since this planned repatriation is expected to qualify for the tax benefit, we reversed $24 million of our deferred tax liability. This adjustment was recorded as a component of income from continuing operations in the second quarter of 2005. We may repatriate additional amounts that may qualify for the repatriation tax benefit during the remainder of 2005. If successful, our current estimate is that additional amounts could range between $50 million and $150 million. The amount of additional repatriation remains uncertain because it is based on future foreign subsidiary operations, cash flows, financings, and repatriation limitations. This potential additional repatriation could reduce our recorded deferred tax liability by $15 million to $45 million. We expect to be in a position to finalize our assessment regarding any potential repatriation, which may be higher or lower, in the fourth quarter of 2005. NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE SFAS NO. 123R, SHARE-BASED PAYMENT: This Statement requires companies to use the fair value of employee stock options and similar awards at the grant date to value the awards. Companies must expense this amount over the vesting period of the awards. This 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. 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 cash inflows from financing activities rather than as a reduction of taxes paid in operating activities. Excess tax benefits are recorded as adjustments to additional paid-in capital. This Statement is effective for us as of the beginning of 2006. We adopted the fair value method of accounting for share-based awards effective December 2002. Therefore, we do not expect this statement to have a significant impact on our results of operations when it becomes effective. FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS: This Interpretation clarifies the term "conditional asset retirement obligation" as used in SFAS No. 143. The term refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred. This Interpretation also clarifies when an entity would have sufficient information to estimate reasonably the fair value of an asset retirement obligation. For us, this Interpretation is effective no later than December 31, 2005. We are in the process of determining the impact this Interpretation will have on our financial statements upon adoption. CMS-73 CMS Energy Corporation (This page intentionally left blank) CMS-74 Consumers Energy Company 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." This MD&A has been prepared in accordance with the instructions to Form 10-Q and Item 303 of Regulation S-K. This MD&A should be read in conjunction with the MD&A contained in Consumers Energy's Form 10-K for the year ended December 31, 2004. EXECUTIVE OVERVIEW Consumers, a subsidiary of CMS Energy, a holding company, is a combination electric and gas utility company serving 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 our strategy to improve credit ratings, grow earnings, and position us to make new investments. Despite strong financial and operational performance, we face important challenges in the future. As a result of Michigan's Customer Choice Act, which allows alternative electric suppliers to sell electric power directly to our customers, we have lost industrial and commercial load. As of July 2005, alternative electric suppliers provide 811 MW, or 11 percent, of our electric load. Based on current trends, we predict total load loss by the end of 2005 to be in the range of 900 MW to 950 MW. However, we cannot assure that the actual load loss will fall within that range. 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. Natural gas prices have increased substantially in recent years. Because the price the MCV Partnership can charge us for energy has not increased to reflect current natural gas prices, the MCV Partnership's financial performance has been impacted negatively. In 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. CE-1 Consumers Energy Company We are focused on growing the equity base of our company and refinancing our debt to reduce interest rate costs. In 2005, we retired higher-interest rate debt through the use of proceeds from the issuance of $550 million of FMB and $150 million of senior insured quarterly notes. We also received cash contributions from CMS Energy of $550 million in 2005. These 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. FORWARD-LOOKING STATEMENTS AND RISK FACTORS This Form 10-Q 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 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 CE-2 Consumers Energy Company - 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 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 adverse impacts of the new Midwest Energy Market upon power supply and transmission costs, - the GAAP requirement that we utilize mark-to-market accounting on certain 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, CE-3 Consumers Energy Company - 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. For additional information regarding these and other uncertainties, see Note 2, Contingencies. RESULTS OF OPERATIONS NET INCOME AVAILABLE TO COMMON STOCKHOLDER
In Millions - -------------------------------------------------------------------------------- June 30 2005 2004 Change - -------------------------------------------------------------------------------- Net income available to common stockholder Electric $ 46 $ 27 $ 19 Gas (3) 1 (4) Other (Includes MCV Partnership interest) (11) (5) (6) - -------------------------------------------------------------------------------- Three months ended $ 32 $ 23 $ 9 ================================================================================
For the three months ended June 30, 2005, our net income available to the common stockholder increased $9 million versus the same period in 2004. The $9 million increase in net income available to the common stockholder reflects: - a $22 million increase in electric delivery revenue due to warmer weather and increased surcharge revenue, - a $4 million increase in electric utility earnings due to the return on capital expenditures in excess of our depreciation base as allowed by the Customer Choice Act, and - a $5 million increase in gas delivery revenue due to higher deliveries and the MPSC's October 2004 final gas rate order. These increases in net income available to the common stockholder were offset partially by reductions to net income available to the common stockholder from: - a $15 million increase in operating expenses due primarily to higher depreciation and amortization expense, higher pension and benefit expense, and higher underrecovery expense related to the MCV PPA, offset partially by our direct savings from the RCP, and - a $10 million decrease in earnings from our ownership interest in the MCV Partnership primarily due to the decrease in fair value of certain long-term gas contracts and financial hedges. CE-4 Consumers Energy Company
In Millions - -------------------------------------------------------------------------------- June 30 2005 2004 Change - -------------------------------------------------------------------------------- Net income available to common stockholder Electric $ 79 $ 75 $ 4 Gas 55 57 (2) Other (Includes MCV Partnership interest) 55 (5) 60 - -------------------------------------------------------------------------------- Six months ended $ 189 $ 127 $ 62 ================================================================================
For the six months ended June 30, 2005, our net income available to the common stockholder increased $62 million versus the same period in 2004. The $62 million increase in net income available to the common stockholder reflects: - a $53 million increase in earnings from our ownership interest in the MCV Partnership primarily due to the increase in fair value of certain long-term gas contracts and financial hedges (the MPSC's approval of the RCP resulted in the MCV Partnership recognizing the increase in the fair value of additional gas contracts beginning January 2005), - a $25 million increase in electric delivery revenue due to warmer weather and increased surcharge revenue, - a $14 million increase in gas delivery revenue due to the MPSC's October 2004 final gas rate order, and - an $8 million increase in electric utility earnings due to the return on capital expenditures in excess of our depreciation base as allowed by the Customer Choice Act. These increases in net income available to the common stockholder were offset partially by reductions to net income available to the common stockholder from: - a $30 million increase in operating expenses due primarily to higher depreciation and amortization expense, higher pension and benefit expense, and higher underrecovery expense related to the MCV PPA, offset partially by our direct savings from the RCP, and - a $7 million underrecovery of power supply revenue primarily due to non-recoverable power supply costs related to capped customers. For additional details, see "Electric Utility Results of Operations," "Gas Utility Results of Operations," and "Other Results of Operations" within this section and Note 2, Contingencies. For additional details regarding the fair value of certain of the MCV Partnership's long-term gas contracts, see the "Critical Accounting Policies-Accounting for Financial and Derivative Instruments and Market Risk Information-Derivative Instruments" section within this MD&A. CE-5 Consumers Energy Company ELECTRIC UTILITY RESULTS OF OPERATIONS
In Millions - ------------------------------------------------------------------------------------------------------------------- June 30 2005 2004 Change - ------------------------------------------------------------------------------------------------------------------- Three months ended $ 46 $ 27 $ 19 Six months ended $ 79 $ 75 $ 4 ===================================================================================================================
Three Months Ended Six Months Ended Reasons for the change: June 30, 2005 vs. 2004 June 30, 2005 vs. 2004 - ------------------------------------------------------------------------------------------------------------------- Electric deliveries $ 34 $ 38 Power supply costs and related revenue (2) (11) Other operating expenses, other income, and non- commodity revenue (8) (31) Regulatory return on capital expenditures 6 13 General taxes (1) (4) Fixed charges 1 2 Income taxes (11) (3) --------------------------------------------------------- Total change $ 19 $ 4 ===================================================================================================================
ELECTRIC DELIVERIES: For the three months ended June 30, 2005, electric deliveries increased 0.5 billion kWh or 5.1 percent versus the same period in 2004. For the six months ended June 30, 2005, electric deliveries increased 0.1 billion kWh or 0.4 percent versus the same period in 2004. The corresponding increases in electric delivery revenue for both periods were due to increased sales to residential customers due to warmer weather and increased surcharge revenue, offset partially by reduced electric delivery revenue from customers choosing alternative electric suppliers. On July 1, 2004, Consumers started collecting a surcharge related to the recovery of costs incurred in the transition to customer choice. This surcharge increased electric delivery revenue by $6 million for the three months ended June 30, 2005 and $11 million for the six months ended June 30, 2005. Surcharge revenue related to the recovery of security costs and Stranded Costs increased electric delivery revenue by an additional $3 million for the three months ended June 30, 2005 and $6 million for the six months ended June 30, 2005. POWER SUPPLY COSTS AND RELATED REVENUE: Our recovery of power supply costs is capped for our residential customers. For the three months ended June 30, 2005, our underrecovery of power costs allocated to these capped customers increased by $6 million versus the same period in 2004. For the six months ended June 30, 2005, our underrecovery of power costs allocated to these capped customers increased by $20 million versus the same period in 2004. Power supply-related costs increased in 2005 primarily due to higher coal costs and higher priced purchased power to replace the generation loss from outages at our Palisades and Campbell 3 generating plants. Partially offsetting these underrecoveries are transmission and nitrogen oxide allowance expenditures related to our capped customers, which we have deferred for future recovery. For the three months ended June 30, 2005, we deferred $4 million of these costs. For the six months ended June 30, 2005, we deferred $9 million of these costs. CE-6 Consumers Energy Company OTHER OPERATING EXPENSES, OTHER INCOME, AND NON-COMMODITY REVENUE: For the three months ended June 30, 2005, other operating expenses increased $14 million, other income increased $4 million, and non-commodity revenue increased $2 million versus the same period in 2004. For the six months ended June 30, 2005, other operating expenses increased $39 million, other income increased $4 million, and non-commodity revenue increased $4 million versus the same period in 2004. The increase in other operating expenses reflects higher depreciation and amortization expense, and higher pension and benefit expense. Depreciation and amortization expense increased due to higher plant in service and greater amortization of certain regulatory assets. Pension and benefit expense increased primarily due to changes in actuarial assumptions and the remeasurement of our pension and OPEB plans to reflect the new collective bargaining agreement between the Utility Workers Union of America and Consumers. Benefit expense also reflects the reinstatement of the employer matching contribution to our 401(k) plan. In addition, the increase in other operating expenses reflects increased underrecovery expense related to the MCV PPA, offset partially by our direct savings from the RCP. In 1992, a liability was established for estimated future underrecoveries of power supply costs under the MCV PPA. In 2004, a portion of the cash underrecoveries continued to reduce this liability until its depletion in December. In 2005, all cash underrecoveries are expensed directly to income. Partially offsetting this increased operating expense were the savings from the RCP approved by the MPSC in January 2005. The RCP allows us to dispatch the MCV Facility on the basis of natural gas 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. The MCV Facility's fuel cost savings are first used to offset the cost of replacement power and fund a renewable energy program. Remaining savings are split between the MCV Partnership and us. Our direct savings are shared 50 percent with customers in 2005 and 70 percent thereafter. The cost associated with the MCV PPA cash underrecoveries, net of our direct savings from the RCP, increased operating expense $2 million for the three months ended June 30, 2005 and $4 million for the six months ended June 30, 2005 versus the same periods in 2004. The increase in other income is primarily due to higher interest income on short-term cash investments, offset partially by expenses associated with the early retirement of debt in 2005. The increase in non-commodity revenue is primarily due to higher transmission services revenue. REGULATORY RETURN ON CAPITAL EXPENDITURES: The return on capital expenditures in excess of our depreciation base as allowed by the Customer Choice Act increased income by $6 million for the three months ended June 30, 2005 and $13 million for the six months ended June 30, 2005 versus the same periods in 2004. GENERAL TAXES: For the three and six months ended June 30, 2005, general taxes increased versus the same periods in 2004 primarily due to higher MSBT expense. FIXED CHARGES: For the three months ended June 30, 2005, fixed charges reflect a 36 basis point reduction in the average rate of interest on our debt and higher average debt levels versus the same period in 2004. For the six months ended June 30, 2005, fixed charges reflect a 32 basis point reduction in the average rate of interest on our debt and higher average debt levels versus the same period in 2004. CE-7 Consumers Energy Company INCOME TAXES: For the three and six months ended June 30, 2005, income taxes increased versus the same periods in 2004 primarily due to higher earnings by the electric utility. GAS UTILITY RESULTS OF OPERATIONS
In Millions - ------------------------------------------------------------------------------------------------------------------- June 30 2005 2004 Change - ------------------------------------------------------------------------------------------------------------------- Three months ended $ (3) $ 1 $ (4) Six months ended $ 55 $ 57 $ (2) ===================================================================================================================
Reasons for the change: Three Months Ended Six Months Ended June 30, 2005 vs. 2004 June 30, 2005 vs. 2004 - ------------------------------------------------------------------------------------------------------------------- Gas deliveries $ 2 $ (1) Gas rate increase 5 21 Gas wholesale and retail services, other gas revenues and other income 1 (1) Operation and maintenance (12) (17) General taxes and depreciation (2) (3) Fixed charges - (2) Income taxes 2 1 --------------------------------------------------------- Total change $ (4) $ (2) ===================================================================================================================
GAS DELIVERIES: For the three months ended June 30, 2005, higher gas delivery revenues reflect increased deliveries to our residential, commercial, and industrial customers versus the same period in 2004. Gas deliveries, including miscellaneous transportation to end-use customers, increased 1.4 bcf or 3.1 percent. For the six months ending June 30, 2005, lower gas delivery revenues reflect decreased deliveries to our residential and industrial transportation customers. Gas deliveries, including miscellaneous transportation to end-use customers, decreased 2.0 bcf or 1.0 percent. 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 annual increase of $58 million through a two-year surcharge. As a result of these orders, gas revenues increased $5 million for the three months ended June 30, 2005 and $21 million for the six months ended June 30, 2005 versus the same periods in 2004. GAS WHOLESALE AND RETAIL SERVICES, OTHER GAS REVENUES AND OTHER INCOME: For the three months ended June 30, 2005, other income increased $1 million primarily due to higher interest income on short-term cash investments versus the same period in 2004. For the six months ended June 30, 2005, gas wholesale and retail services revenue decreased primarily due to decreases in miscellaneous transportation and storage revenue. OPERATION AND MAINTENANCE: For the three and six months ended June 30, 2005, operation and maintenance expenses increased primarily due to increases in benefit costs and additional safety, reliability, and customer service expense. Pension and benefit expense increased primarily due to changes in actuarial assumptions and the remeasurement of our pension and OPEB plans to reflect the new collective bargaining agreement between the Utility Workers Union of America and Consumers. Benefit expense CE-8 Consumers Energy Company also reflects the reinstatement of the employer matching contribution to our 401(k) plan. GENERAL TAXES AND DEPRECIATION: For the three and six months ended June 30, 2005, general tax expense increased primarily due to higher MSBT expense. Depreciation expense increased due to higher plant in service. FIXED CHARGES: For the six months ended June 30, 2005, fixed charges reflect a 32 basis point reduction in the average rate of interest on our debt and higher average debt levels versus the same period in 2004. INCOME TAXES: For the three and six months ended June 30, 2005, income taxes decreased primarily due to lower earnings by the gas utility. OTHER RESULTS OF OPERATIONS
In Millions - ------------------------------------------------------------------------------------------------------------ June 30 2005 2004 Change - ------------------------------------------------------------------------------------------------------------ Three months ended $ (11) $ (5) $ (6) Six months ended $ 55 $ (5) $ 60 ============================================================================================================
For the three months ended June 30, 2005, other operations reduced net income by $11 million, a decrease of $6 million versus the same period in 2004. The change reflects a $10 million decrease in earnings from our ownership interest in the MCV Partnership, primarily due to a decrease in the fair value of certain long-term gas contracts and related financial hedges. The reduction in earnings at the MCV Partnership was offset partially by a $4 million reduction in other expenses. For the six months ended June 30, 2005, other operations increased net income by $55 million, an increase of $60 million versus the same period in 2004. The change reflects a $53 million increase in earnings from our ownership interest in the MCV Partnership, primarily due to an increase in the fair value of certain long-term gas contracts and related financial hedges. Also contributing to the increase in earnings was a $7 million reduction in other expenses. CRITICAL 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. 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 the history and specifics of each matter. The most significant of these contingencies are our electric and gas environmental liabilities, and the potential underrecoveries from our CE-9 Consumers Energy Company power purchase contract with the MCV Partnership, all of which are discussed in the "Outlook" section included in this MD&A. 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. There have been no material changes to the accounting for financial instruments since the year ended December 31, 2004. For details on financial instruments, see Note 4, Financial and Derivative Instruments. DERIVATIVE INSTRUMENTS: We use SFAS No. 133 to account for derivatives. Except as noted within this section, there have been no material changes to the accounting for derivative instruments since the year ended December 31, 2004. The MISO began operating the Midwest Energy Market on April 1, 2005. The Midwest Energy Market provides day-ahead and real-time energy market information and centralized generation dispatch for market participants. At this time, we believe that the commencement of this market does not constitute the development of an active energy market in Michigan. However, as we gain additional experience with the Midwest Energy Market, we will continue to evaluate whether or not the activity level within this market leads to the conclusion that an active energy market exists. If an active market develops in the future, certain of our electric purchases and sales contracts may qualify as derivatives. However, we believe that we will be able to apply the normal purchases and sales exception, which would not require us to mark these contracts to market. Also as part of the Midwest Energy Market, FTRs were established. FTRs are financial instruments established to manage price risk relating to electricity transmission congestion. An FTR entitles the holder to receive compensation (or remit payment) for certain congestion-related transmission charges that arise when the transmission grid is congested. We presently hold FTRs for certain areas on the transmission grid within the MISO's market area. FTRs are derivative instruments and are required to be recognized on our Consolidated Balance Sheets as assets or liabilities at their fair values, with any subsequent changes in fair value recognized in earnings. As of June 30, 2005, we recorded an asset of $1 million associated with the fair value of FTRs on our Consolidated Balance Sheets. 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 our Consolidated Balance Sheets. Due to the implementation of the RCP in January 2005, the MCV Partnership 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 are accounted for as derivatives, with changes in fair value recorded in earnings each quarter. Additionally, the financial hedges associated with these contracts no longer qualify as cash flow hedges. Thus, as of January 2005, any changes in the fair value of these financial hedges are recorded in earnings each quarter. The MCV Partnership expects future earnings volatility on both the gas fuel derivative contracts and the related financial hedges, since gains and losses will be recorded each quarter. For the six months ended June 30, 2005, we recorded a $170 million gain associated with the increase in fair value of these instruments on our Consolidated Statements of Income, resulting in a cumulative mark-to-market gain through June 30, 2005 of $226 million. The majority of this mark-to-market gain is expected to reverse through earnings during 2005 and 2006 as the gas is purchased and the financial hedges settle, with the remainder reversing between 2007 and 2011. CE-10 Consumers Energy Company 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 June 30, 2005, we assumed market-based interest rates ranging between 3.34 percent and 4.22 percent (depending on the term of the contract) and monthly volatility rates ranging between 25 percent and 42 percent to calculate the fair value of the gas fuel contracts held by the MCV Partnership. Also, at June 30, 2005, we assumed a market-based interest rate of 3.00 percent and monthly volatility rates ranging between 35 percent and 39 percent to calculate the fair value of our gas options. MARKET RISK INFORMATION: The following is an update of our risk sensitivities since the year ended December 31, 2004. These 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 SENSITIVITY ANALYSIS (assuming a 10 percent adverse change in market interest rates):
In Millions - ----------------------------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - ----------------------------------------------------------------------------------------------------- Variable-rate financing - before-tax annual earnings exposure $ 1 $ 2 Fixed-rate financing - potential loss in fair value (a) 145 138 =====================================================================================================
(a) Fair value exposure could only be realized if we repurchased all of our fixed-rate financing. COMMODITY PRICE RISK SENSITIVITY ANALYSIS (assuming a 10 percent adverse change in market prices):
In Millions - ----------------------------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - ----------------------------------------------------------------------------------------------------- Potential REDUCTION in fair value: Gas supply option contracts $ - $ 1 FTRs - - Derivative contracts associated with the MCV Partnership: Gas fuel contracts (a) 38 17 Gas fuel futures and swaps 47 41 =====================================================================================================
(a) The increased potential reduction in fair value for the MCV Partnership's gas fuel contracts is due to an increased number of contracts accounted for as derivatives. This is a result of the implementation of the RCP, at which time the MCV Partnership determined that a significant portion of its gas fuel contracts no longer qualify as normal purchases and must now be accounted for as derivatives. CE-11 Consumers Energy Company INVESTMENT SECURITIES PRICE RISK SENSITIVITY ANALYSIS (assuming a 10 percent adverse change in market prices):
In Millions - ------------------------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - ------------------------------------------------------------------------------------------------- Potential REDUCTION in fair value of available-for-sale equity securities (SERP investments and investments in CMS Energy common stock) $ 6 $ 5 =================================================================================================
We maintain trust funds, as required by the NRC, which may only be used to fund certain costs of nuclear plant decommissioning. These funds are 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. On September 1, 2005, we will implement the Defined Company Contribution Plan. The Defined Company Contribution Plan will provide an employer contribution of 5 percent of base pay to the existing Employees' Savings Plan. No employee contribution is required to receive the plan's employer cash contribution. All employees hired on and after September 1, 2005 will participate in this plan as part of their retirement benefit program. Cash balance pension plan participants will also participate in the Defined Company Contribution Plan on September 1, 2005. Additional pay credits under the cash balance pension plan will be discontinued as of that date. We use SFAS No. 87 to account for pension costs. 401(k): We resumed the employer's match on our 401(k) Savings Plan on January 1, 2005. The plan provides for an employer match of 50 percent on eligible contributions up to the first six percent of an employee's wages. Effective September 1, 2005, employees enrolled in the company's 401(k) Savings Plan will have the employer match increased from 50 percent to 60 percent. 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 CE-12 Consumers Energy Company - anticipated health care costs. Any change in these assumptions can change significantly the liability and associated expenses recognized in any given year. The following table provides an estimate of our pension cost, OPEB cost, and cash contributions for the next three years:
In Millions - ------------------------------------------------------------------------------- Expected Costs Pension Cost OPEB Cost Contributions - ------------------------------------------------------------------------------- 2006 $ 88 $ 38 $ 81 2007 97 34 176 2008 92 30 109 ===============================================================================
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. For additional details on postretirement benefits, see Note 5, Retirement Benefits. OTHER Other accounting policies that are important to an understanding of our results of operations and financial condition include: - accounting for the effects of industry regulation, - accounting for asset retirement obligations, - accounting for nuclear decommissioning costs, and - accounting for related party transactions. There have been no material changes to these accounting policies since the year ended December 31, 2004. 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 require additional liquidity due to the timing of the cost recoveries as gas prices increase. 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 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. CE-13 Consumers Energy Company CASH POSITION, INVESTING, AND FINANCING Our operating, investing, and financing activities meet consolidated cash needs. At June 30, 2005, $667 million consolidated cash was on hand, which includes $54 million of restricted cash and $209 million from the entities consolidated pursuant to FASB Interpretation No. 46. For additional details, see Note 8, Consolidation of Variable Interest Entities. SUMMARY OF CASH FLOWS:
In Millions - ------------------------------------------------------------------------------ Six Months Ended June 30 2005 2004 - ------------------------------------------------------------------------------ Net cash provided by (used in): Operating activities $ 590 $ 561 Investing activities (310) (251) ---------------- Net cash provided by operating and investing activities 280 310 Financing activities 162 (125) ---------------- Net Increase in Cash and Cash Equivalents $ 442 $ 185 ==============================================================================
OPERATING ACTIVITIES: For the six months ended June 30, 2005, net cash provided by operating activities increased $29 million versus the same period in 2004 due to decreases in inventory from lower volumes of gas purchased and other timing differences. INVESTING ACTIVITIES: For the six months ended June 30, 2005, net cash used in investing activities increased $59 million versus the same period in 2004 due to an increase in capital expenditures of $38 million and an increase in restricted cash on hand of $31 million. FINANCING ACTIVITIES: For the six months ended June 30, 2005, net cash provided by financing activities increased $287 million versus the same period in 2004 due to a $550 million stockholder's contribution from the parent, offset by a decrease in net proceeds from borrowings of $201 million and an increase in common stock dividends of $62 million. For additional details on long-term debt activity, see Note 3, Financings and Capitalization. OBLIGATIONS AND COMMITMENTS REVOLVING CREDIT FACILITIES: For details on revolving credit facilities, see Note 3, Financings and Capitalization. OFF-BALANCE SHEET ARRANGEMENTS: There have been no material changes in off-balance sheet arrangements since the year ended December 31, 2004. For 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." DIVIDEND RESTRICTIONS: For details on dividend restrictions, see Note 3, Financings and Capitalization. CE-14 Consumers Energy Company OUTLOOK ELECTRIC BUSINESS OUTLOOK GROWTH: In 2005, we project electric deliveries to grow approximately three percent. This short-term outlook for 2005 assumes a stronger economy than in 2004 and normal weather conditions during the remainder of 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 or contraction of manufacturing facilities. 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 establish a reserve margin target to address various scenarios and contingencies so that the probability of interrupting service to retail customers because of a supply shortage is no greater than an industry-recognized standard. However, even with the reserve margin target, additional spot purchases during periods when electric prices are high may be required. 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 100 percent from our electric generating plants and long-term power purchase contracts, and approximately 11 percent from short-term contracts, options for physical deliveries, and other agreements. We have purchased capacity and energy contracts covering the estimated reserve margin requirements for 2005 and covering partially the estimated reserve margin requirements for 2006 through 2007. As a result, we have recognized an asset of $12 million for unexpired capacity and energy contracts at June 30, 2005. COAL DELIVERY DISRUPTIONS: In May 2005, western coal rail carriers experienced derailments and significant service disruptions due to heavy snow and rain conditions. These disruptions affected all shippers of western coal from Wyoming mines as well as coal producers from May 2005 through June 2005. We received notification that, under contractual Force Majeure provisions, the coal tonnage not delivered during this period will not be made up. According to recent announcements, rail repairs will extend through November 2005. Although we expect some impact on coal shipments during the repair period, and as a result our coal inventories may drop below historical levels this winter, based on our current delivery experience, projections, and inventory, we believe we will have adequate coal supply to allow for normal dispatch of our coal-fired generating units. However, we are unable to predict other potential industry-wide shortages, which could affect the ability of our suppliers to deliver on their commitments. TRANSMISSION MARKET DEVELOPMENT: The MISO began operating the Midwest Energy Market on April 1, 2005. The Midwest Energy Market includes a day-ahead and real-time energy market and centralized generation dispatch for market participants. We are a participant in this energy market. The intention of these changes is to meet load requirements in the region reliably and efficiently, to improve management of congestion on the grid, and to centralize dispatch of generation throughout the region. The MISO is now responsible for the reliability and economic dispatch in the entire MISO area, which covers parts of 15 states and Manitoba, including our service territory. We are presently evaluating what financial impact, if any, these changes are having on our operations. CE-15 Consumers Energy Company RENEWABLE RESOURCES PROGRAM: In January 2005, in collaboration with the MPSC, we established a renewable resources program. Under the RRP, we will purchase energy from approved renewable sources, which include solar, wind, geothermal, biomass, and hydroelectric. Customers will be able to participate in the RRP in accordance with tariffs approved by the MPSC. The MPSC has authorized recovery of costs for the RRP by establishing a fund that consists of an annual contribution from savings generated by the RCP, a surcharge imposed by the MPSC, and contributions from customers. In February 2005, the Attorney General filed appeals of the MPSC orders providing funding for the RRP in the Michigan Court of Appeals. In March 2005, we issued a request for proposal for long-term renewable energy supply contracts. We are in negotiations with certain respondents to this request. 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 load migration to alternative electric suppliers, increased system maintenance and improvement costs, Clean Air Act-related expenditures, and employee pension costs. In April 2005, we filed updated debt and equity information in this case. In June 2005, the MPSC Staff filed its position in this case, recommending a base rate increase of $98 million. The MPSC Staff also recommended an 11.25 percent return on equity to establish rates and recognized all of our projected equity investment (infusions and retained earnings) in 2006. We expect a final order from the MPSC 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 under discussion in a few municipalities in our service territory. If incurred, we would seek recovery of these costs from our customers located in the municipality affected, subject to MPSC approval. This case has potentially broad ramifications for the electric utility industry in Michigan. In a similar matter, in May 2005, we filed a request with the MPSC that asks the MPSC to rule that the City of East Grand Rapids, Michigan must pay for the relocation of electric utility facilities required by an ordinance adopted by the city. At this time, we cannot predict the outcome of these matters. 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. 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 Nitrogen Oxide State Implementation Plan requires significant reductions in nitrogen oxide emissions. To comply with the regulations, we expect to incur capital expenditures totaling $815 million. The key assumptions in the capital expenditure estimate include: CE-16 Consumers Energy Company - 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 8.3 percent. As of June 2005, we have incurred $563 million in capital expenditures to comply with these regulations and anticipate that the remaining $252 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, of which 90 percent have been purchased. The cost of the allowances is estimated to average $8 million per year for 2005-2006. The estimated costs are based on the average cost of the purchased, allocated, and swapped allowances. The need for allowances will decrease after year 2006 with the installation of selective catalytic 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 recently adopted a Clean Air Interstate Rule that requires additional coal-fired electric plant emission controls for nitrogen oxides and sulfur dioxide. The rule involves a two-phase program to reduce emissions of sulfur dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The final rule will require that we run our Selective Catalytic Reduction units year round beginning in 2009 and may require that we purchase additional nitrogen oxide credits beginning in 2009. In addition to the selective catalytic reduction control technology installed to meet the Nitrogen Oxide State Implementation Plan, our current plan includes installation of flue gas desulfurization scrubbers. The scrubbers are to be installed by 2014 to meet the phase I reduction requirements of the Clean Air Interstate Rule at a cost near that of the Nitrogen Oxide State Implementation Plan. In March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial reductions of mercury emissions from coal-fired electric power plants by 2010 and further reductions by 2018. While the industry has not reached a consensus on the technical methods for curtailing mercury emissions, our capital and operating costs for mercury emissions reductions are expected to be significantly less than what is required for nitrogen oxide compliance. 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 sector. 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 uncertain 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. CE-17 Consumers Energy Company 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 2007. We are currently performing the required studies 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: 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 July 2005, alternative electric suppliers are providing 811 MW of generation supply to ROA customers. This amount represents a decrease of 5 percent compared to July 2004, and 11 percent of our total distribution load. Several customers notified us of their intent to return to our service after a notification period that ended in June 2005 and July 2005. Customers representing 106 MW returned to our service during this period. Based on this and other current trends, we predict that total load loss by the end of 2005 will be in the range of 900 MW to 950 MW. However, we cannot assure that the actual load loss will fall within that range. Implementation Costs: In June 2005, the MPSC issued an order that authorizes us to recover implementation costs incurred during 2002 and 2003 totaling $6 million, plus the cost of money through the period of collection. We are also pursuing authorization at the FERC for the MISO to reimburse us for Alliance RTO development costs. Included in this amount is $2 million that the MPSC did not approve as part of our 2002 implementation costs application. The FERC denied our request for reimbursement and we are appealing the FERC ruling at the United States Court of Appeals for the District of Columbia. We cannot predict the amount, if any, the FERC will approve as recoverable. Section 10d(4) Regulatory Assets: 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. 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 in Section 10d(4) costs, which includes the cost of money through the period of collection. In June 2005, the ALJ issued a proposal for decision recommending the MPSC approve recovery of the same Section 10d(4) costs recommended by the MPSC Staff. However, we may have the opportunity to recover certain costs included in our application alternatively in other cases pending before the MPSC. We cannot predict the amount, if any, the MPSC will approve as recoverable. 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." OTHER ELECTRIC BUSINESS UNCERTAINTIES 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. 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 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 CE-18 Consumers Energy Company $150 million from 2005 through 2007. After September 15, 2007, we expect to claim relief under the regulatory out provision in the MCV PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amounts that we collect 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 15, 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 MCV 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. Natural gas prices have increased substantially in recent years. NYMEX forward natural gas prices through 2010 recently were approximately $2 per mcf higher than they were at year-end 2004. Because the price the MCV Partnership can charge us for energy has not increased to reflect current natural gas prices, the MCV Partnership's financial performance has been impacted negatively. If forward gas prices for 2010 and beyond do not decline to the $4 to $6 per mcf range currently anticipated by various government and private natural gas price forecasts, and remain in that range for the remaining life of the MCV PPA, the economics of operating the MCV Facility would be adverse enough to require the MCV Partnership to recognize a substantial impairment of its property, plant and equipment, which are included in our Consolidated Balance Sheets. However, forecasting future natural gas prices is extremely difficult and there are currently differing views among forecasters as to whether such prices will increase, decrease or remain at current levels over any period of time. At present, some of the forecasts indicate natural gas prices in excess of the $4 to $6 per mcf range during the years after 2010. At June 30, 2005, the net book value of the MCV Partnership's property, plant and equipment was $1.396 billion. Several other factors could alter significantly the MCV Partnership's future impairment analyses including, but not limited to, energy payments to the MCV Partnership, which are based on the cost of coal burned at our coal plants, and any reduction in payments to the MCV Partnership subsequent to September 15, 2007 due to underrecovery of contract costs by Consumers from its customers as a result of past or future actions by the MPSC. Any such impairment would be required to be recognized in the period when management's analysis of the factors described above meets the accounting standards for impairment recognition. We will continue to monitor the current and long-term trends in natural gas prices and their effect on the economics of operating the MCV Facility. For additional details on the MCV Partnership, see Note 2, Contingencies, "Other Electric Contingencies - The Midland Cogeneration Venture." 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 by early 2007. We expect a 30-acre area containing eight casks loaded with spent nuclear fuel and other high-level radioactive waste material to be returned to a natural state within two years from the date the DOE begins removing the spent nuclear fuel from Big Rock. Palisades: In March 2005, the NRC completed its end-of-cycle plant performance assessment of Palisades, which covered the calendar year 2004. The NRC determined that Palisades was operated in a CE-19 Consumers Energy Company manner that preserved public health and safety and met all of the NRC's specific "cornerstone objectives." As of June 2005, 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 September 2006. The amount of spent nuclear fuel at Palisades exceeds the plant's temporary onsite wet storage pool capacity. We are using dry casks for temporary onsite dry storage to supplement the wet storage pool capacity. As of June 2005, 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." Palisades' current license from the NRC expires in 2011. In March 2005, NMC, which operates the Palisades plant, applied for a 20-year license renewal for the plant on behalf of Consumers. The NRC typically takes 22-30 months to review a license renewal application. A decision is expected in 2007. Palisades, like many other nuclear plants, has experienced cracking in reactor head nozzle penetrations. Repairs to two nozzles were made in 2004. We have authorized the purchase of a replacement reactor vessel closure head. The replacement head is being manufactured and is scheduled to be installed in 2007. The replacement head nozzles will be manufactured from materials less susceptible to cracking and should minimize inspection and repair costs. 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. In March 2005, an MPSC ALJ recommended that the complaint be dismissed. Exceptions to this proposal for decision have been filed, and the matter is now before the MPSC for a decision. We are unable to predict the outcome of this matter. 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, - the price of competing energy sources or fuels, - gas consumption per customer, and - changes 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 CE-20 Consumers Energy Company necessary to meet estimated peak load beginning in the winter of 2005 through 2006. We started construction of the pipeline in June 2005 and it is expected to be completed and in service by November 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. On July 8, 2005, the Administrative Law Judge hearing the case issued a proposal for decision supporting the project as filed. 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. GAS ENVIRONMENTAL ESTIMATES: We expect to incur investigation and remedial action costs at a number of sites, including 23 former manufactured gas plant sites. For additional details, see Note 2, Contingencies, "Gas Contingencies - Gas Environmental Matters." GAS TITLE TRACKING FEES AND SERVICES: There has been no material change in the Gas Title Tracking Fees and Services matter since the year ended December 31, 2004. 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. For additional details on gas cost recovery, see Note 2, Contingencies, "Gas Rate Matters - Gas Cost Recovery." 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, which reaffirmed the previously ordered $34 million reduction in our depreciation expense. The October 2004 order also required 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. The MPSC has directed us to file our next gas depreciation case within 90 days after the latter of: - the removal cost study filing or - the MPSC issuance of a final order in the pending case related to ARO accounting. The MPSC order on the pending case related to ARO accounting is expected in the first quarter of 2006. We proposed to incorporate the results of the gas depreciation case into gas general rates using a surcharge mechanism if the depreciation case order was not issued concurrently with a gas general rate case order. CE-21 Consumers Energy Company 2005 GAS RATE CASE: In July 2005, we filed an application with the MPSC seeking a 12 percent authorized return on equity along with a $132 million annual increase in our gas delivery and transportation rates. The primary reasons for the request are recovery of new investments, carrying costs on natural gas inventory related to higher gas prices, system maintenance, employee benefits, and low-income assistance. If approved, the request would add approximately 5 percent to the typical residential customer's average monthly bill. The increase would also affect commercial and industrial customers. As part of this filing, we also requested interim rate relief of $75 million. OTHER OUTLOOK COLLECTIVE BARGAINING AGREEMENTS: Approximately 46 percent of our employees are represented by the Utility Workers Union of America. 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 expired on June 1, 2005. In April 2005, a new Operating, Maintenance, and Construction Agreement was reached between the Utility Workers Union of America and Consumers. The Union membership voted to ratify this agreement. The collective bargaining agreement with the Union for our call center employees expired on August l, 2005. In July 2005, Consumers and the Union reached and ratified a new collective bargaining agreement for our call center employees. 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 a class action lawsuit alleging ERISA violations. For additional details regarding these investigations and litigation, see Note 2, Contingencies. NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE SFAS NO. 123R, SHARE-BASED PAYMENT: This Statement requires companies to use the fair value of employee stock options and similar awards at the grant date to value the awards. Companies must expense this amount over the vesting period of the awards. This 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. 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 cash inflows from financing activities rather than as a reduction of taxes paid in operating activities. Excess tax benefits are recorded as adjustments to additional paid-in capital. This Statement is effective for us as of the beginning of 2006. We adopted the fair value method of accounting for share-based awards effective December 2002. Therefore, we do not expect this statement to have a significant impact on our results of operations when it becomes effective. FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS: This Interpretation clarifies the term "conditional asset retirement obligation" as used in SFAS No. 143. The term refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably CE-22 Consumers Energy Company estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred. This Interpretation also clarifies when an entity would have sufficient information to estimate reasonably the fair value of an asset retirement obligation. For us, this Interpretation is effective no later than December 31, 2005. We are in the process of determining the impact this Interpretation will have on our financial statements upon adoption. CE-23 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------------------------------------------------- In Millions OPERATING REVENUE $ 1,016 $ 923 $ 2,648 $ 2,470 OPERATING EXPENSES Fuel for electric generation 157 170 311 330 Fuel costs mark-to-market at MCV 39 - (170) (6) Purchased and interchange power 63 50 127 100 Purchased power - related parties 14 15 31 31 Cost of gas sold 242 195 982 858 Cost of gas sold - related parties - - - 1 Other operating expenses 201 177 389 348 Maintenance 50 57 102 107 Depreciation, depletion and amortization 111 98 256 231 General taxes 53 50 118 112 --------------------------------------------- 930 812 2,146 2,112 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME 86 111 502 358 OTHER INCOME (DEDUCTIONS) Accretion expense (1) (1) (1) (2) Interest and dividends 10 4 15 7 Regulatory return on capital expenditures 15 9 31 18 Other income 6 2 10 4 Other expense (2) (1) (8) (2) --------------------------------------------- 28 13 47 25 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST CHARGES Interest on long-term debt 75 72 147 145 Interest on long-term debt - related parties 2 11 9 22 Other interest 2 4 4 7 Capitalized interest (1) (1) (2) (3) --------------------------------------------- 78 86 158 171 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 36 38 391 212 MINORITY INTERESTS (14) 1 97 11 --------------------------------------------- INCOME BEFORE INCOME TAXES 50 37 294 201 INCOME TAX EXPENSE 17 13 104 72 --------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 33 24 190 129 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR RETIREMENT BENEFITS, NET OF $- TAX BENEFIT IN 2004 - - - (1) --------------------------------------------- NET INCOME 33 24 190 128 PREFERRED STOCK DIVIDENDS 1 1 1 1 --------------------------------------------- NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 32 $ 23 $ 189 $ 127 ===================================================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CE-24 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30 2005 2004 - ----------------------------------------------------------------------------------------------------------- In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 190 $ 128 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $3 per period) 256 231 Regulatory return on capital expenditures (31) (18) Minority interest 97 11 Fuel costs mark-to-market at MCV (170) (6) Capital lease and other amortization 17 13 Cumulative effect of change in accounting - 1 Changes in assets and liabilities: Increase in accounts receivable and accrued revenue (94) (112) Decrease in inventories 107 75 Increase in accounts payable 41 44 Increase (decrease) in accrued expenses (26) 16 Deferred income taxes and investment tax credit 78 72 Decrease in other current and non-current assets 125 79 Increase in other current and non-current liabilities - 27 ------------------------ Net cash provided by operating activities $ 590 $ 561 - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) $ (270) $ (232) Cost to retire property (44) (37) Restricted cash on hand (33) (2) Investments in nuclear decommissioning trust funds (3) (3) Proceeds from nuclear decommissioning trust funds 24 23 Proceeds from short-term investments 145 - Purchase of short-term investments (141) - Maturity of MCV restricted investment securities held-to-maturity 222 300 Purchase of MCV restricted investment securities held-to-maturity (223) (300) Cash proceeds from sale of assets 1 - Other investing 12 - ------------------------ Net cash used in investing activities $ (310) $ (251) - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt $ 735 $ - Retirement of long-term debt (925) (14) Payment of common stock dividends (167) (105) Payment of preferred stock dividends (1) (1) Payment of capital and finance lease obligations (5) (5) Stockholder's contribution 550 - Debt issuance costs and financing fees (25) - ------------------------ Net cash provided by (used in) financing activities $ 162 $ (125) - ----------------------------------------------------------------------------------------------------------- Net Increase in Cash and Cash Equivalents $ 442 $ 185 Cash and Cash Equivalents from Effect of Revised FASB Interpretation No. 46 Consolidation - 174 Cash and Cash Equivalents, Beginning of Period 171 46 ------------------------ Cash and Cash Equivalents, End of Period $ 613 $ 405 ===========================================================================================================
CE-25 CONSUMERS ENERGY COMPANY CONSOLIDATED BALANCE SHEETS
ASSETS JUNE 30 2005 DECEMBER 31 (UNAUDITED) 2004 - -------------------------------------------------------------------------------------------------------------- In Millions PLANT AND PROPERTY (AT COST) Electric $ 8,044 $ 7,967 Gas 3,028 2,995 Other 2,521 2,523 -------------------------- 13,593 13,485 Less accumulated depreciation, depletion and amortization 5,804 5,665 -------------------------- 7,789 7,820 Construction work-in-progress 476 353 -------------------------- 8,265 8,173 - -------------------------------------------------------------------------------------------------------------- INVESTMENTS Stock of affiliates 34 25 Other 7 19 -------------------------- 41 44 - -------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents at cost, which approximates market 613 171 Short-term investments at cost, which approximates market - 4 Restricted cash 54 21 Accounts receivable, notes receivable and accrued revenue, less allowances of $10 and $10, respectively 469 374 Accounts receivable - related parties 11 18 Inventories at average cost Gas in underground storage 737 855 Materials and supplies 71 67 Generating plant fuel stock 73 66 Deferred property taxes 139 165 Regulatory assets - postretirement benefits 19 19 Derivative instruments 241 96 Other 43 95 -------------------------- 2,470 1,951 - -------------------------------------------------------------------------------------------------------------- NON-CURRENT ASSETS Regulatory Assets Securitized costs 583 604 Additional minimum pension 466 372 Postretirement benefits 128 139 Abandoned Midland Project 10 10 Other 636 552 Nuclear decommissioning trust funds 555 575 Other 430 391 -------------------------- 2,808 2,643 -------------------------- TOTAL ASSETS $ 13,584 $ 12,811 ==============================================================================================================
CE-26 STOCKHOLDER'S EQUITY AND LIABILITIES
JUNE 30 2005 DECEMBER 31 (UNAUDITED) 2004 - ------------------------------------------------------------------------------------------------------ In Millions CAPITALIZATION Common stockholder's equity Common stock, authorized 125.0 shares; outstanding 84.1 shares for all periods $ 841 $ 841 Paid-in capital 1,482 932 Accumulated other comprehensive income 48 31 Retained earnings since December 31, 1992 630 608 ---------------------------- 3,001 2,412 Preferred stock 44 44 Long-term debt 4,196 4,000 Long-term debt - related parties 129 326 Non-current portion of capital leases and finance lease obligations 315 315 ---------------------------- 7,685 7,097 - ------------------------------------------------------------------------------------------------------ MINORITY INTERESTS 773 657 - ------------------------------------------------------------------------------------------------------ CURRENT LIABILITIES Current portion of long-term debt, capital leases and finance leases 147 147 Current portion of long-term debt - related parties - 180 Accounts payable 312 267 Accounts payable - related parties 10 14 Accrued interest 95 83 Accrued taxes 224 254 Deferred income taxes 33 20 Other 213 238 ---------------------------- 1,034 1,203 - ------------------------------------------------------------------------------------------------------ NON-CURRENT LIABILITIES Deferred income taxes 1,418 1,350 Regulatory Liabilities Regulatory liabilities for cost of removal 1,084 1,044 Income taxes, net 365 357 Other 173 173 Postretirement benefits 353 207 Asset retirement obligations 431 436 Deferred investment tax credit 77 79 Other 191 208 ---------------------------- 4,092 3,854 - ------------------------------------------------------------------------------------------------------ COMMITMENTS AND CONTINGENCIES (Notes 2, 3, and 4) TOTAL STOCKHOLDER'S EQUITY AND LIABILITIES $ 13,584 $ 12,811 ======================================================================================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CE-27 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 2005 2004 2005 2004 - -------------------------------------------------------------------------------------------------------------------------------- In Millions COMMON STOCK At beginning and end of period (a) $ 841 $ 841 $ 841 $ 841 - -------------------------------------------------------------------------------------------------------------------------------- OTHER PAID-IN CAPITAL At beginning of period 1,132 682 932 682 Stockholder's contribution 350 - 550 - ------------------------------------------- At end of period 1,482 682 1,482 682 ------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Minimum Pension Liability At beginning of period (1) - (1) - Minimum pension liability adjustment (b) (1) - (1) - ------------------------------------------- At end of period (2) - (2) - ------------------------------------------- Investments At beginning of period 15 10 12 9 Unrealized gain on investments (b) 3 - 6 1 ------------------------------------------- At end of period 18 10 18 10 ------------------------------------------- Derivative Instruments At beginning of period 26 15 20 8 Unrealized gain on derivative instruments (b) 7 4 23 13 Reclassification adjustments included in net income (b) (1) (3) (11) (5) ------------------------------------------- At end of period 32 16 32 16 - -------------------------------------------------------------------------------------------------------------------------------- Total Accumulated Other Comprehensive Income 48 26 48 26 - -------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS At beginning of period 647 547 608 521 Net income 33 24 190 128 Cash dividends declared - Common Stock (49) (27) (167) (105) Cash dividends declared - Preferred Stock (1) (1) (1) (1) ------------------------------------------- At end of period 630 543 630 543 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKHOLDER'S EQUITY $ 3,001 $ 2,092 $ 3,001 $ 2,092 ================================================================================================================================ (a) Number of shares of common stock outstanding was 84,108,789 for all periods presented. (b) Disclosure of Other Comprehensive Income: Minimum Pension Liability Minimum pension liability adjustment, net of tax of $-, $-, $-, and $-, respectively $ (1) $ - $ (1) $ - Investments Unrealized gain on investments, net of tax of $1, $-, $3, and $-, respectively 3 - 6 1 Derivative Instruments Unrealized gain on derivative instruments, net of tax of $3, $3, $12, and $7, respectively 7 4 23 13 Reclassification adjustments included in net income, net of tax of $(1), $(2), $(6), and $(3), respectively (1) (3) (11) (5) Net income 33 24 190 128 ------------------------------------------- Total Other Comprehensive Income $ 41 $ 25 $ 207 $ 137 ===========================================
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CE-28 Consumers Energy Company CONSUMERS ENERGY COMPANY CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) These interim Consolidated Financial Statements have been prepared by Consumers in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Certain prior year amounts have been reclassified to conform to the presentation in the current year. In management's opinion, the unaudited information contained in this report reflects all adjustments of a normal recurring nature necessary to assure the fair presentation of financial position, results of operations and cash flows for the periods presented. The Condensed Notes to Consolidated Financial Statements and the related Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained in the Consumers' Form 10-K for the year ended December 31, 2004. Due to the seasonal nature of Consumers' operations, the results as presented for this interim period are not necessarily indicative of results to be achieved for the fiscal year. 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 serving 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. 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. We eliminate intercompany transactions and balances. 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. CE-29 Consumers Energy Company OTHER INCOME AND OTHER EXPENSE: The following tables show the components of Other income and Other expense:
In Millions - -------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended - -------------------------------------------------------------------------------------------------------------- June 30 2005 2004 2005 2004 - -------------------------------------------------------------------------------------------------------------- Other income Electric restructuring return $ 3 $ 1 $ 4 $ 3 Return on stranded costs 1 - 2 - Return on security costs 1 1 1 1 Nitrogen oxide allowance sales 1 - 1 - Gain on stock - - 1 - All other - - 1 - - -------------------------------------------------------------------------------------------------------------- Total other income $ 6 $ 2 $ 10 $ 4 ==============================================================================================================
In Millions - -------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended - -------------------------------------------------------------------------------------------------------------- June 30 2005 2004 2005 2004 - -------------------------------------------------------------------------------------------------------------- Other expense Loss on reacquired debt $ (1) $ - $ (6) $ - Civic and political expenditures - - (1) (1) All Other (1) (1) (1) (1) - -------------------------------------------------------------------------------------------------------------- Total other expense $ (2) $ (1) $ (8) $ (2) ==============================================================================================================
RECLASSIFICATIONS: Certain prior year amounts have been reclassified for comparative purposes. These reclassifications did not affect consolidated net income for the years presented. 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, 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 nor denied the order's findings. The settlement resolved the SEC investigation involving CMS Energy and CMS MST. Also in March 2004, CE-30 Consumers Energy Company the SEC filed an action against three former employees related to round-trip trading by CMS MST. One of the individuals has settled with the SEC. CMS Energy is currently advancing legal defense costs for the remaining two individuals, in accordance with existing indemnification policies. SECURITIES CLASS ACTION LAWSUITS: Beginning on May 17, 2002, a number of complaints were filed against CMS Energy, Consumers, and certain officers and directors of CMS Energy and its affiliates, including but not limited to Consumers which, while established, operated and regulated as a separate legal entity and publicly traded company, shares a parallel Board of Directors with CMS Energy. 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 running from May 2000 through March 2003. The cases were consolidated into a single lawsuit. The consolidated lawsuit 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. In January 2005, a motion was granted dismissing Consumers and three of the individual defendants, but the court denied the motions to dismiss for CMS Energy and the 13 remaining individual defendants. Plaintiffs filed a motion for class certification on April 15, 2005 and an amended motion for class certification on June 20, 2005. CMS Energy and the individual defendants will defend themselves vigorously in this litigation but cannot predict its outcome. ERISA LAWSUITS: CMS Energy is a named defendant, along with Consumers, CMS MST, and certain named and unnamed officers and directors, in two lawsuits brought as purported class actions on behalf of participants and beneficiaries of the CMS Employees' Savings and Incentive Plan (the Plan). The two cases, filed in July 2002 in United States District Court for the Eastern District of Michigan, were consolidated by the trial judge and an amended consolidated complaint was filed. Plaintiffs allege breaches of fiduciary duties under ERISA and seek restitution on behalf of the Plan with respect to a decline in value of the shares of CMS Energy Common Stock held in the Plan. Plaintiffs also seek other equitable relief and legal fees. In March 2004, the judge granted in part, but denied in part, CMS Energy's motion to dismiss the complaint. The judge has conditionally granted plaintiffs' motion for class certification. A trial date has not been set, but is expected to be no earlier than mid 2006. CMS Energy and Consumers will defend themselves vigorously in this litigation but cannot predict its outcome. 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: Compliance with the federal Clean Air Act and resulting regulations has been, and will continue to be, a significant focus for us. The Nitrogen Oxide State Implementation Plan requires significant reductions in nitrogen oxide emissions. To comply with the regulations, we expect to incur capital expenditures totaling $815 million. The key assumptions 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. CE-31 Consumers Energy Company Our current capital cost estimates include an escalation rate of 2.6 percent and an AFUDC capitalization rate of 8.3 percent. As of June 2005, we have incurred $563 million in capital expenditures to comply with these regulations and anticipate that the remaining $252 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, of which 90 percent have been purchased. The cost of the allowances is estimated to average $8 million per year for 2005-2006. The estimated costs are based on the average cost of the purchased, allocated, and swapped allowances. The need for allowances will decrease after year 2006 with the installation of selective catalytic 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 recently adopted a Clean Air Interstate Rule that requires additional coal-fired electric plant emission controls for nitrogen oxides and sulfur dioxide. The rule involves a two-phase program to reduce emissions of sulfur dioxide by 71 percent and nitrogen oxides by 63 percent by 2015. The final rule will require that we run our Selective Catalytic Reduction units year round beginning in 2009 and may require that we purchase additional nitrogen oxide credits beginning in 2009. In addition to the selective catalytic reduction control technology installed to meet the Nitrogen Oxide State Implementation Plan, our current plan includes installation of flue gas desulfurization scrubbers. The scrubbers are to be installed by 2014 to meet the phase I reduction requirements of the Clean Air Interstate Rule at a cost near that of the Nitrogen Oxide State Implementation Plan. In March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial reductions of mercury emissions from coal-fired electric power plants by 2010 and further reductions by 2018. While the industry has not reached a consensus on the technical methods for curtailing mercury emissions, our capital and operating costs for mercury emissions reductions are expected to be significantly less than what is required for nitrogen oxide compliance. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seeking 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. 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. At June 30, 2005, 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 CE-32 Consumers Energy Company part of the PCB material. We have proposed a plan to deal with the remaining materials and are awaiting a response from the EPA. MCV Environmental Issue: On July 12, 2004, the MDEQ, Air Control Division, issued the MCV Partnership a Letter of Violation asserting that the MCV Facility violated its Air Use Permit to Install (PTI) by exceeding the carbon monoxide emission limit on the Unit 14 GTG duct burner and failing to maintain certain records in the required format. On July 13, 2004, the MDEQ, Water Division, issued the MCV Facility a Notice Letter asserting the MCV Facility violated its National Pollutant Discharge Elimination System (NPDES) Permit by discharging heated process wastewater into the storm water system, failure to document inspections, and other minor infractions (alleged NPDES violations). The MCV Partnership has declared five of the six duct burners in the MCV Facility as unavailable for operational use (which reduces the generation capability of the MCV Facility by approximately 100 MW), is assessing the duct burner issue and has begun other corrective action to address the MDEQ's assertions. The one available duct burner was tested in April 2005 and its emissions met permitted levels due to the unique configuration of that particular unit. The MCV Partnership disagrees with certain of the MDEQ's assertions. The MCV Partnership filed responses to these MDEQ letters in July and August 2004. On December 13, 2004, the MDEQ informed the MCV Partnership that it was pursuing an escalated enforcement action against the MCV Partnership regarding the alleged violations of the MCV Facility's PTI. The MDEQ also stated that the alleged violations are deemed federally significant and, as such, placed the MCV Partnership on the EPA's High Priority Violators List (HPVL). The MDEQ and the MCV Partnership are pursuing voluntary settlement of this matter, which will satisfy state and federal requirements and remove the MCV Partnership from the HPVL. Any such settlement is likely to involve a fine, but at this time, the MDEQ has not stated what, if any, fine they will seek to impose. At this time, the MCV Partnership management cannot predict the financial impact or outcome of these issues, however, the MCV Partnership believes it has resolved all issues associated with the alleged NPDES violations and does not expect any further MDEQ actions on this NPDES matter. LITIGATION: In October 2003, a group of eight PURPA qualifying facilities, which sell 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. The qualifying facilities have also appealed the February 2005 MPSC order in the 2004 PSCR plan case to the Michigan Court of Appeals, and have initiated separate legal actions in federal district court and at the FERC concerning the energy charge calculation issue. In June 2005, the FERC issued a notice of intent not to act on this issue. We cannot predict the outcome of these appeals or the remaining legal action. ELECTRIC RESTRUCTURING MATTERS ELECTRIC ROA: We cannot predict the total amount of electric supply load that may be lost to alternative electric suppliers. As of July 2005, alternative electric suppliers are providing 811 MW of generation supply to ROA customers. This amount represents a decrease of 5 percent compared to July 2004, and 11 percent of our total distribution load. CE-33 Consumers Energy Company 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 Requested Proceeding Filed Covered 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, plus the cost of money through the period of collection. Implementation 1999-2004 1997-2003 $91 million (b) The MPSC allowed $68 million for the Costs years 1997-2001, plus the cost of money through the period of collection. The MPSC allowed $6 million for the years 2002-2003, plus the cost of money through the period of collection. Section 10d(4) 2004 2000-2005 $628 million Application filed with the MPSC in Regulatory Assets October 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. CE-34 Consumers Energy Company Of the $628 million, $152 million relates to the cost of money. As allowed by the Customer Choice Act, we accrue and defer for recovery a portion of our Section 10d(4) Regulatory Assets. In March 2005, the MPSC Staff filed testimony recommending the MPSC approve recovery of approximately $323 million in Section 10d(4) costs, which includes the cost of money through the period of collection. In June 2005, the ALJ issued a Proposal for Decision recommending that the MPSC approve recovery of the same Section 10d(4) costs recommended by the MPSC Staff. However, we may have the opportunity to recover certain costs included in our application alternatively in other cases pending before the MPSC. We cannot predict the amount, if any, the MPSC will approve as recoverable. At June 30, 2005, total recorded Section 10d(4) Regulatory Assets were $179 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 load migration to alternative electric suppliers, increased system maintenance and improvement costs, Clean Air Act-related expenditures, and employee pension costs. In April 2005, we filed updated debt and equity information in this case. In June 2005, the MPSC Staff filed its position in this case, recommending a base rate increase of $98 million. The MPSC Staff also recommended an 11.25 percent return on equity to establish rates and recognized all of our projected equity investment (infusions and retained earnings) in 2006. We expect a final order from the MPSC 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 covering the estimated reserve margin requirements for 2005 and covering partially the estimated reserve margin requirements for 2006 through 2007. As a result, we have recognized an asset of $12 million for unexpired capacity and energy contracts at June 30, 2005. As of July 2005, we expect the total premium cost of electric capacity and energy contracts for 2005 to be approximately $8 million. PSCR: The PSCR process assures recovery of all reasonable and prudent power supply costs that we actually incur. 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 power supply costs from commercial and industrial customers and, subject to the overall rate caps, from other customers. In January 2005, we self-implemented the proposed 2005 PSCR charge. In June 2005, the MPSC issued an order that approves our 2005 PSCR plan. The revenues from the PSCR charges are subject to reconciliation after review of actual costs for reasonableness and prudence. In March 2005, we submitted our 2004 PSCR reconciliation filing to the MPSC. We cannot predict the outcome of these PSCR proceedings. CE-35 Consumers Energy Company 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. 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 8, Consolidation of Variable Interest Entities. Our consolidated retained earnings include undistributed earnings from the MCV Partnership of $292 million at June 30, 2005 and $246 million at June 30, 2004. The cost that we incur under the MCV 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 ================================================================================
Of the 2005 estimate, we expensed $29 million for the six months ended June 30, 2005. After September 15, 2007, we expect to claim relief under the regulatory out provision in the MCV PPA, thereby limiting our capacity and fixed energy payments to the MCV Partnership to the amount that we collect from our customers. The MCV Partnership has indicated that it may take issue with our exercise of the regulatory out clause after September 15, 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 MCV 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. Natural gas prices have increased substantially in recent years. NYMEX forward natural gas prices through 2010 recently were approximately $2 per mcf higher than they were at year-end 2004. Because the price the MCV Partnership can charge us for energy has not increased to reflect current natural gas prices, the MCV Partnership's financial performance has been impacted negatively. If forward gas prices for 2010 and beyond do not decline to the $4 to $6 per mcf range currently anticipated by various government and private natural gas price forecasts, and remain in that range for the remaining life of the MCV PPA, the economics of operating the MCV Facility would be adverse enough to require the MCV Partnership to recognize a substantial impairment of its property, plant and equipment, which are included in our Consolidated Balance Sheets. However, forecasting future natural gas prices is extremely difficult and there are currently differing views among forecasters as to whether such prices will increase, decrease or remain at current levels over any period of time. At present, some of the forecasts indicate natural gas prices in excess of the $4 to $6 per mcf range during the years after 2010. At June 30, 2005, the net book value of the MCV Partnership's property, plant and equipment was $1.396 billion. Several other factors could alter significantly the MCV Partnership's future impairment analyses including, but not limited to, energy payments to the MCV Partnership, which are based on the cost of coal burned at our CE-36 Consumers Energy Company coal plants, and any reduction in payments to the MCV Partnership subsequent to September 15, 2007 due to underrecovery of contract costs by Consumers from its customers as a result of past or future actions by the MPSC. Any such impairment would be required to be recognized in the period when management's analysis of the factors described above meets the accounting standards for impairment recognition. We will continue to monitor the current and long-term trends in natural gas prices and their effect on the economics of operating the MCV Facility. 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 reduces the MCV Facility's annual production of electricity and, as a result, reduces 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 are first used to offset fully the cost of replacement power. Second, $5 million annually, funded jointly by Consumers and the MCV Partnership, are contributed to our RRP. Remaining savings are split between the MCV Partnership and Consumers. Consumers' direct savings are shared 50 percent with its customers in 2005 and 70 percent in 2006 and beyond. Consumers' direct savings from the RCP, after allocating a portion to customers, are 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 MCV PPA. However, either party may terminate that agreement under certain conditions. In February 2005, a group of intervenors in the RCP case filed for rehearing of the MPSC order. The Attorney General also filed an appeal with the Michigan Court of Appeals. We cannot predict the outcome of these matters. 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 decision was 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 estimates that the 1997 through 2004 tax year cases will result in a refund to the MCV Partnership of approximately $77 million inclusive of interest. The MCV Partnership cannot predict the outcome of these proceedings; therefore, this refund has not been recognized in 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 decommissioning, 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 CE-37 Consumers Energy Company 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 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, in 2007, of radiological decommissioning work, seek recovery of such expenditures at the MPSC. We cannot predict how the MPSC will rule on our request. Palisades: Excluding additional nuclear fuel storage costs due to the DOE's failure to accept spent fuel on schedule, we concluded, based on the costs estimates filed in March 2004, that the existing surcharge for Palisades needed to be increased to $25 million annually, beginning January 1, 2006, and continuing 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 would 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 involved in the proceeding. 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 contested settlement, but cannot predict the outcome. In March 2005, NMC, which operates the Palisades plant, applied for a 20-year license renewal for the plant on behalf of Consumers. The NRC typically takes 22-30 months to review a license renewal application. A decision is expected in 2007. At this time, we cannot determine what impact this will have on decommissioning costs or the adequacy of funding. NUCLEAR MATTERS: 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. At June 30, 2005, we have recorded a liability to the DOE of $143 million, including interest, which is payable prior to 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. 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. On April 29, 2005, the court ruled on various cross-motions for summary judgment previously filed by the DOE and us. The court denied the DOE's motions to dismiss Counts I and II of the complaint and its motion seeking recovery of a one-time fee that is due to be paid by us prior to delivery of the spent nuclear fuel. The court, however, granted the DOE's motion to recoup the one-time fee against any award of damages to us. The court further granted our motion for summary judgment on liability and our motion to dismiss the DOE's affirmative defense alleging our failure to satisfy a CE-38 Consumers Energy Company condition precedent. We filed a motion for reconsideration of the portion of the Court's order dealing with recoupment, which the Court denied. In a related case, a judge in one of many spent nuclear fuel cases now pending in the United States Court of Claims issued a decision and order suggesting that the standard contract between the utilities and the DOE should be held void because of mutual mistake and impossibility of performance and that restitution of all waste fees paid by utilities should be made from the Nuclear Waste Fund. The judge ordered the utility in that case and the DOE to file briefs addressing the court's views and invited any interested party to file an amicus brief. We have filed an amicus brief opposing holding the standard contract void. If our litigation against the DOE is successful, we plan to use any 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 energy 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. This requirement will end December 31, 2007. 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 remediation 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 CE-39 Consumers Energy Company 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. In 2003, we estimated our remaining costs to be between $37 million and $90 million, based on 2003 discounted 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. We have expended $12 million on these sites since the 2003 estimates were made. At June 30, 2005, we have a liability of $36 million, net of $46 million of expenditures incurred to date, and a regulatory asset of $63 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. 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 the proceedings follow the table.
Gas Cost Recovery Reconciliation - ------------------------------------------------------------------------------------------------------------------ Net Over GCR Year Date Filed Order Date Recovery Status - ------------------------------------------------------------------------------------------------------------------ 2003-2004 June 2004 February 2005 $31 million The net overrecovery includes $1 million and $5 million GCR net overrecoveries from prior GCR years and interest accrued through March 2004 2004-2005 June 2005 Pending $2 million ==================================================================================================================
Net overrecoveries 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 overrecovery, plus $3 million interest, using a roll-in refund methodology. The roll-in methodology incorporates a GCR over/underrecovery in the next GCR plan year. GCR 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. Actual gas costs and revenues are subject to an annual reconciliation proceeding, which was filed in June 2005. We proposed to refund to our customers $2 million using a roll-in methodology. The $2 million reflects an underrecovery of $1 million, offset by interest owed to customers of $3 million. The roll-in methodology incorporates a GCR over/underrecovery in the next GCR plan year. CE-40 Consumers Energy Company 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. The current ceiling price for 2005 is $7.61 per mcf. Actual gas costs and revenues will be subject to an annual reconciliation proceeding. In June 2005, four of the five parties filed a settlement agreement; the fifth party filed a statement of non-objection. The settlement agreement includes a GCR ceiling price adjustment contingent upon future events. 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, which reaffirmed the previously ordered $34 million reduction in our depreciation expense. The October 2004 order also required 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. The MPSC has directed us to file our next gas depreciation case within 90 days after the latter of: - the removal cost study filing or - the MPSC issuance of a final order in the pending case related to ARO accounting. The MPSC order on the pending case related to ARO accounting is expected in the first quarter of 2006. We proposed to incorporate the results of the gas depreciation case into gas general rates using a surcharge mechanism if the depreciation case order was not issued concurrently with a gas general rate case order. 2005 GAS RATE CASE: In July 2005, we filed an application with the MPSC seeking a 12 percent authorized return on equity along with a $132 million annual increase in our gas delivery and transportation rates. The primary reasons for the request are recovery of new investments, carrying costs on natural gas inventory related to higher gas prices, system maintenance, employee benefits, and low-income assistance. If approved, the request would add approximately 5 percent to the typical residential customer's average monthly bill. The increase would also affect commercial and industrial customers. As part of this filing, we also requested interim rate relief of $75 million. CE-41 Consumers Energy Company OTHER CONTINGENCIES IRS RULING: On August 2, 2005, the IRS issued Revenue Ruling 2005-53 and regulations to provide guidance with respect to the use of the "simplified service cost" method of tax accounting. We use this tax accounting method, generally allowed by the IRS under Section 263A of the Internal Revenue Code, with respect to the allocation of certain corporate overheads to the tax basis of self-constructed utility assets. We are studying the IRS guidance to determine its effect on us. We cannot predict the impact of this ruling on future earnings, cash flows, or our present NOL carryforwards. 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. 3: FINANCINGS AND CAPITALIZATION Long-term debt is summarized as follows:
In Millions - ------------------------------------------------------------------------------------------------------------------ June 30, 2005 December 31, 2004 - ------------------------------------------------------------------------------------------------------------------ First mortgage bonds $ 3,000 $ 2,300 Senior notes, bank debt and other 938 1,436 Securitization bonds 384 398 ------------- ----------------- Principal amounts outstanding 4,322 4,134 Current amounts (118) (118) Net unamortized discount (8) (16) - ------------------------------------------------------------------------------------------------------------------ Total Long-term debt $ 4,196 $ 4,000 ==================================================================================================================
FINANCINGS: The following is a summary of significant long-term debt issuances and retirements during the six months ended June 30, 2005:
- ------------------------------------------------------------------------------------------------------------------ Principal Interest Rate (In millions) (%) Issue/Retirement Date Maturity Date - ------------------------------------------------------------------------------------------------------------------ DEBT ISSUANCES FMB $ 250 5.15 January 2005 February 2017 FMB 300 5.65 March 2005 April 2020 FMB insured quarterly notes 150 5.65 April 2005 April 2035 LORB 35 Variable April 2005 April 2035 - ------------------------------------------------------------------------------------------------------------------ Total $ 735 ================================================================================================================== DEBT RETIREMENTS Long-term bank debt $ 60 Variable January 2005 November 2006 Long-term debt - related parties 180 9.25 January 2005 December 2029 Long-term debt - related parties 73 8.36 February 2005 December 2015 Long-term debt - related parties 124 8.20 February 2005 September 2027 Senior notes 332 6.25 April and May 2005 September 2006 Senior insured quarterly notes 141 6.50 May 2005 October 2028 - ------------------------------------------------------------------------------------------------------------------ Total $ 910 ==================================================================================================================
In April 2005, we received a $350 million capital contribution from our parent company, CMS Energy. REGULATORY AUTHORIZATION FOR FINANCINGS: In April 2005, the FERC issued an authorization to permit us to issue up to an additional $1.0 billion ($2.0 billion in total) of long-term securities for refinancing or CE-42 Consumers Energy Company refunding purposes, and up to an additional $1.0 billion ($2.5 billion in total) of long-term securities for general corporate purposes during the period ending June 30, 2006. Combined with remaining availability from previously issued FERC authorizations, we can now issue up to: - - $1.001 billion of long-term securities for refinancing or refunding purposes, - - $1.209 billion of long-term securities for general corporate purposes, and - - $1.935 billion of long-term FMB to be issued solely as collateral for other long-term securities. REVOLVING CREDIT FACILITIES: The following secured revolving credit facilities with banks are available at June 30, 2005:
In Millions - --------------------------------------------------------------------------------------------------- Outstanding Amount of Amount Letters-of- Amount Company Expiration Date Facility Borrowed Credit Available - --------------------------------------------------------------------------------------------------- Consumers May 18, 2010 $ 500 $ - $ 31 $ 469 MCV Partnership August 27, 2005 50 - 3 47 - ---------------------------------------------------------------------------------------------------
We amended our credit facility in May 2005. The amendment extended the term of the agreement to 2010 and reduced certain fees and interest margins. CAPITAL AND FINANCE LEASE OBLIGATIONS: Our capital leases are comprised mainly of leased service vehicles and office furniture. At June 30, 2005, capital lease obligations totaled $54 million. 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. At June 30, 2005, finance lease obligations totaled $290 million, which represents the third-party portion of the MCV Partnership's finance lease obligation. SALE OF ACCOUNTS RECEIVABLE: Under a revolving accounts receivable sales program, we currently sell certain accounts receivable to a wholly owned, consolidated, bankruptcy remote special purpose entity. In turn, the special purpose entity may sell an undivided interest in up to $325 million of the receivables. The special purpose entity sold no receivables as of June 30, 2005 and $304 million as of December 31, 2004. 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 no right to any receivables not sold. We have not recorded a gain or loss on the receivables sold or retained interest in the receivables sold. Certain cash flows under our accounts receivable sales program are shown in the following table:
In Millions - ------------------------------------------------------------------------------------------------------------ Six months ended June 30 2005 2004 - ------------------------------------------------------------------------------------------------------------ Net cash flow as a result of accounts receivable financing $ (304) $ (297) Collections from customers $ 2,787 $ 2,645 ============================================================================================================
CE-43 Consumers Energy Company DIVIDEND RESTRICTIONS: Under the provisions of our articles of incorporation, at June 30, 2005, we had $479 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. For the six months ended June 30, 2005, we paid $167 million in common stock dividends to CMS Energy. FASB INTERPRETATION NO. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS: The Interpretation requires the guarantor, upon issuance of a guarantee, to recognize a liability for the fair value of the obligation it undertakes 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 corporations under common control, although disclosure of these guarantees is required. The disclosure requirements in this Interpretation are effective for interim and annual financial statements issued after December 15, 2002. The following table describes our guarantees at June 30, 2005:
In Millions - ----------------------------------------------------------------------------------------------------------------------- Issue Expiration Maximum Carrying Recourse Guarantee Description Date Date Obligation Amount Provision (a) - ----------------------------------------------------------------------------------------------------------------------- Standby letters of credit Various Various $ 31 $ - $ - 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:
Events That Would Require Guarantee Description How Guarantee Arose Performance - ----------------------------------------------------------------------------------------------------------------------- Standby letters of credit Normal operations of coal power plants Noncompliance with environmental regulations and inadequate response to demands for corrective action Natural gas transportation Nonperformance Self-insurance requirement Nonperformance Nuclear plant closure Nonperformance - ----------------------------------------------------------------------------------------------------------------------- Surety bonds Normal operating activity, permits and Nonperformance license - ----------------------------------------------------------------------------------------------------------------------- Nuclear insurance retrospective premiums Normal operations of nuclear plants Call by NEIL and Price-Anderson Act for nuclear incident =======================================================================================================================
In the ordinary course of business, we enter into agreements containing indemnification provisions in connection with a variety of transactions including financing agreements. While we cannot estimate our maximum exposure under these indemnities, we consider the probability of liability remote. CE-44 Consumers Energy Company 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:
In Millions - --------------------------------------------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - --------------------------------------------------------------------------------------------------------------------- Cost Fair Unrealized Fair Unrealized Value Gain (Loss) Cost Value Gain (Loss) - --------------------------------------------------------------------------------------------------------------------- Long-term debt, including current amounts $ 4,314 $ 4,476 $ (162) $ 4,118 $ 4,232 $ (114) Long-term debt - related parties 129 134 (5) 506 518 (12) Available-for-sale securities: Common stock of CMS Energy 10 34 24 10 25 15 SERP: Equity securities 15 21 6 15 21 6 Debt securities 9 9 - 9 9 - Nuclear decommissioning investments: Equity securities 132 246 114 136 262 126 Debt securities 284 294 10 291 302 11 =====================================================================================================================
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 CE-45 Consumers Energy Company losses) are reported in Other Comprehensive Income if the derivative qualifies for cash flow hedge accounting treatment and in earnings if the derivative does not qualify for such 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. Our coal purchase contracts are not accounted for as derivatives due to the lack of an active market for the coal that we purchase. Similarly, our electric capacity and energy contracts are not accounted for as derivatives due to the lack of an active energy market in 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. If active markets for these commodities develop in the future, we may be required to account for these contracts as derivatives. For our coal purchase contracts, the resulting mark-to-market impact on earnings could be material to our financial statements. For our electric capacity and energy contracts, we believe that we will be able to apply the normal purchases and sales exception, which would not require us to mark these contracts to market. The MISO began operating the Midwest Energy Market on April 1, 2005. The Midwest Energy Market provides day-ahead and real-time energy market information and centralized generation dispatch for market participants. At this time, we believe that the commencement of this market does not constitute the development of an active energy market in Michigan. However, as we gain additional experience with the Midwest Energy Market, we will continue to evaluate whether or not the activity level within this market leads to the conclusion that an active energy market exists. Also as part of the Midwest Energy Market, FTRs were established. FTRs are financial instruments established to manage price risk relating to electricity transmission congestion. An FTR entitles the holder to receive compensation (or remit payment) for certain congestion-related transmission charges that arise when the transmission grid is congested. We presently hold FTRs for certain areas on the transmission grid within the MISO's market area. FTRs are derivative instruments and are required to be recognized on our Consolidated Balance Sheets as assets or liabilities at their fair values, with any subsequent changes in fair value recognized in earnings. As of June 30, 2005, we recorded an asset of $1 million associated with the fair value of FTRs on our Consolidated Balance Sheets. CE-46 Consumers Energy Company 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:
In Millions - -------------------------------------------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - -------------------------------------------------------------------------------------------------------------------- Cost Fair Unrealized Cost Fair Unrealized Derivative Instruments Value Gain Value Gain (Loss) - -------------------------------------------------------------------------------------------------------------------- Gas contracts $ - $ - $ - $ 2 $ - $ (2) FTRs - 1 1 - - - Derivative contracts associated with the MCV Partnership: Gas fuel contracts - 181 181 - 56 56 Gas fuel futures and swaps - 145 145 - 64 64 ====================================================================================================================
The fair value of our derivative contracts is included in Derivative instruments, Other assets, or Other liabilities 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 June 30, 2005, we had purchased a fixed-priced gas supply call option and had sold a fixed-priced gas supply put option. We held no fixed-priced weather-based gas supply call options. DERIVATIVE CONTRACTS ASSOCIATED WITH 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 gas contracts qualify as normal purchases under SFAS No. 133, and therefore, these contracts were not recognized at fair value on our Consolidated Balance Sheets at June 30, 2005. The MCV Partnership also held certain long-term gas contracts that did not qualify as normal purchases at June 30, 2005, because these contracts contained volume optionality. In addition, due to the implementation of the RCP in January 2005, the MCV Partnership 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, all of these contracts are accounted for as derivatives, with changes in fair value recorded in earnings each quarter. Additionally, the financial hedges associated with these contracts no longer qualify as cash flow hedges. Thus, as of January 2005, any changes in the fair value of these financial hedges are recorded in earnings each quarter. The MCV Partnership expects future earnings volatility on both the gas fuel derivative contracts and the related financial hedges, since gains and losses will be recorded each quarter. For the six months ended June 30, 2005, we recorded a $170 million gain associated with the increase in fair value of these instruments in Fuel costs mark-to-market at MCV on our Consolidated Statements of Income, resulting in a cumulative mark-to-market gain through June 30, 2005 of $226 million. This cumulative amount consists of a $181 million gain related to gas fuel derivative contracts. The remaining gain of $45 million relates to the financial hedges associated with these contracts, which is included in the Gas fuel futures and swaps amount in the Derivative Instruments table above. The majority of this mark-to-market gain is expected to reverse through earnings during 2005 and 2006 as the gas is purchased and CE-47 Consumers Energy Company the financial hedges settle, with the remainder reversing between 2007 and 2011. For further details on the RCP, see Note 2, Contingencies, "Other Electric Contingencies - The Midland Cogeneration Venture." 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 June 30, 2005, 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 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. There was no ineffectiveness associated with any of the gas contracts that qualified for hedge accounting treatment. At June 30, 2005, we have recorded a cumulative net gain of $32 million, net of tax, in Accumulated other comprehensive income 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 July 2005 to December 2009, of which $6 million of this gain is expected to be reclassified as an increase to earnings during the next 12 months as the contracts settle, offsetting the costs of gas purchases. In addition, for the six months ended June 30, 2005, we recorded a net gain of $22 million in earnings from hedging activities related to natural gas requirements for the MCV Facility operations. 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, - a defined company contribution plan for employees hired on or after September 1, 2005, - 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 current employees, our non-utility affiliates, and Panhandle, a former affiliate. The Pension Plan's assets are not distinguishable by company. CE-48 Consumers Energy Company On September 1, 2005, we will implement the Defined Company Contribution Plan. The Defined Company Contribution Plan will provide an employer cash contribution of 5 percent of base pay to the existing Employees' Savings Plan. No employee contribution is required to receive the plan's employer contribution. All employees hired on and after September 1, 2005 will participate in this plan as part of their retirement benefit program. Cash balance pension plan participants will also participate in the Defined Company Contribution Plan on September 1, 2005. Additional pay credits under the cash balance pension plan will be discontinued as of that date. OPEB: 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. 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 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. Costs: The following table recaps the costs incurred in our retirement benefits plans:
In Millions - --------------------------------------------------------------------------------------------------------- Pension Three Months Ended Six Months Ended 2005 2004 2005 2004 - --------------------------------------------------------------------------------------------------------- Service cost $ 14 $ 9 $ 23 $ 19 Interest expense 27 18 45 36 Expected return on plan assets (35) (27) (58) (54) Amortization of: Net loss 7 4 14 7 Prior service cost 2 2 3 3 ----------------------------------------- Net periodic pension and postretirement benefit cost $ 15 $ 6 $ 27 $ 11 =========================================================================================================
In Millions - ---------------------------------------------------------------------------------------------------------- OPEB Three Months Ended Six Months Ended 2005 2004 2005 2004 - ---------------------------------------------------------------------------------------------------------- Service cost $ 5 $ 4 $ 10 $ 9 Interest expense 15 14 30 27 Expected return on plan assets (13) (11) (26) (23) Amortization of: Net loss 5 3 10 6 Prior service cost (2) (2) (4) (4) ------------------------------------------ Net periodic pension and postretirement benefit cost $ 10 $ 8 $ 20 $ 15 ==========================================================================================================
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 MCV Partnership's net periodic postretirement health care cost for the six months ended June 30, 2005 was less than $1 million. CE-49 Consumers Energy Company We remeasured our Pension and OPEB obligations as of April 30, 2005 to incorporate the effects of the collective bargaining agreement reached between the Utility Workers Union of America and Consumers. The Pension plan remeasurement increased our accumulated benefit obligation (ABO) by $127 million. Net periodic pension cost increased by $3 million for the six months ended June 30, 2005, with an expected total increase in net periodic pension cost of $12 million for 2005. The Pension plan remeasurement resulted in an unfunded accumulated benefit obligation of $208 million. The unfunded accumulated benefit obligation is the amount by which the ABO exceeds the fair value of the plan assets. SFAS No. 87 states that the pension liability shown on the balance sheet must be at least equal to the unfunded accumulated benefit obligation. As such, we increased our additional minimum liability by $129 million to $521 million at June 30, 2005. Consistent with MPSC guidance, we recognized the cost of our minimum pension liability adjustment as a regulatory asset. This adjustment increased our regulatory assets by $94 million and intangible assets by $35 million. The OPEB plan remeasurement increased our accumulated postretirement benefit obligation by $41 million, with an expected total increase in benefit costs of $2 million for 2005. 6: ASSET RETIREMENT OBLIGATIONS SFAS NO. 143: This standard 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-50 Consumers Energy Company The following tables describe our assets that have legal obligations to be removed at the end of their useful life:
June 30, 2005 In Millions - --------------------------------------------------------------------------------------------------------------------- In Service Trust ARO Description Date Long Lived Assets Fund - --------------------------------------------------------------------------------------------------------------------- Palisades - decommission plant site 1972 Palisades nuclear plant $ 529 Big Rock - decommission plant site 1962 Big Rock nuclear plant 26 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 - =====================================================================================================================
In Millions - ---------------------------------------------------------------------------------------------------------------------- ARO ARO Liability Cash flow Liability ARO Description 12/31/04 Incurred Settled Accretion Revisions 6/30/05 - ---------------------------------------------------------------------------------------------------------------------- Palisades - decommission $ 350 $ - $ - $ 12 $ - $ 362 Big Rock - decommission 30 - (25) 7 - 12 JHCampbell intake line - - - - - - Coal ash disposal areas 54 - (1) 2 - 55 Wells at gas storage fields 1 - - - - 1 Indoor gas services relocations 1 - - - - 1 ------------------------------------------------------------------------------- Total $ 436 $ - $ (26) $ 21 $ - $ 431 ======================================================================================================================
On October 14, 2004, the MPSC issued a generic proceeding to review SFAS No. 143, FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing Requirements for Asset Retirement Obligations, and their accounting and ratemaking issues. Utilities responded to the Order in March 2005; MPSC Staff and intervenor filed responses in May 2005. We consider the proceeding a clarification of accounting and reporting issues that relate to all Michigan utilities. 7: 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. CE-51 Consumers Energy Company The following table shows our financial information by reportable segment:
In Millions - ---------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended - ---------------------------------------------------------------------------------------------------------------- June 30 2005 2004 2005 2004 - ---------------------------------------------------------------------------------------------------------------- Operating revenue Electric $ 649 $ 612 $ 1,277 $ 1,243 Gas 355 300 1,347 1,205 Other 12 11 24 22 - ---------------------------------------------------------------------------------------------------------------- Total Operating Revenue $ 1,016 $ 923 $ 2,648 $ 2,470 ================================================================================================================ Net income available to common stockholder Electric $ 46 $ 27 $ 79 $ 75 Gas (3) 1 55 57 Other (11) (5) 55 (5) - ---------------------------------------------------------------------------------------------------------------- Total Net Income Available to Common Stockholder $ 32 $ 23 $ 189 $ 127 ================================================================================================================
In Millions - ---------------------------------------------------------------------------------------------------------------- June 30, 2005 December 31, 2004 - ---------------------------------------------------------------------------------------------------------------- Assets Electric (a) $ 7,646 $ 7,289 Gas (a) 3,209 3,187 Other 2,729 2,335 - ---------------------------------------------------------------------------------------------------------------- Total Assets $ 13,584 $ 12,811 ================================================================================================================
(a) Amounts include a portion of our other common assets attributable to both the electric and gas utility businesses. 8: CONSOLIDATION OF VARIABLE INTEREST ENTITIES 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. Therefore, we consolidated these partnerships into our consolidated financial statements for all periods presented. These partnerships have third-party obligations totaling $586 million at June 30, 2005. Property, plant, and equipment serving as collateral for these obligations has a carrying value of $1.396 billion at June 30, 2005. The creditors of these partnerships do not have recourse to the general credit of Consumers. CE-52 Consumers Energy Company 9: NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE SFAS NO. 123R, SHARE-BASED PAYMENT: This Statement requires companies to use the fair value of employee stock options and similar awards at the grant date to value the awards. Companies must expense this amount over the vesting period of the awards. This 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. 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 cash inflows from financing activities rather than as a reduction of taxes paid in operating activities. Excess tax benefits are recorded as an adjustment to additional paid-in capital. This Statement is effective for us as of the beginning of 2006. We adopted the fair value method of accounting for share-based awards effective December 2002. Therefore, we do not expect this statement to have a significant impact on our results of operations when it becomes effective. FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS: This Interpretation clarifies the term "conditional asset retirement obligation" as used in SFAS No. 143. The term refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred. This Interpretation also clarifies when an entity would have sufficient information to estimate reasonably the fair value of an asset retirement obligation. For us, this Interpretation is effective no later than December 31, 2005. We are in the process of determining the impact this Interpretation will have on our financial statements upon adoption. CE-53 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK CMS ENERGY Quantitative and Qualitative Disclosures about Market Risk is contained in PART I: CMS Energy Corporation's Management's Discussion and Analysis, which is incorporated by reference herein. CONSUMERS Quantitative and Qualitative Disclosures about Market Risk is contained in PART I: Consumers Energy Company's Management's Discussion and Analysis, which is incorporated by reference herein. ITEM 4. CONTROLS AND PROCEDURES CMS ENERGY Disclosure Controls and Procedures: CMS Energy's management, with the participation of its CEO and CFO, has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, CMS Energy's CEO and CFO have concluded that, as of the end of such period, its disclosure controls and procedures are effective. Internal Control Over Financial Reporting: There have not been any changes in CMS Energy's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. CONSUMERS Disclosure Controls and Procedures: Consumers' management, with the participation of its CEO and CFO, has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, Consumers' CEO and CFO have concluded that, as of the end of such period, its disclosure controls and procedures are effective. Internal Control Over Financial Reporting: There have not been any changes in Consumers' internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The discussion below is limited to an update of developments that have occurred in various judicial and administrative proceedings, many of which are more fully described in CMS Energy's and Consumers' Forms 10-K for the year ended December 31, 2004. Reference is also made to the Condensed Notes to the Consolidated Financial Statements, in particular, Note 3, Contingencies, for CMS Energy and Note 2, Contingencies, for Consumers, included herein for additional information regarding various pending administrative and judicial proceedings involving rate, operating, regulatory and environmental matters. CO-1 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 officials or relatives of 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. CMS Energy has provided responsive documents to the SEC and will continue to provide such documents as it reviews its electronic records in further response to the SEC's request. On August 1, 2005, CMS Energy and several other companies who have conducted business in Equatorial Guinea received subpoenas from the SEC to provide documents regarding payments made to officials or relatives of officials of the government of Equatorial Guinea. CMS Energy will provide responsive documents in connection with the subpoena. 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 was 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. On July 7, 2005, CMS Energy filed with the court a Stipulation of Settlement that was signed by all parties as well as the special litigation committee. Under the terms of the settlement, CMS Energy will receive $12 million under its directors and officers liability insurance program, $7 million of which will be used to pay costs associated with the securities class action lawsuits. CMS Energy may use the remaining $5 million to pay attorneys' fees and expenses arising out of the derivative proceeding. The terms of the settlement are subject to court approval and the hearing for final approval is scheduled for August 26, 2005. 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 Cornerstone complaint was subsequently consolidated with two similar complaints filed by other plaintiffs. 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 of CMS Field Services to Cantera Gas Company. CMS Energy is required to indemnify Cantera Natural Gas, LLC with respect to this action.) CO-2 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 (including CMS Energy). The complaint alleged defendants entered into a price-fixing scheme by engaging in activities to manipulate the price of natural gas in California. The complaint alleged 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 sought 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 Multidistrict Litigation (MDL) Panel ordered the transfer of 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 remained in Nevada federal district court, and defendants, with CMS Energy joining, filed a motion to dismiss. The court issued an order granting the motion to dismiss on April 8, 2005 and entered a judgment in favor of the defendants on April 11, 2005. Texas-Ohio has appealed the dismissal to the Ninth Circuit Court of Appeals. 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 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.) The Fairhaven, Utility Savings and Abelman Art Glass cases have been transferred to the MDL proceeding, where the Texas-Ohio case was pending. Pursuant to stipulation by the parties and court order, defendants were not required to respond to the Fairhaven, Utility Savings and Abelman Art Glass complaints until the court ruled on defendants' motion to dismiss in the Texas-Ohio case. Plaintiffs subsequently filed a consolidated class action complaint alleging violations of federal and California antitrust laws. Defendants filed a motion to dismiss, arguing that the consolidated complaint should be dismissed for the same reasons as the Texas-Ohio case. 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 one complaint. 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 24 state court complaints involving price reporting were coordinated as Natural Gas Antitrust Cases V. Plaintiffs CO-3 in Natural Gas Antitrust Cases V were ordered to file a consolidated complaint, but a consolidated complaint was filed only for the two putative class action lawsuits. On April 8, 2005, defendants filed a demurrer to the master class action complaint and the individual complaints and on May 13, 2005, plaintiffs filed a memorandum of points and authorities in opposition to defendants' federal preemption demurrer and motion to strike. Pursuant to a ruling dated June 29, 2005, the demurrer was overruled and the motion to strike was denied. 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. On March 7, 2005, defendants removed the case to the United States District Court for the Western District of Tennessee, Western Division, and they filed a motion on May 20, 2005 to transfer the case to the MDL proceeding in Nevada. On April 6, 2005, plaintiffs filed a motion to remand the case back to the Chancery Court in Tennessee. Defendants filed a motion to stay proceedings pending resolution of the motion to remand and plaintiffs have filed a response, objecting to defendants' motion. The parties are considering further extending the time to answer or otherwise respond to the complaint until after the motion to remand is decided. CMS Energy and the other CMS defendants will defend themselves vigorously against these matters but cannot predict their outcome. CMS ENERGY AND CONSUMERS SECURITIES CLASS ACTION LAWSUITS Beginning on May 17, 2002, a number of complaints were filed against CMS Energy, Consumers, and certain officers and directors of CMS Energy and its affiliates, including but not limited to Consumers which, while established, operated and regulated as a separate legal entity and publicly traded company, shares a parallel Board of Directors with CMS Energy. 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 running from May 2000 through March 2003. The cases were consolidated into a single lawsuit. The consolidated lawsuit 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. In January 2005, a motion was granted dismissing Consumers and three of the individual defendants, but the court denied the motions to dismiss for CMS Energy and the 13 remaining individual defendants. Plaintiffs filed a motion for class certification on April 15, 2005 and an amended motion for class certification on June 20, 2005. CMS Energy and the individual defendants will defend themselves vigorously in this litigation but cannot predict its outcome. ERISA LAWSUITS CMS Energy is a named defendant, along with Consumers, CMS MST, and certain named and unnamed officers and directors, in two lawsuits brought as purported class actions on behalf of participants and beneficiaries of the CMS Employees' Savings and Incentive Plan (the Plan). The two cases, filed in July 2002 in United States District Court for the Eastern District of Michigan, were consolidated by the trial judge and an amended consolidated complaint was filed. Plaintiffs allege breaches of fiduciary duties under ERISA and seek restitution on behalf of the Plan with respect to a decline in value of the shares of CO-4 CMS Energy Common Stock held in the Plan. Plaintiffs also seek other equitable relief and legal fees. In March 2004, the judge granted in part, but denied in part, CMS Energy's motion to dismiss the complaint. The judge has conditionally granted plaintiffs' motion for class certification. A trial date has not been set, but is expected to be no earlier than mid-2006. CMS Energy and Consumers will defend themselves vigorously in this litigation but cannot predict its outcome. ENVIRONMENTAL MATTERS CMS Energy, Consumers and 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, CMS Energy and Consumers believe that it is unlikely that these actions, individually or in total, will have a material adverse effect on their financial condition. See CMS Energy's and Consumers' MANAGEMENT'S DISCUSSION AND ANALYSIS and CMS Energy's and Consumers' CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the CMS Energy Annual Meeting of Shareholders held on May 20, 2005, the CMS Energy shareholders voted upon two proposals, as follows: - Ratification of the appointment of Ernst & Young LLP as the independent registered public accounting firm to audit CMS Energy's financial statements for the year ending December 31, 2005, with a vote of 170,359,235 shares in favor, 835,976 against and 1,476,040 abstentions; and - Election of twelve members to the Board of Directors. The votes for individual nominees were as follows: CMS ENERGY
Number of Votes: For Withheld Total -------------------------------------------------------------------------- Merribel S. Ayres 167,079,391 5,609,800 172,689,191 Richard M. Gabrys 167,147,454 5,541,737 172,689,191 Earl D. Holton 166,459,567 6,229,624 172,689,191 David W. Joos 166,523,599 6,165,592 172,689,191 Philip R. Lochner, Jr. 166,821,472 5,867,719 172,689,191 Michael T. Monahan 167,130,271 5,558,920 172,689,191 Joseph F. Paquette, Jr. 167,011,549 5,677,642 172,689,191 Percy A. Pierre 164,425,375 8,263,816 172,689,191 S. Kinnie Smith, Jr. 166,376,003 6,313,188 172,689,191
CO-5
Number of Votes: For Withheld Total -------------------------------------------------------------------------- Kenneth L. Way 167,016,414 5,672,777 172,689,191 Kenneth Whipple 166,473,648 6,215,543 172,689,191 John B. Yasinsky 164,430,059 8,259,132 172,689,191
CONSUMERS Consumers did not solicit proxies for the matters submitted to votes at the contemporaneous May 20, 2005 Consumers' Annual Meeting of Shareholders. All 84,108,789 shares of Consumers Common Stock were voted in favor of electing the above-named individuals as directors of Consumers and in favor of the remaining proposals for Consumers. None of the 441,599 shares of Consumers Preferred Stock were voted at the Annual Meeting. ITEM 5. OTHER INFORMATION A shareholder who wishes to submit a proposal for consideration at the CMS Energy 2006 Annual Meeting pursuant to the applicable rules of the SEC must send the proposal to reach CMS Energy's Corporate Secretary on or before December 19, 2005. In any event if CMS Energy has not received written notice of any matter to be proposed at that meeting by March 4, 2006, the holders of proxies may use their discretionary voting authority on such matter. The proposals should be addressed to: Corporate Secretary, CMS Energy Corporation, One Energy Plaza, Jackson, MI 49201. ITEM 6. EXHIBITS (4)(a) $300 million Sixth Amended and Restated Credit Agreement dated as of May 18, 2005 among CMS Energy Corporation, CMS Enterprises, and the Administrative Agent and Collateral Agent, as defined therein (Previously filed as Exhibit (4)(i) to Form S-3 filed by CMS Energy on June 6, 2005, and incorporated by reference herein) (4)(b) $500 million Third Amended and Restated Credit Agreement dated as of May 18, 2005 among Consumers Energy Company and the Banks, the Administrative Agent, the Syndication Agent and the Co-Documentation Agents, all as defined therein (31)(a) CMS Energy Corporation's certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31)(b) CMS Energy Corporation's certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31)(c) Consumers Energy Company's certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31)(d) Consumers Energy Company's certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32)(a) CMS Energy Corporation's certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32)(b) Consumers Energy Company's certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 CO-6 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiary. CMS ENERGY CORPORATION (Registrant) Dated: August 4, 2005 By: /s/ Thomas J. Webb ----------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer CONSUMERS ENERGY COMPANY (Registrant) Dated: August 4, 2005 By: /s/ Thomas J. Webb ----------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer CO-7 CMS ENERGY AND CONSUMERS EXHIBITS
EXHIBIT NUMBER DESCRIPTION (4)(b) $500 million Third Amended and Restated Credit Agreement dated as of May 18, 2005 among Consumers Energy Company and the Banks, the Administrative Agent, the Syndication Agent and the Co-Documentation Agents, all as defined therein (31)(a) CMS Energy Corporation's certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31)(b) CMS Energy Corporation's certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31)(c) Consumers Energy Company's certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31)(d) Consumers Energy Company's certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32)(a) CMS Energy Corporation's certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32)(b) Consumers Energy Company's certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-4.(B) 2 k97012exv4wxby.txt $500 MILLION THIRD AMENDED AND RESTATED CREDIT AGREEMENT Exhibit (4)(b) ================================================================================ $500,000,000 THIRD AMENDED AND RESTATED CREDIT AGREEMENT Dated as of May 18, 2005 among CONSUMERS ENERGY COMPANY, as the Borrower, THE FINANCIAL INSTITUTIONS NAMED HEREIN, as the Banks, JPMORGAN CHASE BANK, N.A., as Administrative Agent, BARCLAYS BANK PLC, as Syndication Agent, and CITIBANK, N.A., UNION BANK OF CALIFORNIA, N.A. and WACHOVIA BANK, NATIONAL ASSOCIATION, as Co-Documentation Agents ================================================================================ J.P. MORGAN SECURITIES, INC. and BARCLAYS CAPITAL Co-Lead Arrangers and Joint Book Runners ================================================================================ TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS........................................... 1 1.1 Definitions........................................................ 1 1.2 Interpretation..................................................... 12 1.3 Accounting Terms................................................... 12 ARTICLE II THE ADVANCES.......................................... 13 2.1 Commitment......................................................... 13 2.2 Repayment.......................................................... 13 2.3 Ratable Loans...................................................... 13 2.4 Types of Advances.................................................. 13 2.5 Fees and Changes in Commitments.................................... 13 2.6 Minimum Amount of Advances......................................... 15 2.7 Optional Principal Payments........................................ 15 2.8 Method of Selecting Types and Interest Periods for New Advances.... 15 2.9 Conversion and Continuation of Outstanding Advances................ 15 2.10 Interest Rates, Interest Payment Dates............................. 16 2.11 Rate after Maturity................................................ 17 2.12 Method of Payment.................................................. 17 2.13 Bonds; Record-keeping; Telephonic Notices.......................... 17 2.14 Lending Installations.............................................. 18 2.15 Non-Receipt of Funds by the Agent.................................. 18 ARTICLE III LETTER OF CREDIT FACILITY............................. 18 3.1 Issuance........................................................... 18 3.2 Participations..................................................... 19 3.3 Notice............................................................. 19 3.4 LC Fees............................................................ 19 3.5 Administration; Reimbursement by Banks............................. 20 3.6 Reimbursement by Company........................................... 20 3.7 Obligations Absolute............................................... 21 3.8 Actions of LC Issuer............................................... 21
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PAGE 3.9 Indemnification.................................................... 21 3.10 Banks' Indemnification............................................. 22 3.11 Rights as a Bank................................................... 22 ARTICLE IV CHANGE IN CIRCUMSTANCES............................... 22 4.1 Yield Protection................................................... 22 4.2 Replacement Bank................................................... 24 4.3 Availability of Eurodollar Rate Loans.............................. 24 4.4 Funding Indemnification............................................ 24 4.5 Taxes.............................................................. 25 4.6 Bank Certificates, Survival of Indemnity........................... 26 ARTICLE V REPRESENTATIONS AND WARRANTIES........................ 27 5.1 Incorporation and Good Standing.................................... 27 5.2 Corporate Power and Authority: No Conflicts........................ 27 5.3 Governmental Approvals............................................. 27 5.4 Legally Enforceable Agreements..................................... 27 5.5 Financial Statements............................................... 27 5.6 Litigation......................................................... 28 5.7 Margin Stock....................................................... 28 5.8 ERISA.............................................................. 28 5.9 Insurance.......................................................... 28 5.10 Taxes.............................................................. 28 5.11 Investment Company Act............................................. 28 5.12 Public Utility Holding Company Act................................. 28 5.13 Bonds.............................................................. 28 5.14 Disclosure......................................................... 29 5.15 OFAC............................................................... 29 ARTICLE VI AFFIRMATIVE COVENANTS................................. 29 6.1 Payment of Taxes, Etc.............................................. 29 6.2 Maintenance of Insurance........................................... 29
-ii- TABLE OF CONTENTS (continued)
PAGE 6.3 Preservation of Corporate Existence, Etc........................... 29 6.4 Compliance with Laws, Etc.......................................... 29 6.5 Visitation Rights.................................................. 29 6.6 Keeping of Books................................................... 30 6.7 Reporting Requirements............................................. 30 6.8 Use of Proceeds.................................................... 31 6.9 Maintenance of Properties, Etc..................................... 31 6.10 Bonds.............................................................. 32 ARTICLE VII NEGATIVE COVENANTS.................................... 32 7.1 Liens.............................................................. 32 7.2 Sale of Assets..................................................... 33 7.3 Mergers, Etc....................................................... 33 7.4 Compliance with ERISA.............................................. 34 7.5 Change in Nature of Business....................................... 34 7.6 Restricted Payments................................................ 34 7.7 Off-Balance Sheet Liabilities...................................... 34 7.8 Transactions with Affiliates....................................... 34 ARTICLE VIII FINANCIAL COVENANTS................................... 34 8.1 Debt to Capital Ratio.............................................. 34 8.2 Interest Coverage Ratio............................................ 34 ARTICLE IX EVENTS OF DEFAULT..................................... 35 9.1 Events of Default.................................................. 35 9.2 Remedies........................................................... 36 ARTICLE X WAIVERS, AMENDMENTS AND REMEDIES...................... 37 10.1 Amendments......................................................... 37 10.2 Preservation of Rights............................................. 38 ARTICLE XI CONDITIONS PRECEDENT.................................. 38 11.1 Initial Credit Extension........................................... 38 11.2 Each Credit Extension.............................................. 39
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PAGE ARTICLE XII GENERAL PROVISIONS.................................... 40 12.1 Successors and Assigns............................................. 40 12.2 Survival of Representations........................................ 42 12.3 Governmental Regulation............................................ 42 12.4 Taxes.............................................................. 42 12.5 Choice of Law...................................................... 42 12.6 Headings........................................................... 42 12.7 Entire Agreement................................................... 42 12.8 Expenses; Indemnification.......................................... 42 12.9 Severability of Provisions......................................... 43 12.10 Setoff............................................................. 43 12.11 Ratable Payments................................................... 43 12.12 Nonliability....................................................... 44 12.13 Other Agents....................................................... 44 12.14 USA Patriot Act.................................................... 44 ARTICLE XIII THE AGENT............................................. 44 13.1 Appointment........................................................ 44 13.2 Powers............................................................. 45 13.3 General Immunity................................................... 45 13.4 No Responsibility for Loans, Recitals, Etc......................... 45 13.5 Action on Instructions of Banks.................................... 45 13.6 Employment of Agents and Counsel................................... 45 13.7 Reliance on Documents; Counsel..................................... 45 13.8 Agent's Reimbursement and Indemnification.......................... 46 13.9 Rights as a Bank................................................... 46 13.10 Bank Credit Decision............................................... 46 13.11 Successor Agent.................................................... 47 13.12 Agent and Arranger Fees............................................ 47 ARTICLE XIV NOTICES............................................... 47
-iv- TABLE OF CONTENTS (continued)
PAGE 14.1 Giving Notice...................................................... 47 14.2 Change of Address.................................................. 48 ARTICLE XV TERMINATION OF PRIOR AGREEMENT........................ 48 ARTICLE XVI COUNTERPARTS.......................................... 48 ARTICLE XVII RELEASE OF BONDS...................................... 48
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SCHEDULES - --------- Schedule 1 Pricing Schedule Schedule 2 Commitment Schedule Schedule 3 Existing Facility LC Schedule
EXHIBITS - -------- Exhibit A Form of Supplemental Indenture Exhibit B-1 Required Opinions from Robert S. Shrosbree, Esq. Exhibit B-2 Required Opinion from Miller, Canfield, Paddock and Stone, P.L.C. Exhibit C Form of Compliance Certificate Exhibit D Form of Assignment and Assumption Agreement Exhibit E Terms of Subordination (Junior Subordinated Debt) Exhibit F Terms of Subordination (Guaranty of Hybrid Preferred Securities) Exhibit G Form of Bond Delivery Agreement Exhibit H Form of Increase Request
-vi- THIRD AMENDED AND RESTATED CREDIT AGREEMENT This Third Amended and Restated Credit Agreement, dated as of May 18, 2005, is among Consumers Energy Company, a Michigan corporation (the "Company"), the financial institutions listed on the signature pages hereof (together with their respective successors and assigns, the "Banks") and JPMorgan Chase Bank, N.A., a national banking association, as Agent and as LC Issuer. W I T N E S S E T H: WHEREAS, the Company has requested, and the Banks have agreed to enter into, a credit facility in an aggregate amount of $500,000,000; NOW THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. As used in this Agreement: "Accounting Changes" - see Section 1.3. "Administrative Questionnaire" means an administrative questionnaire, substantially in the form supplied by the Agent, completed by a Bank and furnished to the Agent in connection with this Agreement. "Advance" means a group of Loans made by the Banks hereunder of the same Type, made, converted or continued on the same day and, in the case of Eurodollar Rate Loans, having the same Interest Period. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling (including all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control another entity if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such entity, whether through the ownership of voting securities, by contract or otherwise. "Agent" means JPMorgan Chase Bank, N.A. in its capacity as administrative agent for the Banks pursuant to Article XIII, and not in its individual capacity as a Bank, and any successor Agent appointed pursuant to Article XIII. "Aggregate Commitment" means the aggregate amount of the Commitments of all Banks. "Aggregate Outstanding Credit Exposure" means, at any time, the aggregate of the Outstanding Credit Exposure of all the Banks. "Agreement" means this Third Amended and Restated Credit Agreement, as amended from time to time. "Alternate Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of the Federal Funds Effective Rate for such day plus 1/2% per annum. "Applicable Margin" means, with respect to Advances of any Type at any time, the percentage rate per annum which is applicable at such time with respect to Advances of such Type as set forth in Schedule 1. "Arrangers" - see Section 13.12. "Assignment Agreement" - see Section 12.1(e). "Available Aggregate Commitment" means, at any time, the Available Commitment then in effect minus the Aggregate Outstanding Credit Exposure at such time. "Available Commitment" means, at any time, the lesser of (i) the Aggregate Commitment and (ii) the face amount of the Bonds. "Banks" - see the preamble. "Base Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the per annum interest rate determined by the offered rate per annum at which deposits in U.S. dollars, for a period equal or comparable to such Interest Period, appears on page 3750 (or any successor page) of the Dow Jones Market Service as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or in the event such offered rate is not available from the Dow Jones Market Service page, the rate offered on deposits in U.S. dollars, for a period equal or comparable to such Interest Period, by JPMorgan's London Office to prime banks in the London interbank market at approximately 11:00 a.m. (London time), two Business Days prior to the first day of such Interest Period, and in an amount substantially equal to the amount of JPMorgan's relevant Eurodollar Rate Loan for such Interest Period. "Bond Delivery Agreement" means a bond delivery agreement whereby the Agent (x) acknowledges delivery of the Bonds and (y) agrees to hold the Bonds for the benefit of the Banks and to distribute all payments made by the Company on account thereof to the Banks, substantially in the form of Exhibit G. "Bonds" means a series of interest-bearing First Mortgage Bonds created under the Supplemental Indenture issued in favor of, and in form and substance satisfactory to, the Agent. "Borrowing Date" means a date on which a Credit Extension is made hereunder. "Borrowing Notice" - see Section 2.8. 2 "Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in New York, New York for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in New York, New York for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system. "Capital Lease" means any lease which has been or would be capitalized on the books of the lessee in accordance with GAAP. "CMS" means CMS Energy Corporation, a Michigan corporation. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral Shortfall Amount" - see Section 9.2. "Commitment" means, for each Bank, the obligation of such Bank to make Loans to, and participate in Facility LCs issued upon the application of, the Company in an aggregate amount not exceeding the amount set forth on Schedule 2 or as set forth in any Assignment Agreement that has become effective pursuant to Section 12.1, as such amount may be modified from time to time. "Commitment Fee" - see Section 2.5. "Commitment Fee Rate" means, at any time, the percentage rate per annum at which Commitment Fees are accruing on the Unused Commitment as set forth in Schedule 1. "Company" - see the preamble. "Consolidated EBIT" means, for any period, Consolidated Net Income for such period plus (i) to the extent deducted from revenues in determining such Consolidated Net Income (without duplication), (a) Consolidated Interest Expense plus interest and dividends on Hybrid Preferred Securities and on securities of the type described in clause (iv) of the definition of Total Consolidated Debt (but only, in the case of securities of the type described in such clause (iv), to the extent such securities have been deemed to be equity), (b) expense for taxes paid or accrued, and (c) any non-cash write-offs and write-downs contained in the Company's Consolidated Net Income, including write-offs or write-downs related to the sale of assets, impairment of assets and loss on contracts minus (ii) to the extent included in such Consolidated Net Income, extraordinary gains realized other than in the ordinary course of business, all calculated for the Company and its Subsidiaries on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, with respect to any period, an amount equal to interest expense on Debt, including payments in the nature of interest under Capital Leases but excluding (a) interest and dividends paid on Hybrid Preferred Securities and on securities of the type described in clause (iv) of the definition of Total Consolidated Debt (but only, in the case of 3 securities of the type described in such clause (iv), to the extent such securities have been deemed to be equity), all calculated for the Company and its Subsidiaries on a consolidated basis in accordance with GAAP (except as otherwise provided above). "Consolidated Net Income" means, for any period, the net income (or loss) of the Company and its Subsidiaries calculated on a consolidated basis for such period. "Consolidated Subsidiary" means any Subsidiary the accounts of which are or are required to be consolidated with the accounts of the Company in accordance with GAAP. "Credit Documents" means this Agreement, the Facility LC Applications, the Supplemental Indenture, any promissory note issued pursuant to Section 2.13 and the Bonds. "Credit Extension" means the making of an Advance or the issuance of a Facility LC hereunder. "Debt" means, with respect to any Person, and without duplication, (a) all indebtedness of such Person for borrowed money, (b) all indebtedness of such Person for the deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business which are not overdue), (c) all liabilities arising from any accumulated funding deficiency (as defined in Section 412(a) of the Code) for a Plan, (d) all liabilities arising in connection with any withdrawal liability under ERISA to any Multiemployer Plan, (e) all obligations of such Person arising under acceptance facilities, (f) all obligations of such Person as lessee under Capital Leases, (g) all obligations of such Person arising under any interest rate swap, "cap", "collar" or other hedging agreement; provided that for purposes of the calculation of Debt for this clause (g) 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, and (h) all guaranties, endorsements (other than for collection in the ordinary course of business) and other contingent obligations of such Person to assure a creditor against loss (whether by the purchase of goods or services, the provision of funds for payment, the supply of funds to invest in any Person or otherwise) in respect of indebtedness or obligations of any other Person of the kinds referred to in clauses (a) through (g) above. "Default" means an event which but for the giving of notice or lapse of time, or both, would constitute an Event of Default. "Designated Officer" means the Chief Financial Officer, the Treasurer, an Assistant Treasurer, any Vice President in charge of financial or accounting matters or the principal accounting officer of the Company. "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. 4 "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Substance, (c) exposure to any Hazardous Substance, (d) the release or threatened release of any Hazardous Substance 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. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company or is under common control (within the meaning of Section 414(c) of the Code) with the Company. "Eurodollar Advance" means an Advance consisting of Eurodollar Rate Loans. "Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, an interest rate per annum equal to the sum of (i) the quotient obtained by dividing (a) the Base Eurodollar Rate applicable to such Interest Period by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) the Applicable Margin. "Eurodollar Rate Loan" means a Loan which bears interest by reference to the Eurodollar Rate. "Event of Default" means an event described in Article IX. "Excluded Taxes" means, in the case of each Bank, the LC Issuer or applicable Lending Installation and the Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by (i) the jurisdiction under the laws of which such Bank, the LC Issuer or the Agent is incorporated or organized or (ii) the jurisdiction in which the Agent's, the LC Issuer's or such Bank's principal executive office or such Bank's or the LC Issuer's applicable Lending Installation is located. "Existing Facility LC" means each letter of credit issued under the Prior Agreement that is listed on Schedule 3. "Facility LC" - see Section 3.1. The term "Facility LC" includes each Existing Facility LC. "Facility LC Application" - see Section 3.3. "Facility LC Collateral Account" means a special, interest-bearing account maintained (pursuant to arrangements satisfactory to the Agent) at the Agent's office at the address specified 5 pursuant to Article XII, which account shall be in the name of the Company but under the sole dominium and control of the Agent, for the benefit of the Banks. "Federal Funds Effective Rate" means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 11:00 a.m. (New York time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. "Fee Letter" means the fee letter referred to in Section 13.12. "First Mortgage Bonds" means bonds issued by the Company pursuant to the Indenture. "Floating Rate" means a rate per annum equal to (i) the Alternate Base Rate plus (ii) the Applicable Margin, changing when and as the Alternate Base Rate or the Applicable Margin changes. "Floating Rate Advance" means an Advance consisting of Floating Rate Loans. "Floating Rate Loan" means a Loan which bears interest at the Floating Rate. "FMB Release Date" means the date on which the Bonds are released pursuant to Article XVII. "FRB" means the Board of Governors of the Federal Reserve System or any successor thereto. "GAAP" means generally accepted accounting principles in the United States of America as in effect on the date hereof, applied on a basis consistent with those used in the preparation of the financial statements referred to in Section 5.5 (except, for purposes of the financial statements required to be delivered pursuant to Sections 6.7(b) and (c), for changes concurred in by the Company's independent public accountants). "Hazardous Substance" means any waste, substance or material identified as hazardous, dangerous or toxic by any office, agency, department, commission, board, bureau or instrumentality of the United States or of the State or locality in which the same is located having or exercising jurisdiction over such waste, substance or material. "Hybrid Preferred Securities" means any preferred securities issued by a Hybrid Preferred Securities Subsidiary, where such preferred securities have the following characteristics: (i) such Hybrid Preferred Securities Subsidiary lends substantially all of the proceeds from the issuance of such preferred securities to the Company or a wholly-owned direct or indirect Subsidiary of the Company in exchange for Junior Subordinated 6 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 such 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 such Junior Subordinated Debt, which interest payments are in turn used by the Hybrid Preferred Securities Subsidiary to make corresponding payments to the holders of the preferred securities. "Hybrid Preferred Securities Subsidiary" means any Delaware business trust (or similar entity) (i) all of the common equity interest of which is owned (either directly or indirectly through one or more wholly-owned Subsidiaries of the Company) at all times by the Company or a wholly-owned direct or indirect Subsidiary of the Company, (ii) that has been formed for the purpose of issuing Hybrid Preferred Securities and (iii) substantially all of the assets of which consist at all times solely of Junior Subordinated Debt issued by the Company or a wholly-owned direct or indirect Subsidiary of the Company (as the case may be) and payments made from time to time on such Junior Subordinated Debt. "Indenture" means the Indenture, dated as of September 1, 1945, as supplemented and amended from time to time, from the Company to JPMorgan Chase Bank, N.A. (formerly known as JPMorgan Chase Bank), as successor Trustee. "Initial Borrowing Date" means May 18, 2005. "Interest Period" means, with respect to a Eurodollar Advance, a period of one, two, three or six months, or such shorter period agreed to by the Company and the Banks, commencing on a Business Day selected by the Company pursuant to this Agreement. Such Interest Period shall end on the day which corresponds numerically to such date one, two, three or six months thereafter (or such shorter period agreed to by the Company and the Banks); provided that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month (or such shorter period, as applicable), such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month (or such shorter period, as applicable). If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day; provided that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day. The Company may not select any Interest Period that ends after the scheduled Termination Date. "JPMorgan" means JPMorgan Chase Bank, N.A., in its individual capacity, and its successors and assigns. 7 "Junior Subordinated Debt" means any unsecured Debt of the Company or a Subsidiary of the Company that is (i) issued in exchange for the proceeds of Hybrid Preferred Securities and (ii) subordinated to the rights of the Banks hereunder and under the other Credit Documents pursuant to terms of subordination substantially similar to those set forth in Exhibit E, or pursuant to other terms and conditions satisfactory to the Majority Banks. "LC Fee" - see Section 3.4. "LC Issuer" means JPMorgan (or any subsidiary or affiliate of JPMorgan designated by JPMorgan) in its capacity as issuer of Facility LCs hereunder. "LC Obligations" means, at any time, the sum, without duplication, of (i) the aggregate undrawn stated amount under all Facility LCs outstanding at such time plus (ii) the aggregate unpaid amount at such time of all Reimbursement Obligations. "LC Payment Date" - see Section 3.5. "Lending Installation" means any office, branch, subsidiary or affiliate of a Bank. "Lien" means any lien (statutory or otherwise), security interest, mortgage, deed of trust, priority, pledge, charge, conditional sale, title retention agreement, financing lease or other encumbrance or similar right of others, or any agreement to give any of the foregoing. "Loan" - see Section 2.1. "Majority Banks" means, as of any date of determination, Banks in the aggregate having more than 50% of the Aggregate Commitment as of such date or, if the Aggregate Commitment has been terminated, Banks in the aggregate holding more than 50% of the aggregate unpaid principal amount of the Aggregate Outstanding Credit Exposure as of such date. "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 financial condition or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole, (b) the Company's ability to perform its obligations under any Credit Document or (c) the validity or enforceability of any Credit Document or the rights or remedies of the Agent or the Banks thereunder. "Modify" and "Modification" - see Section 3.1. "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 or issuance of securities or incurrence of Debt by any Person, the excess of (i) the gross cash proceeds received by or on behalf of such Person in respect of such sale, issuance or incurrence (as the case may be) over (ii) customary 8 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 therewith. "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 from the determination of total assets (i) goodwill, organizational expenses, research and development expenses, trademarks, trade names, copyrights, patents, patent applications, licenses and rights in any thereof, and other similar intangibles, (ii) cash held in a sinking or other analogous fund established for the purpose of redemption, retirement or prepayment of capital stock or Debt, and (iii) any item not included in clause (i) or (ii) above, that is treated as an intangible asset in conformity with GAAP. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Loans, all Reimbursement Obligations, all accrued and unpaid fees and all other obligations of the Company to the Banks or to any Bank, the LC Issuer or the Agent arising under the Credit Documents. "Off-Balance Sheet Liability" of a Person means (i) any repurchase obligation or liability of such Person with respect to accounts or notes receivable sold by such Person, (ii) any liability under any sale and leaseback transaction which is not a Capital Lease, (iii) any liability under any so-called "synthetic lease" transaction entered into by such Person, or (iv) any obligation arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the balance sheet of such Person, but excluding from this clause (iv) Operating Leases. "Operating Lease" of a Person means any lease of Property (other than a Capital Lease) by such Person as lessee. "Other Taxes" - see Section 4.5(b). "Outstanding Credit Exposure" means, as to any Bank at any time, the sum of (i) the aggregate principal amount of its Loans outstanding at such time, plus (ii) an amount equal to its Pro Rata Share of the LC Obligations at such time. "Payment Date" means the second Business Day of each calendar quarter occurring after the Initial Borrowing Date. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Plan" means any employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Company or any ERISA Affiliate and covered by Title IV of ERISA. 9 "Plan Termination Event" means (a) a Reportable Event described in 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), (b) the withdrawal of the Company or any ERISA Affiliate from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (d) the institution of proceedings to terminate a Plan by the PBGC or to appoint a trustee to administer any Plan. "Prime Rate" means a rate per annum equal to the prime rate of interest announced from time to time by JPMorgan or its parent (which is not necessarily the lowest rate charged to any customer), changing when and as said prime rate changes. "Prior Agreement" means the Second Amended and Restated Credit Agreement dated as of August 3, 2004 among the Company, various financial institutions and JPMorgan (then known as Bank One, NA), as Agent, as amended. "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Pro Rata Share" means, with respect to a Bank, a portion equal to a fraction the numerator of which is such Bank's Commitment and the denominator of which is the Aggregate Commitment. "Regulation D" means Regulation D of the FRB from time to time in effect and shall include any successor or other regulation or official interpretation of the FRB relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation U" means Regulation U of the FRB from time to time in effect and shall include any successor or other regulation or official interpretation of the FRB relating to the extension of credit by banks, non-banks and non-broker-dealers for the purpose of purchasing or carrying margin stocks. "Reimbursement Obligations" means, at any time, the aggregate of all obligations of the Company then outstanding under Article III to reimburse the LC Issuer for amounts paid by the LC Issuer in respect of any one or more drawings under Facility LCs. "Reportable Event" has the meaning assigned to that term in Title IV of ERISA. "Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities. "S&P" means Standard and Poor's Rating Services, a division of The McGraw Hill Companies, Inc., or any successor thereto. 10 "SEC" means the Securities and Exchange Commission or any governmental authority which may be substituted therefor. "Securitized Bonds" means nonrecourse bonds or similar asset-backed securities issued by a special-purpose Subsidiary of the Company which are payable solely from specialized charges authorized by the utility commission of the relevant state in connection with the recovery of (x) stranded regulatory costs, (y) stranded clean air and pension costs and (z) other "Qualified Costs" (as defined in M.C.L. ss.460.10h(g)) authorized to be securitized by the Michigan Public Service Commission. "Senior Debt" means the First Mortgage Bonds. "Single Employer Plan" means a Plan maintained by the Company or any ERISA Affiliate for employees of the Company or any ERISA Affiliate. "Subsidiary" means, as to any Person, any corporation or other entity of which at least a majority of the securities or other ownership interests having ordinary voting power (absolutely or contingently) for the election of directors or other Persons performing similar functions are at the time owned directly or indirectly by such Person. "Supplemental Indenture" means a supplemental indenture substantially in the form of Exhibit A. "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but excluding Excluded Taxes and Other Taxes. "Termination Date" means the earlier of (i) May 18, 2010 and (ii) the date on which the Commitments are terminated. "Total Consolidated Capitalization" means, at any date of determination, without duplication, the sum of (a) Total Consolidated Debt plus all amounts excluded from Total Consolidated Debt pursuant to clauses (ii), (iii) and (iv) of the proviso to the definition of such term (but only, in the case of securities of the type described in such clause (iv), to the extent such securities have been deemed to be equity), (b) equity of the common stockholders of the Company, (c) equity of the preference stockholders of the Company and (d) equity of the preferred stockholders of the Company, in each case determined at such date. "Total Consolidated Debt" means, at any date of determination, the aggregate Debt of the Company and its Consolidated Subsidiaries; provided that Total Consolidated Debt shall exclude (i) the principal amount of any Securitized Bonds, (ii) any Junior Subordinated Debt owned by any Hybrid Preferred Securities Subsidiary, (iii) any guaranty by the Company of payments with respect to any Hybrid Preferred Securities, provided that such guaranty is subordinated to the rights of the Banks hereunder and under the other Credit Documents pursuant to terms of subordination substantially similar to those set forth in Exhibit F, or pursuant to other terms and conditions satisfactory to the Majority Banks, (iv) such percentage of the Net Proceeds from any issuance of hybrid debt/equity securities (other than Junior Subordinated Debt and Hybrid 11 Preferred Securities) by the Company or any Consolidated Subsidiary as shall be agreed to be deemed equity by the Agent and the Company prior to the issuance thereof (which determination shall be based on, among other things, the treatment (if any) given to such securities by the applicable rating agencies). "Type" - see Section 2.4. "Unused Commitment" means, at any time, the Aggregate Commitment then in effect minus the Aggregate Outstanding Credit Exposure at such time. "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. "Utilization Fee Rate" means, at any time, the percentage rate per annum at which utilization fees are accruing at such time as set forth in Schedule 1. 1.2 Interpretation. (a) The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. (b) The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." (c) Unless otherwise specified, each reference to an Article, Section, Exhibit and Schedule means an Article or Section of or an Exhibit or Schedule to this Agreement. 1.3 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP; provided that the financial covenants set forth in Sections 8.1 and 8.2 shall be calculated exclusive of all Debt of any Affiliate of the Company (including Midland Cogeneration Venture Limited Partnership and First Midland Limited Partnership) that (a) is (i) consolidated on the financial statements of the Company solely as a result of the effect and application of Financial Accounting Standards Board No. 46 and of Accounting Research Bulletin No. 51, Consolidated Financial Statements, as modified by Statement of Financial Accounting Standards No. 94, and (ii) non-recourse to the Company or any of its Affiliates (other than the primary obligor of such Debt and any of its Subsidiaries); or (b) is re-categorized as such from certain lease obligations pursuant to Emerging Issues Task Force ("EITF") Issue 01-8, any subsequent EITF Issue or recommendation or 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 Liabilities, including 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 of any of the 12 financial covenants, tests, restrictions or standards herein or in the related definitions or terms used therein ("Accounting Changes"), the parties hereto agree, at the Company's request, to enter into negotiations, in good faith, in order to amend such provisions in a credit neutral manner so as to reflect equitably such changes with the desired result that the criteria for evaluating the Company's and its Subsidiaries' financial condition shall be the same after such changes as if such changes had not been made; provided that, until such provisions are amended in a manner reasonably satisfactory to the Majority Banks, no Accounting Change shall be given effect in such calculations. In the event such amendment is entered into, all references in this Agreement to GAAP shall mean generally accepted accounting principles as of the date of such amendment. ARTICLE II THE ADVANCES 2.1 Commitment. From and including the Initial Borrowing Date and prior to the Termination Date, each Bank severally agrees, on the terms and conditions set forth in this Agreement, (a) to make loans to the Company from time to time (the "Loans"), and (b) to participate in Facility LCs issued upon the request of the Company from time to time; provided that, after giving effect to the making of each such Loan and the issuance of each such Facility LC, such Bank's Outstanding Credit Exposure shall not exceed its Commitment. In no event may the Aggregate Outstanding Credit Exposure exceed the Available Commitment. Subject to the terms and conditions of this Agreement, the Company may borrow, repay and reborrow at any time prior to the Termination Date. The Commitments shall expire on the Termination Date. 2.2 Repayment. The Aggregate Outstanding Credit Exposure and all other unpaid obligations of the Company hereunder shall be paid in full on the Termination Date. 2.3 Ratable Loans. Each Advance shall consist of Loans made by the several Banks ratably according to their Pro Rata Shares. 2.4 Types of Advances. The Advances may be Floating Rate Advances or Eurodollar Advances (each a "Type" of Advance), or a combination thereof, as selected by the Company in accordance with Sections 2.8 and 2.9. 2.5 Fees and Changes in Commitments. (a) The Company agrees to pay to the Agent for the account of each Bank according to its Pro Rata Share (i) a commitment fee (the "Commitment Fee") at the Commitment Fee Rate on the daily Unused Commitment from the Initial Borrowing Date to but not including the date on which this Agreement is terminated in full and all of the Obligations hereunder have been paid in full and (ii) a utilization fee at the Utilization Fee Rate on such Bank's Outstanding Credit Exposure for any date on which the Aggregate Outstanding Credit Exposure exceeds 50% of the Aggregate Commitment. The fees payable pursuant to this clause (a) shall be payable quarterly in arrears on each Payment Date (for the quarter then most recently ended) and on the Termination Date (for the period then ended for which such fee has not previously been paid) and shall be calculated for actual days elapsed on the basis of a 360 day year. 13 (b) The Company may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Banks in the minimum amount of $10,000,000 (and in multiples of $1,000,000 if in excess thereof), upon at least five Business Days' written notice to the Agent, which notice shall specify the amount of any such reduction; provided that the Aggregate Commitment may not be reduced below the Aggregate Outstanding Credit Exposure. All accrued Commitment Fees shall be payable on the effective date of any termination of the obligation of the Banks to make Credit Extensions hereunder. Upon any permanent reduction in the Aggregate Commitment pursuant to the terms of this Section 2.5(b), the Agent shall, upon request of the Company, promptly surrender to or upon the order of the Company one or more Bonds specified by the Company; provided that the Company remains in compliance with Section 6.10. (c) The Company may, from time to time, by means of a letter delivered to the Agent substantially in the form of Exhibit H, request that the Aggregate Commitment be increased by up to $250,000,000 (in the aggregate during the term of this Agreement) by (i) increasing the Commitment of one or more Banks which have agreed to such increase in writing pursuant to the procedures described below (it being understood that no Bank has any obligation to agree to such increase) and/or (ii) adding one or more commercial banks or other Persons as a party hereto (each an "Additional Bank") with a Commitment in an amount agreed to by any such Additional Bank; provided that no Additional Bank shall be added as a party hereto without the written consent of the Agent and the LC Issuer (which consents shall not be unreasonably withheld) or if a Default or an Event of Default exists. Any increase in the Aggregate Commitment pursuant to this clause (c) shall be effective three Business Days (or such other reasonable period of time as may be specified by the Agent) after the date on which the Agent has received (A) the applicable increase letter in the form of Annex 1 to Exhibit H (in the case of an increase in the Commitment of an existing Bank) or assumption letter in the form of Annex 2 to Exhibit H (in the case of the addition of a commercial bank or other Person as a new Bank), in each case signed by all applicable parties; and (b) if the requested increase is to occur before the FMB Release Date and, after giving effect to such increase, the Aggregate Commitment would exceed the face amount of all Bonds, additional Bonds in an amount not less than such excess together with such certificates, opinions of counsel and other documents as the Agent may reasonably request in connection with the issuance and delivery of such Bonds.. The Agent shall promptly notify the Company and the Banks of any increase in the amount of the Aggregate Commitment pursuant to this clause (c) and of the Pro Rata Share of each Bank after giving effect thereto. The parties hereto agree that, notwithstanding any other provision of this Agreement, the Agent, the Company, each Additional Bank and each increasing Bank, as applicable, may make arrangements satisfactory to such parties to cause an Additional Bank or an increasing Bank to temporarily hold risk participations in the outstanding Loans of the other Banks (rather than fund its Percentage of all outstanding Loans concurrently with the applicable increase) with a view toward minimizing breakage costs and transfers of funds in connection with any increase in the Aggregate Commitment. The Company acknowledges that if, as a result of an increase in the Aggregate Commitment that is not pro rata among the existing Banks, any Eurodollar Rate Loan is prepaid or converted (in whole or in part) on a day other than the last day of an Interest Period therefor, then such prepayment or conversion shall be subject to the provisions of Section 4.4. 14 2.6 Minimum Amount of Advances. Each Advance shall be in the minimum amount of $10,000,000 (and in integral multiples of $1,000,000 if in excess thereof); provided that any Floating Rate Advance may be in the amount of the Available Aggregate Commitment (rounded down, if necessary, to an integral multiple of $1,000,000). 2.7 Optional Principal Payments. The Company may from time to time prepay, without penalty or premium, all outstanding Floating Rate Advances or, in a minimum aggregate amount of $10,000,000 or a higher integral multiple of $1,000,000, any portion of the outstanding Floating Rate Advances upon one Business Day's prior notice to the Agent. The Company may from time to time pay, subject to the payment of any funding indemnification amounts required by Section 4.4 but without penalty or premium, all outstanding Eurodollar Advances or, in a minimum aggregate amount of $10,000,000 or a higher integral multiple of $1,000,000, any portion of any outstanding Eurodollar Advance upon three Business Days' prior notice to the Agent; provided that if after giving effect to any such prepayment the principal amount of any Eurodollar Advance is less than $10,000,000, such Eurodollar Advance shall automatically convert into a Floating Rate Advance. 2.8 Method of Selecting Types and Interest Periods for New Advances. The Company shall select the Type of Advance and, in the case of each Eurodollar Advance, the Interest Period applicable thereto from time to time. The Company shall give the Agent irrevocable notice (a "Borrowing Notice") not later than 12:00 noon (New York time) on the Borrowing Date of each Floating Rate Advance and not later than 12:00 noon (New York time) three Business Days before the Borrowing Date for each Eurodollar Advance, specifying: (i) the Borrowing Date, which shall be a Business Day; (ii) the aggregate amount of such Advance; (iii) the Type of Advance selected; and (iv) in the case of each Eurodollar Advance, the initial Interest Period applicable thereto. Promptly after receipt thereof, the Agent will notify each Bank of the contents of each Borrowing Notice. Not later than 2:00 p.m. (New York time) on each Borrowing Date, each Bank shall make available its Loan in funds immediately available in New York to the Agent at its address specified pursuant to Section 14. To the extent funds are received from the Banks, the Agent will make such funds available to the Company at the Agent's aforesaid address. No Bank's obligation to make any Loan shall be affected by any other Bank's failure to make any Loan. 2.9 Conversion and Continuation of Outstanding Advances. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into Eurodollar Advances pursuant to this Section 2.9 or are repaid in accordance with Section 2.2 or 2.7. Each Eurodollar Advance shall continue as a Eurodollar Advance until the end of the then applicable Interest Period therefor, at which time such Eurodollar Advance shall 15 be automatically converted into a Floating Rate Advance unless (x) such Eurodollar Advance is or was repaid in accordance with Section 2.2 or 2.7 or (y) the Company shall have given the Agent a Conversion/Continuation Notice (as defined below) requesting that, at the end of such Interest Period, such Eurodollar Advance continue as a Eurodollar Advance for the same or another Interest Period. Subject to the terms of Section 2.6, the Company may elect from time to time to convert all or any part of a Floating Rate Advance into a Eurodollar Advance. The Company shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Floating Rate Advance into a Eurodollar Advance or continuation of a Eurodollar Advance not later than 12:00 noon (New York time) at least three Business Days prior to the date of the requested conversion or continuation, specifying: (i) the requested date, which shall be a Business Day, of such conversion or continuation; (ii) the aggregate amount and Type of the Advance which is to be converted or continued; and (iii) the amount of the Advance which is to be converted into or continued as a Eurodollar Advance and the duration of the Interest Period applicable thereto; provided that no Advance may be continued as, or converted into, a Eurodollar Advance if (x) such continuation or conversion would violate any provision of this Agreement or (y) a Default or Event of Default exists. 2.10 Interest Rates, Interest Payment Dates. (a) Subject to Section 2.11, each Advance shall bear interest as follows: (i) at any time such Advance is a Floating Rate Advance, at a rate per annum equal to the Floating Rate from time to time in effect; and (ii) at any time such Advance is a Eurodollar Advance, at a rate per annum equal to the Eurodollar Rate for each applicable Interest Period. Changes in the rate of interest on that portion or any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Floating Rate. (b) Interest accrued on each Floating Rate Advance shall be payable on each Payment Date and on the Termination Date. Interest accrued on each Eurodollar Advance shall be payable on the last day of its applicable Interest Period, on any date on which such Eurodollar Advance is prepaid and on the Termination Date. Interest accrued on each Eurodollar Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest on Eurodollar Advances, interest on Floating Rate Advances based on the Federal Funds Effective Rate and the LC Fee shall be calculated for actual days elapsed on the basis of a 360-day year. Interest on Floating Rate Advances based on the Prime Rate shall be calculated for actual days elapsed on the basis of a 365- or 366-day year, as appropriate. Interest on each Advance shall accrue from and including the date such Advance is made to but excluding the date payment thereof is received in 16 accordance with Section 2.12. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day (unless, in the case of a Eurodollar Advance, such next succeeding Business Day falls in a new calendar month, in which case such payment shall be due on the immediately preceding Business Day) and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. 2.11 Rate after Maturity. Any Advance not paid by the Company at maturity, whether by acceleration or otherwise, shall bear interest until paid in full at a rate per annum equal to the higher of (i) the rate otherwise applicable thereto plus 1% or (ii) the Floating Rate plus 1%. 2.12 Method of Payment. All payments of principal, interest and fees hereunder shall be made in immediately available funds to the Agent at its address specified on its signature page to this Agreement (or at any other Lending Installation of the Agent specified in writing by the Agent to the Company) not later than 1:00 p.m. (New York time) on the date when due and shall (except in the case of Reimbursement Obligations for which the LC Issuer has not been fully indemnified by the Banks, or as otherwise specifically required hereunder) be applied ratably by the Agent among the Banks. Funds received after such time shall be deemed received on the following Business Day unless the Agent shall have received from, or on behalf of, the Company a Federal Reserve reference number with respect to such payment before 4:00 p.m. (New York time) on the date of such payment. Each payment delivered to the Agent for the account of any Bank shall be delivered promptly by the Agent in the same type of funds received by the Agent to such Bank at the address specified for such Bank in its Administrative Questionnaire or at any Lending Installation specified in a notice received by the Agent from such Bank. The Agent is hereby authorized to charge the account of the Company maintained with JPMorgan, if any, for each payment of principal, interest, Reimbursement Obligations and fees as such payment becomes due hereunder. Each reference to the Agent in this Section 2.12 shall also be deemed to refer, and shall apply equally, to the LC Issuer, in the case of payments required to be made by the Company to the LC Issuer pursuant to Section 3.6. 2.13 Bonds; Record-keeping; Telephonic Notices. (a) The obligation of the Company to repay the Obligations shall be evidenced by one or more Bonds or, at the request of any Bank following the FMB Release Date, a promissory note in form and substance reasonably satisfactory to the Company, the Agent and such Bank. (b) Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Company to such Bank resulting from each Loan made by such Bank from time to time, including the amounts of principal and interest payable and paid to such Bank from time to time hereunder. (c) The Agent shall also maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and, if applicable, the Interest Period with respect thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Company to each Bank hereunder, (iii) the original stated amount of each 17 Facility LC and the amount of LC Obligations outstanding at any time, and (iv) the amount of any sum received by the Agent hereunder from the Company and each Bank's share thereof. (d) The entries maintained in the accounts maintained pursuant to clauses (b) and (c) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided that the failure of the Agent or any Bank to maintain such accounts or any error therein shall not in any manner affect the obligation of the Company to repay the Obligations in accordance with their terms. (e) The Company hereby authorizes the Banks and the Agent to make Advances based on telephonic notices made by any person or persons the Agent or any Bank in good faith believes to be acting on behalf of the Company. The Company agrees to deliver promptly to the Agent a written confirmation of each telephonic notice signed by a Designated Officer. If the written confirmation differs in any material respect from the action taken by the Agent and the Banks, the records of the Agent and the Banks shall govern absent manifest error. 2.14 Lending Installations. Subject to the provisions of Section 4.6, each Bank may book its Loans and its participation in any LC Obligations and the LC Issuer may book the Facility LCs at any Lending Installation selected by such Bank or the LC Issuer, as the case may be, and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Loans shall be deemed held by the applicable Bank for the benefit of such Lending Installation. Each Bank may, by written or facsimile notice to the Company, designate a Lending Installation through which Loans will be made by it or Facility LCs will be issued by it and for whose account payments on the Loans or payments with respect to Facility LCs are to be made. 2.15 Non-Receipt of Funds by the Agent. Unless a Bank or the Company, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (i) in the case of a Bank, the proceeds of a Loan or (ii) in the case of the Company, a payment of principal, interest or fees to the Agent for the account of the Banks, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Bank or the Company, as the case may be, has not in fact made such payment to the Agent, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (i) in the case of payment by a Bank, the Federal Funds Rate for such day or (ii) in the case of payment by the Company, the interest rate applicable to the relevant Loan. ARTICLE III LETTER OF CREDIT FACILITY 3.1 Issuance. The LC Issuer hereby agrees, on the terms and conditions set forth in this Agreement, to issue standby and commercial letters of credit denominated in U.S. dollars (each, a "Facility LC") and to renew, extend, increase, decrease or otherwise modify each Facility 18 LC ("Modify," and each such action a "Modification"), from time to time from and including the date hereof and prior to the Termination Date upon the request of the Company; provided that immediately after each such Facility LC is issued or Modified, (i) the aggregate amount of the outstanding LC Obligations shall not exceed $100,000,000 and (ii) the Aggregate Outstanding Credit Exposure shall not exceed the Available Commitment. No Facility LC shall (x) be issued later than 30 days prior to the scheduled Termination Date, (y) have an expiry date later than the fifth Business Day (or, in the case of a commercial Facility LC, the 30th day) prior to the scheduled Termination Date or (z) provide for time drafts. 3.2 Participations. Upon the issuance or Modification by the LC Issuer of a Facility LC in accordance with this Article III (or, in the case of any Existing Facility LC, on the Initial Borrowing Date), the LC Issuer shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably purchased from the LC Issuer, a participation in such Facility LC (and each Modification thereof) and the related LC Obligations in proportion to its Pro Rata Share. 3.3 Notice. Subject to Section 3.1, the Company shall give the LC Issuer notice prior to 12:00 noon (New York time) at least three Business Days prior to the proposed date of issuance (other than an Existing Facility LC) or Modification of each Facility LC, specifying the beneficiary, the proposed date of issuance (or Modification) and the expiry date of such Facility LC, and describing the proposed terms of such Facility LC and the nature of the transactions proposed to be supported thereby. Upon receipt of such notice, the LC Issuer shall promptly notify the Agent, and the Agent shall promptly notify each Bank, of the contents thereof and of the amount of such Bank's participation in such proposed Facility LC. The issuance or Modification by the LC Issuer of any Facility LC shall, in addition to the conditions precedent set forth in Article XI (the satisfaction of which the LC Issuer shall have no duty to ascertain), be subject to the conditions precedent that such Facility LC shall be satisfactory to the LC Issuer and that the Company shall have executed and delivered such application agreement and/or such other instruments and agreements relating to such Facility LC as the LC Issuer shall have reasonably requested (each, a "Facility LC Application"). In the event of any conflict between the terms of this Agreement and the terms of any Facility LC Application, the terms of this Agreement shall control. 3.4 LC Fees. The Company shall pay to the Agent, for the account of the Banks ratably in accordance with their respective Pro Rata Shares, a letter of credit fee (the "LC Fee") at a per annum rate equal to the Applicable Margin for Eurodollar Rate Loans in effect from time to time on the daily undrawn stated amount of each Facility LC, such fee to be payable in arrears on each Payment Date and the Termination Date (and, if applicable, thereafter on demand). The Company shall also pay to the LC Issuer for its own account (a) a fronting fee for each Facility LC at the time and in the amount set forth in the Fee Letter and (b) documentary and processing charges in connection with the issuance or Modification of and draws under Facility LCs in accordance with the LC Issuer's standard schedule for such charges as in effect from time to time. 3.5 Administration; Reimbursement by Banks. Upon receipt from the beneficiary of any Facility LC of any demand for payment under such Facility LC, the LC Issuer shall notify 19 the Agent and the Agent shall promptly notify the Company and each other Bank as to the amount to be paid by the LC Issuer as a result of such demand and the proposed payment date (the "LC Payment Date"). The responsibility of the LC Issuer to the Company and each Bank shall be only to determine that the documents (including each demand for payment) delivered under each Facility LC in connection with such presentment shall be in conformity in all material respects with such Facility LC. The LC Issuer shall endeavor to exercise the same care in the issuance and administration of the Facility LCs as it does with respect to letters of credit in which no participations are granted, it being understood that in the absence of any gross negligence or willful misconduct by the LC Issuer, each Bank shall be unconditionally and irrevocably liable without regard to the occurrence of any Default or any condition precedent whatsoever, to reimburse the LC Issuer on demand for (i) such Bank's Pro Rata Share of the amount of each payment made by the LC Issuer under each Facility LC to the extent such amount is not reimbursed by the Company pursuant to Section 3.6 below, plus (ii) interest on the foregoing amount to be reimbursed by such Bank, for each day from the date of the LC Issuer's demand for such Reimbursement (or, if such demand is made after 12:00 noon (New York time) on such date, from the next succeeding Business Day) to the date on which such Bank pays the amount to be reimbursed by it, at a rate of interest per annum equal to the Federal Funds Effective Rate for the first three days and, thereafter, at a rate of interest equal to the rate applicable to Floating Rate Advances. 3.6 Reimbursement by Company. The Company shall be irrevocably and unconditionally obligated to reimburse the LC Issuer on the applicable LC Payment Date for any amounts to be paid by the LC Issuer upon any drawing under any Facility LC, without presentment, demand, protest or other formalities of any kind; provided that neither the Company nor any Bank shall hereby be precluded from asserting any claim for direct (but not consequential) damages suffered by the Company or such Bank to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of the LC Issuer in determining whether a request presented under any Facility LC issued by it complied with the terms of such Facility LC or (ii) the LC Issuer's failure to pay under any Facility LC issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. All such amounts paid by the LC Issuer and remaining unpaid by the Company shall bear interest, payable on demand, for each day until paid at a rate per annum equal to (x) the rate applicable to Floating Rate Advances for such day if such day falls on or before the applicable LC Payment Date and (y) the sum of 1% plus the rate applicable to Floating Rate Advances for such day if such day falls after such LC Payment Date. The LC Issuer will pay to each Bank ratably in accordance with its Pro Rata Share all amounts received by it from the Company for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Facility LC issued by the LC Issuer, but only to the extent such Bank has made payment to the LC Issuer in respect of such Facility LC pursuant to Section 3.5. Subject to the terms and conditions of this Agreement (including the submission of a Borrowing Notice in compliance with Section 2.8 and the satisfaction of the applicable conditions precedent set forth in Article XI), the Company may request an Advance hereunder for the purpose of satisfying any Reimbursement Obligation. 3.7 Obligations Absolute. The Company's obligations under this Article III shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, 20 counterclaim or defense to payment which the Company may have or have had against the LC Issuer, any Bank or any beneficiary of a Facility LC. The Company further agrees with the LC Issuer and the Banks that the LC Issuer and the Banks shall not be responsible for, and the Company's Reimbursement Obligation in respect of any Facility LC shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Company, any of its affiliates, the beneficiary of any Facility LC or any financing institution or other party to whom any Facility LC may be transferred or any claims or defenses whatsoever of the Company or of any of its affiliates against the beneficiary of any Facility LC or any such transferee. The LC Issuer shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Facility LC. The Company agrees that any action taken or omitted by the LC Issuer or any Bank under or in connection with each Facility LC and the related drafts and documents, if done without gross negligence or willful misconduct, shall be binding upon the Company and shall not put the LC Issuer or any Bank under any liability to the Company. Nothing in this Section 3.7 is intended to limit the right of the Company to make a claim against the LC Issuer for damages as contemplated by the proviso to the first sentence of Section 3.6. 3.8 Actions of LC Issuer. The LC Issuer shall be entitled to rely, and shall be fully protected in relying, upon any Facility LC, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the LC Issuer. The LC Issuer shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first have received such advice or concurrence of the Majority Banks as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Notwithstanding any other provision of this Article III, the LC Issuer shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Majority Banks, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Banks and any future holders of a participation in any Facility LC. 3.9 Indemnification. The Company hereby agrees to indemnify and hold harmless each Bank, the LC Issuer and the Agent, and their respective directors, officers, agents and employees from and against any and all claims and damages, losses, liabilities, reasonable costs or expenses which such Bank, the LC Issuer or the Agent may incur (or which may be claimed against such Bank, the LC Issuer or the Agent by any Person whatsoever) by reason of or in connection with the issuance, execution and delivery or transfer of or payment or failure to pay under any Facility LC or any actual or proposed use of any Facility LC, including any claims, damages, losses, liabilities, costs or expenses which the LC Issuer may incur by reason of or in connection with (i) the failure of any other Bank to fulfill or comply with its obligations to the LC Issuer hereunder (but nothing herein contained shall affect any rights the Company may have against any defaulting Bank) or (ii) by reason of or on account of the LC Issuer issuing any 21 Facility LC which specifies that the term "Beneficiary" included therein includes any successor by operation of law of the named Beneficiary, but which Facility LC does not require that any drawing by any such successor Beneficiary be accompanied by a copy of a legal document, satisfactory to the LC Issuer, evidencing the appointment of such successor Beneficiary; provided that the Company shall not be required to indemnify any Bank, the LC Issuer or the Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of the LC Issuer in determining whether a request presented under any Facility LC complied with the terms of such Facility LC or (y) the LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. Nothing in this Section 3.9 is intended to limit the obligations of the Company under any other provision of this Agreement. 3.10 Banks' Indemnification. Each Bank shall, ratably in accordance with its Pro Rata Share, indemnify the LC Issuer, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Company) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct or the LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of the Facility LC) that such indemnitees may suffer or incur in connection with this Article III or any action taken or omitted by such indemnitees hereunder. 3.11 Rights as a Bank. In its capacity as a Bank, the LC Issuer shall have the same rights and obligations as any other Bank. ARTICLE IV CHANGE IN CIRCUMSTANCES 4.1 Yield Protection. (a) If any change in law or any governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof by any agency or authority having jurisdiction over any Bank or the LC Issuer, (i) subjects any Bank, the LC Issuer or any applicable Lending Installation to any increased tax, duty, charge or withholding on or from payments due from the Company (excluding taxation measured by or attributable to the overall net income of such Bank, the LC Issuer or such applicable Lending Installation, whether overall or in any geographic area), or changes the rate of taxation of payments to any Bank or the LC Issuer in respect of its Credit Extensions (including any participations in Facility LCs) or other amounts due it hereunder, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by any Bank, the LC Issuer or any applicable 22 Lending Installation (including any reserve costs under Regulation D with respect to Eurocurrency liabilities (as defined in Regulation D)), or (iii) imposes any other condition the result of which is to increase the cost to any Bank, the LC Issuer or any applicable Lending Installation of making, funding or maintaining Credit Extensions (including any participations in Facility LCs), or reduces any amount receivable by any Bank, the LC Issuer or any applicable Lending Installation in connection with Credit Extensions (including any participations in Facility LCs) or requires any Bank, the LC Issuer or any applicable Lending Installation to make any payment calculated by reference to its Outstanding Credit Exposure or interest received by it, by an amount deemed material by such Bank or the LC Issuer, or (iv) affects the amount of capital required or expected to be maintained by any Bank, the LC Issuer or any applicable Lending Installation or any corporation controlling any Bank or the LC Issuer and such Bank or the LC Issuer, as applicable, determines the amount of capital required is increased by or based upon the existence of this Agreement or its obligation to make Credit Extensions (including any participations in Facility LCs) hereunder or of commitments of this type, then, upon presentation by such Bank or the LC Issuer to the Company of a certificate (as referred to in the immediately succeeding sentence of this Section 4.1) setting forth the basis for such determination and the additional amounts reasonably determined by such Bank or the LC Issuer for the period of up to 90 days prior to the date on which such certificate is delivered to the Company and the Agent, to be sufficient to compensate such Bank or the LC Issuer, as applicable, in light of such circumstances, the Company shall within 30 days of such delivery of such certificate pay to the Agent for the account of such Bank or the LC Issuer, as applicable, the specified amounts set forth on such certificate. The affected Bank or the LC Issuer, as applicable, shall deliver to the Company and the Agent a certificate setting forth the basis of the claim and specifying in reasonable detail the calculation of such increased expense, which certificate shall be prima facie evidence as to such increase and such amounts. An affected Bank or the LC Issuer, as applicable, may deliver more than one certificate to the Company during the term of this Agreement. In making the determinations contemplated by the above-referenced certificate, any Bank and the LC Issuer may make such reasonable estimates, assumptions, allocations and the like that such Bank or the LC Issuer, as applicable, in good faith determines to be appropriate, and such Bank's or the LC Issuer's selection thereof in accordance with this Section 4.1 shall be conclusive and binding on the Company, absent manifest error. (b)Neither the LC Issuer nor any Bank shall be entitled to demand compensation or be compensated hereunder to the extent that such compensation relates to any period of time more than 90 days prior to the date upon which such Bank or the LC Issuer, as applicable, first notified the Company of the occurrence of the event entitling such Bank or the LC Issuer, as applicable, to such compensation (unless, and to the extent, that any such compensation so demanded shall relate to the retroactive application of any event so notified to the Company). 4.2 Replacement Bank 23 (a) If any Bank shall make a demand for payment under Section 4.1, then within 30 days after such demand, the Company may, with the approval of the Agent (which approval shall not be unreasonably withheld) and provided that no Default or Event of Default shall then have occurred and be continuing, demand that such Bank assign to one or more financial institutions designated by the Company and approved by the Agent all (but not less than all) of such Bank's Commitment and Outstanding Credit Exposure within the period ending on the later of such 30th day and the last day of the longest of the then current Interest Periods or maturity dates for such Outstanding Credit Exposure. Any such assignment shall be consummated on terms satisfactory to the assigning Bank; provided that such Bank's consent to such assignment shall not be unreasonably withheld. (b) If the Company shall elect to replace a Bank pursuant to clause (a) above, the Company shall prepay the Outstanding Credit Exposure of such Bank, and the financial institution or institutions selected by the Company shall replace such Bank as a Bank hereunder pursuant to an instrument satisfactory to the Company, the Agent and the Bank being replaced by making Credit Extensions to the Company in the amount of the Outstanding Credit Exposure of such assigning Bank and assuming all the same rights and responsibilities hereunder as such assigning Bank and having the same Commitment as such assigning Bank. 4.3 Availability of Eurodollar Rate Loans. If (a) any Bank determines that maintenance of a Eurodollar Rate Loan at a suitable Lending Installation would violate any applicable law, rule, regulation or directive, whether or not having the force of law, or (b) the Majority Banks determine that (i) deposits of a type and maturity appropriate to match fund Eurodollar Rate Loans are not available or (ii) the Base Eurodollar Rate does not accurately reflect the cost of making or maintaining a Eurodollar Rate Loan, then the Agent shall suspend the availability of Eurodollar Rate Loans and, in the case of clause (a), require any outstanding Eurodollar Rate Loans to be converted to Floating Rate Loans on such date as is required by the applicable law, rule, regulation or directive. 4.4 Funding Indemnification. If any payment of a Eurodollar Rate Loan occurs on a date which is not the last day of an applicable Interest Period, whether because of prepayment or otherwise, or a Eurodollar Rate Loan is not made on the date specified by the Company for any reason other than default by the Banks, the Company will indemnify each Bank for any loss or cost (but not lost profits) incurred by it resulting therefrom, including any loss or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Rate Loan; provided that the Company shall not be liable for any of the foregoing to the extent they arise because of acceleration by any Bank. 24 4.5 Taxes. (a) All payments by the Company to or for the account of any Bank, the LC Issuer or the Agent hereunder or under any Bond or Facility LC Application shall be made free and clear of and without deduction for any and all Taxes. If the Company shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Bank, the LC Issuer or the Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.5) such Bank, the LC Issuer or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Company shall make such deductions, (iii) the Company shall pay the full amount deducted to the relevant authority in accordance with applicable law and (iv) the Company shall furnish to the Agent the original copy of a receipt evidencing payment thereof within 30 days after such payment is made. (b) In addition, the Company hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under any Bond or Facility LC Application or from the execution or delivery of, or otherwise with respect to, this Agreement or any Bond or Facility LC Application ("Other Taxes"). (c) The Company hereby agrees to indemnify the Agent, the LC Issuer and each Bank for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed on amounts payable under this Section 4.5) paid by the Agent, the LC Issuer or such Bank and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Payments due under this indemnification shall be made within 30 days of the date the Agent, the LC Issuer or such Bank makes demand therefor pursuant to Section 4.6. (d) Each Bank that is not incorporated under the laws of the United States of America or a state thereof (each a "Non-U.S. Bank") agrees that it will, not more than ten Business Days after the date hereof, or, if later, not more than ten Business Days after becoming a Bank hereunder, (i) deliver to each of the Company and the Agent two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI, certifying in either case that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) deliver to each of the Company and the Agent a United States Internal Revenue Form W-8 or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Bank further undertakes to deliver to each of the Company and the Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Company or the Agent. All forms or amendments described in the preceding sentence shall certify that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form or 25 amendment with respect to it and such Bank advises the Company and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. (e) For any period during which a Non-U.S. Bank has failed to provide the Company with an appropriate form pursuant to clause (d), above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Bank shall not be entitled to indemnification under this Section 4.5 with respect to Taxes imposed by the United States; provided that, should a Non-U.S. Bank which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (d) above, the Company shall take such steps as such Non-U.S. Bank shall reasonably request to assist such Non-U.S. Bank to recover such Taxes. (f) Any Bank that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Bond pursuant to the law of any relevant jurisdiction or any treaty shall deliver to the Company (with a copy to the Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. (g) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered or properly completed, because such Bank failed to notify the Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Agent under this clause (g), together with all costs and expenses related thereto (including attorneys fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent). The obligations of the Banks under this clause (g) shall survive the payment of the Obligations and termination of this Agreement. 4.6 Bank Certificates, Survival of Indemnity. To the extent reasonably possible, each Bank shall designate an alternate Lending Installation with respect to Eurodollar Rate Loans to reduce any liability of the Company to such Bank under Section 4.1 or to avoid the unavailability of Eurodollar Rate Loan under Section 4.3, so long as such designation is not disadvantageous to such Bank. A certificate of such Bank as to the amount due under Section 4.1, 4.4 or 4.5 shall be final, conclusive and binding on the Company in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Rate Loan shall be calculated as though each Bank funded each Eurodollar Rate Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Base Eurodollar Rate applicable to such Loan whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in any certificate shall be payable on demand 26 after receipt by the Company of such certificate. The obligations of the Company under Sections 4.1, 4.4 and 4.5 shall survive payment of the Obligations and termination of this Agreement; provided that no Bank shall be entitled to compensation to the extent that such compensation relates to any period of time more than 90 days after the termination of this Agreement. ARTICLE V REPRESENTATIONS AND WARRANTIES The Company hereby represents and warrants that: 5.1 Incorporation and Good Standing. The Company is duly incorporated, validly existing and in good standing under the laws of the State of Michigan. 5.2 Corporate Power and Authority: No Conflicts. The execution, delivery and performance by the Company of the Credit Documents are within the Company's corporate powers, have been duly authorized by all necessary corporate action and do not (i) violate the Company's charter, bylaws or any applicable law, or (ii) breach or result in an event of default under any indenture or material agreement, and do not result in or require the creation of any Lien upon or with respect to any of its properties (except the Lien of the Indenture securing the Bonds and any Lien in favor of the Agent on the Facility LC Collateral Account or any funds therein). 5.3 Governmental Approvals. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company of any Credit Document, except for the authorization to issue, sell or guarantee secured and/or unsecured short-term debt granted by the Federal Energy Regulatory Commission, which authorization has been obtained and is in full force and effect. 5.4 Legally Enforceable Agreements. Each Credit Document constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms, subject to (a) the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (b) the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law). 5.5 Financial Statements. The audited balance sheet of the Company and its Consolidated Subsidiaries as at December 31, 2004, and the related statements of income and cash flows of the Company and its Consolidated Subsidiaries for the fiscal year then ended, as set forth in the Company's Annual Report on Form 10-K (copies of which have been furnished to each Bank), and the unaudited balance sheet of the Company and its Consolidated Subsidiaries as at March 31, 2005 (copies of which have been furnished to each Bank) 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 GAAP, and since December 31, 2004, there has been no Material Adverse Change. 27 5.6 Litigation. Except (i) to the extent described in the Company's Annual Report on Form 10-K for the year ended December 31, 2004 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, in each case as filed with the SEC, and (ii) such other similar actions, suits and proceedings predicated on the occurrence of the same events giving rise to any actions, suits and proceedings described in the Reports referred to in the foregoing clause (i) (all matters described in clauses (i) and (ii) above, the "Disclosed Matters"), there is no pending or threatened action, suit, investigation or proceeding against the Company or any of its Consolidated Subsidiaries before any court, governmental agency or arbitrator, which, if adversely determined, might reasonably be expected to result in a Material Adverse Change. As of the Initial Borrowing Date, (a) there is no litigation challenging the validity or the enforceability of any of the Credit Documents and (b) there have been no adverse developments with respect to the Disclosed Matters that have resulted, or could reasonably be expected to result, in a Material Adverse Change. 5.7 Margin Stock. The Company is not engaged in the business of extending credit for the purpose of buying or carrying margin stock (within the meaning of Regulation U), and no proceeds of any Credit Extension 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. 5.8 ERISA. No Plan Termination Event has occurred or is reasonably expected to occur with respect to any Plan. Neither the Company nor any ERISA Affiliate is an employer under or has any liability with respect to a Multiemployer Plan. 5.9 Insurance. All insurance required by Section 6.2 is in full force and effect. 5.10 Taxes. The Company and its Subsidiaries have filed all tax returns (Federal, state and local) required to be filed and paid all taxes shown thereon to be due, including interest and penalties, or, to the extent the Company or any of its Subsidiaries is contesting in good faith an assertion of liability based on such returns, has provided adequate reserves for payment thereof in accordance with GAAP. 5.11 Investment Company Act. The Company is not an investment company (within the meaning of the Investment Company Act of 1940, as amended). 5.12 Public Utility Holding Company Act. The Company is exempt from the registration requirements of the Public Utility Holding Company Act of 1935, as amended, 15 USC 79, et seq. 5.13 Bonds. The issuance to the Agent of Bonds as evidence of the Obligations (i) will not violate any provision of the Indenture or any other agreement or instrument, or any law or regulation, or judicial or regulatory order, judgment or decree, to which the Company or any of its Subsidiaries is a party or by which any of the foregoing is bound and (ii) will, prior to the FMB Release Date, provide the Banks, as beneficial holders of the Bonds through the Agent, the benefit of the Lien of the Indenture equally and ratably with the holders of other First Mortgage Bonds. 28 5.14 Disclosure. The Company has not withheld any fact from the Agent or the Banks in regard to the occurrence of a Material Adverse Change; and all financial information delivered by the Company to the Agent and the Banks on and after the date of this Agreement is true and correct in all material respects as at the dates and for the periods indicated therein. 5.15 OFAC. Neither the Company nor any Subsidiary or Affiliate of the Company 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 or as otherwise published from time. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Obligations shall remain unpaid, any Facility LC shall remain outstanding or any Bank shall have any Commitment under this Agreement, the Company shall: 6.1 Payment of Taxes, Etc. Pay and discharge, before the same shall become delinquent, (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its property, and (b) all lawful claims which, if unpaid, might by law become a Lien upon its property; provided that the Company shall not be required to pay or discharge any such tax, assessment, charge or claim (i) which is being contested by it in good faith and by proper procedures or (ii) the non-payment of which will not result in a Material Adverse Change. 6.2 Maintenance of Insurance. Maintain insurance in such amounts and covering such risks with respect to its business and properties as is usually carried by companies engaged in similar businesses and owning similar properties, either with reputable insurance companies or, in whole or in part, by establishing reserves or one or more insurance funds, either alone or with other corporations or associations. 6.3 Preservation of Corporate Existence, Etc. Preserve and maintain its corporate existence, rights and franchises, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary in view of its business and operations or the ownership of its properties; provided that the Company shall not be required to preserve any such right or franchise or to remain so qualified unless the failure to do so would reasonably be expected to result in a Material Adverse Change. 6.4 Compliance with Laws, Etc. Comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, the non-compliance with which would reasonably be expected to result in a Material Adverse Change. 6.5 Visitation Rights. Subject to any necessary approval from the Nuclear Regulatory Commission, at any reasonable time and from time to time, permit the Agent, any of the Banks or any agents or representatives thereof to examine and make copies of and abstracts from its records and books of account, visit its properties and discuss its affairs, finances and accounts with any of its officers. 29 6.6 Keeping of Books. Keep, and cause each Consolidated Subsidiary to keep, adequate records and books of account, in which full and correct entries shall be made of all of its financial transactions and its assets and business so as to permit the Company and its Consolidated Subsidiaries to present financial statements in accordance with GAAP. 6.7 Reporting Requirements. Furnish to the Agent, with sufficient copies for each of the Banks: (a) as soon as practicable and in any event within five Business Days after becoming aware of the occurrence of any Default or Event of Default, a statement of a Designated Officer as to the nature thereof, and as soon as practicable and in any event within five Business Days thereafter, a statement of a Designated Officer as to the action which the Company has taken, is taking or proposes to take with respect thereto; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Company, a consolidated balance sheet of the Company and its Consolidated Subsidiaries as at the end of such quarter, and the related consolidated statements of income, cash flows and common stockholder's equity of the Company and its Consolidated Subsidiaries as at the end of and for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding fiscal year, or statements providing substantially similar information (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 the absence of footnotes and to year-end audit adjustments) by a Designated Officer as having been prepared in accordance with GAAP, together with (i) a certificate of a Designated Officer (which certificate shall also accompany the financial statements delivered pursuant to clause (c) below) stating that such officer has no knowledge (having made due inquiry with respect thereto) that a 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 actions which the Company has taken, is taking or proposes to take with respect thereto, and (ii) a certificate of a Designated Officer, in substantially the form of Exhibit C hereto, setting forth the Company's computation of the financial ratios specified in Sections 8.1 and 8.2 as of the end of the immediately preceding fiscal quarter or year, as the case may be, of the Company; (c) as soon as available and in any event within 120 days after the end of each fiscal year of the Company, a copy of the Company's Annual Report on Form 10-K (or any successor form) for such year, including therein the consolidated balance sheet of the Company and its Consolidated Subsidiaries as at the end of such year and the consolidated statements of income, cash flows and common stockholder's equity of the Company and its Consolidated Subsidiaries as at the end of and for such year, or statements providing substantially similar information, in each case certified by independent public accountants of recognized national standing selected by the Company (and not objected to by the Majority Banks), together with a certificate of such accounting firm addressed to the Banks stating that, in the course of its examination of the consolidated financial statements of the Company and its Consolidated Subsidiaries, which examination was conducted by such accounting firm in accordance with GAAP, (1) such 30 accounting firm has obtained no knowledge that an Event of Default, insofar as such Event of Default related to accounting or financial matters, has occurred and is continuing, or if, in the opinion of such accounting firm, such an Event of Default has occurred and is continuing, a statement as to the nature thereof, and (2) such accounting firm has examined a certificate prepared by the Company setting forth the computations made by the Company in determining, as of the end of such fiscal year, the ratios specified in Sections 8.1 and 8.2, which certificate shall be attached to the certificate of such accounting firm, and such accounting firm confirms that such computations accurately reflect such ratios; (d) promptly after the sending or filing thereof, copies of all proxy statements which the Company sends to its stockholders, copies of all regular, periodic and special reports (other than those which relate solely to employee benefit plans) which the Company files with the SEC and notice of the sending or filing of (and, upon the request of the Agent or any Bank, a copy of) any final prospectus filed with the SEC; (e) as soon as possible and in any event (i) within 30 days after the Company or any ERISA Affiliate knows or has reason to know that any Plan Termination Event described in clause (a) of the definition of Plan Termination Event with respect to any Plan has occurred and (ii) within ten days after the Company or any ERISA Affiliate knows or has reason to know that any other Plan Termination Event with respect to any Plan has occurred, a statement of the Chief Financial Officer of the Company describing such Plan Termination Event and the action, if any, which the Company or such ERISA Affiliate, as the case may be, proposes to take with respect thereto; (f) promptly upon becoming aware thereof, notice of any upgrading or downgrading of the rating of the Senior Debt by Moody's or S&P; (g) as soon as possible and in any event within five days after the occurrence of any default under any agreement to which the Company or any of its Subsidiaries is a party, which default would reasonably be expected to result in a Material Adverse Change, and which is continuing on the date of such certificate, a certificate of the president or chief financial officer of the Company setting forth the details of such default and the action which the Company or any such Subsidiary proposes to take with respect thereto; and (h) promptly, such other information respecting the business, properties or financial condition of the Company as the Agent or any Bank through the Agent may from time to time reasonably request. 6.8 Use of Proceeds. The Company will use the proceeds of the Credit Extensions for general corporate purposes, working capital and refinancing the Debt under the Prior Agreement. The Company will not, nor will it permit any Subsidiary to, use any of the proceeds of the Credit Extensions to purchase or carry any "margin stock" (as defined in Regulation U). 6.9 Maintenance of Properties, Etc. The Company shall, and shall cause each of its Subsidiaries to, maintain in all material respects all of its respective owned and leased Property in good and safe condition and repair to the same degree as other companies engaged in similar 31 businesses and owning similar properties, and not permit, commit or suffer any waste or abandonment of any such Property, and from time to time make or cause to be made all material repairs, renewals and replacements thereof, including any capital improvements which may be required; provided that such Property may be altered or renovated in the ordinary course of the Company's or its Subsidiaries' business; and provided, further, that the foregoing shall not restrict the sale of any asset of the Company or any Subsidiary to the extent not prohibited by Section 7.2. 6.10 Bonds. Beginning on the Initial Borrowing Date and continuing until the earlier of (i) the FMB Release Date and (ii) the date on which the Commitments and Facility LCs have terminated and all Obligations have been paid in full, cause the face amount of all Bonds to at all times be equal to or greater than the greater of (a) the Aggregate Commitment and (b) the Aggregate Outstanding Credit Exposure. ARTICLE VII NEGATIVE COVENANTS So long as any Obligations shall remain unpaid, any Facility LC shall remain outstanding or any Bank shall have any Commitment under this Agreement, the Company shall not: 7.1 Liens. Create, incur, assume or suffer to exist any Lien upon or with respect to any of its properties, now owned or hereafter acquired, except: (a) Liens created pursuant to the Indenture securing the First Mortgage Bonds and any Lien in favor of the Agent on the Facility LC Collateral Account or any funds therein; (b) Liens securing pollution control bonds, or bonds issued to refund or refinance pollution control bonds (including Liens securing obligations (contingent or otherwise) of the Company under letter of credit agreements or other reimbursement or similar credit enhancement agreements with respect to pollution control bonds); provided that the aggregate face amount of any such bonds so issued shall not exceed the aggregate face amount of such pollution control bonds, as the case may be, so refunded or refinanced; (c) Liens in (and only in) assets acquired to secure Debt incurred to finance the acquisition of such assets; (d) Statutory and common law banker's Liens on bank deposits; (e) Liens in respect of accounts receivable sold, transferred or assigned by the Company; (f) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; 32 (g) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business for sums not overdue or being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books; (h) Liens incurred in the ordinary course of business in connection with workers' compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; (i) Judgment Liens in existence less than 30 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered (subject to a customary deductible) by insurance; (j) Zoning restrictions, easements, licenses, covenants, reservations, utility company rights, restrictions on the use of real property or minor irregularities of title incident thereto which do not in the aggregate materially detract from the value of the property or assets of the Company or materially impair the operation of its business; (k) Liens arising in connection with the financing of the Company's fuel resources, including nuclear fuel; (l) Liens arising pursuant to M.C.L. 324.20138; provided that the aggregate amount of all obligations secured by such Liens (excluding any such Liens of which the Company has no knowledge or which are permitted by clause (f) above) shall not exceed $20,000,000; (m) Liens arising in connection with Securitized Bonds; (n) Liens on natural gas, oil and mineral, or on stock in trade, material or supplies manufactured or acquired for the purpose of sale and or resale in the usual course of business or consumable in the operation of any of the properties of the Company; provided that such Liens secure obligations not exceeding $500,000,000 in aggregate principal amount; and (o) Other Liens securing obligations in an aggregate amount not in excess of $150,000,000. 7.2 Sale of Assets. Sell, lease, assign, transfer or otherwise dispose of 25% or more of its assets calculated with reference to total assets as reflected on the Company's consolidated balance sheet as at December 31, 2004, during the term of this Agreement. 7.3 Mergers, Etc. Merge with or into or consolidate with or into any other Person, except that the Company may merge with any other Person; provided that, in each case, immediately after giving effect thereto, (a) no event shall occur and be continuing which constitutes a Default or Event of Default, (b) the Company is the surviving corporation, (c) the Company 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 33 under this Agreement on the date of such transaction and (d) the Company's Net Worth shall be equal to or greater than its Net Worth immediately prior to such merger. 7.4 Compliance with ERISA. Permit to exist any occurrence of any Reportable Event, or any other event or condition which presents a material (in the reasonable opinion of the Majority Banks) risk of a termination by the PBGC of any Plan, which termination will result in any material (in the reasonable opinion of the Majority Banks) liability of the Company or such ERISA Affiliate to the PBGC. 7.5 Change in Nature of Business. Make any material change in the nature of its business as carried on as of the date hereof. 7.6 Restricted Payments. (a) Declare or pay any dividends or make any other distributions on its capital stock (other than dividends payable solely in such capital stock) or redeem any such capital stock; (b) purchase or otherwise acquire or retire, or permit any Subsidiary to purchase or otherwise acquire or retire, any of the Company's capital stock or (c) make, or permit any Subsidiary to make, any loans or advances to CMS or any Subsidiary thereof (other than the Company or any Subsidiary thereof); provided that, so long as no Default or Event of Default exists, the Company may pay dividends in an aggregate amount not to exceed $300,000,000 during any calendar year. 7.7 Off-Balance Sheet Liabilities. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, Off-Balance Sheet Liabilities (exclusive of obligations arising in connection with the Purchase Agreement among the Company, Consumers Receivables Funding II, LLC, Falcon Asset Securitization Corporation and JPMorgan, dated as of May 22, 2003, as amended, restated or otherwise modified from time to time and any similar agreement entered into in replacement thereof) in the aggregate in excess of $250,000,000 at any time. 7.8 Transactions with Affiliates. Enter into, or permit any Subsidiary to enter into, any transaction with any of its Affiliates (other than the Company or any Subsidiary) unless such transaction is on terms no less favorable to the Company or such Subsidiary than if the transaction had been negotiated in good faith on an arm's-length basis with a non-Affiliate; provided that any transaction permitted under Section 7.6 shall be permitted hereunder. ARTICLE VIII FINANCIAL COVENANTS So long as any of the Obligations shall remain unpaid, any Facility LC shall remain outstanding or any Bank shall have any Commitment under this Agreement, the Company shall: 8.1 Debt to Capital Ratio. At all times, maintain a ratio of Total Consolidated Debt to Total Consolidated Capitalization of not greater than 0.70 to 1.0. 8.2 Interest Coverage Ratio. Not permit the ratio, determined as of the end of each of its fiscal quarters for the then most-recently ended four fiscal quarters, of (i) Consolidated EBIT to (ii) Consolidated Interest Expense to be less than 2.0 to 1.0. 34 ARTICLE IX EVENTS OF DEFAULT 9.1 Events of Default. The occurrence of any of the following events shall constitute an "Event of Default": (a) The Company shall fail to pay (i) any principal of any Advance when due and payable, or (ii) any Reimbursement Obligation within one day after the same becomes due, or (iii) any interest on any Advance or any fee or other Obligation payable hereunder within five days after such interest or fee or other Obligation becomes due and payable; (b) Any representation or warranty made by the Company (or any of its officers) in this Agreement or any other Credit Document or in any certificate, document, report, financial or other written statement furnished at any time pursuant to any Credit Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; (c) The Company shall fail to perform or observe any term, covenant or agreement contained in Section 6.10, Article VII or Article VIII; or the Company shall fail to perform or observe any other term, covenant or agreement on its part to be performed or observed in this Agreement or in any other Credit Document and such failure shall continue for 30 consecutive days after the earlier of (i) a Designated Officer obtaining knowledge of such breach and (ii) written notice thereof by means of facsimile, regular mail or written notice delivered in person (or telephonic notice thereof confirmed in writing) having been given to the Company by the Agent or the Majority Banks; (d) The Company shall: (i) fail to pay any Debt (other than the payment obligations described in clause (a) above) in excess of $50,000,000, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the instrument or agreement relating to such Debt; or (ii) fail to perform or observe any term, covenant or condition on its part to be performed or observed under any agreement or instrument relating to any such Debt, when required to be performed or observed, if the effect of such failure to perform or observe is to accelerate, or to permit the acceleration of, the maturity of such Debt, unless the obligee under or holder of such Debt shall have waived in writing such circumstance, or such circumstance has been cured, so that such circumstance is no longer continuing; or (iii) any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), in each case in accordance with the terms of such agreement or instrument, prior to the stated maturity thereof; or (iv) generally not, or shall admit in writing its inability to, pay its debts as such debts become due; (e) The Company: (i) shall make an assignment for the benefit of creditors, or petition or apply to any tribunal for the appointment of a custodian, receiver or trustee for it or a substantial part of its assets; or (ii) shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or (iii) shall have had any such petition or application filed or any such proceeding shall have been commenced, against it, in which an 35 adjudication or appointment is made or order for relief is entered, or which petition, application or proceeding remains undismissed for a period of 30 consecutive days or more; or (iv) by any act or omission shall indicate its consent to, approval of or acquiescence in any such petition, application or proceeding or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its property; or (v) shall suffer any such custodianship, receivership or trusteeship to continue undischarged for a period of 30 days or more; or (vi) shall take any corporate action to authorize any of the actions set forth above in this clause (e); (f) One or more judgments, decrees or orders for the payment of money in excess of $50,000,000 in the aggregate shall be rendered against the Company and either (i) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order or (ii) there shall be any period of more than 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; (g) Any Plan Termination Event with respect to a Plan shall have occurred, and 30 days after notice thereof shall have been given to the Company by the Agent, (i) such Plan Termination Event (if correctable) shall not have been corrected and (ii) the then present value of such Plan's vested benefits exceeds the then current value of the assets accumulated in such Plan by more than the amount of $25,000,000 (or in the case of a Plan Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(A)(2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount). (h) Prior to the FMB Release Date, (i) any Bond shall cease to be in full force and effect (except for Bonds surrendered by the Agent pursuant to Section 2.5(b); or (ii) the Company shall deny that it has any liability or obligation under any Bond or purport to revoke, terminate, rescind or redeem any Bond (other than in accordance with the terms of the Bonds and the Indenture). 9.2 Remedies. (a) If any Event of Default shall occur and be continuing, the Agent shall upon the request, or may with the consent, of the Majority Banks, by notice to the Company, (i) declare the Commitments and the obligation and power of the LC Issuer to issue Facility LCs to be terminated or suspended, whereupon the same shall forthwith terminate, and/or (ii) declare the Obligations to be forthwith due and payable, whereupon the Aggregate Outstanding Credit Exposure and all other Obligations shall become and be forthwith due and payable, and/or (iii) in addition to the continuing right to demand payment of all amounts payable under this Agreement, make demand on the Company to pay, and the Company will, forthwith upon such demand and without any further notice or act, pay to the Agent the Collateral Shortfall Amount (as defined below), which funds shall be deposited in the Facility LC Collateral Account, in each case without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Company; provided that in the case of an Event of Default referred to in Section 9.1(e), the Commitments shall automatically terminate, the obligation and power of the LC Issuer to issue Facility LCs shall automatically terminate and the Obligations shall automatically become due and payable without notice, presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Company, and the 36 Company will be and become thereby unconditionally obligated, without any further notice, act or demand, to pay to the Agent an amount in immediately available funds, which funds shall be held in the Facility LC Collateral Account, equal to the difference of (x) the amount of LC Obligations at such time, less (y) the amount on deposit in the Facility LC 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 (such difference, the "Collateral Shortfall Amount"). (b) If at any time while any Event of Default is continuing, the Agent determines that the Collateral Shortfall Amount at such time is greater than zero, the Agent may make demand on the Company to pay, and the Company will, forthwith upon such demand and without any further notice or act, pay to the Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. (c) The Agent may, at any time or from time to time after funds are deposited in the Facility LC Collateral Account, apply such funds to the payment of the Obligations and any other amounts as shall from time to time have become due and payable by the Company to the Banks or the LC Issuer under the Credit Documents. The Company hereby pledges, assigns and grants to the Agent, on behalf of and for the ratable benefit of the Banks and the LC Issuer, a security interest in all of the Company's right, title and interest in and to all funds which may from time to time be on deposit in the Facility LC Collateral Account to secure the prompt and complete payment and performance of the Obligations. The Agent will invest any funds on deposit from time to time in the Facility LC Collateral Account in certificates of deposit of JPMorgan having a maturity not exceeding 30 days. (d) At any time while any Event of Default is continuing, neither the Company nor any Person claiming on behalf of or through the Company shall have any right to withdraw any of the funds held in the Facility LC Collateral Account. After all of the Obligations have been indefeasibly paid in full, all Facility LCs have expired or been terminated and the Aggregate Commitment has been terminated, any funds remaining in the Facility LC Collateral Account shall be returned by the Agent to the Company or paid to whomever may be legally entitled thereto at such time. ARTICLE X WAIVERS, AMENDMENTS AND REMEDIES 10.1 Amendments. Subject to the provisions of this Article X, the Majority Banks (or the Agent with the consent in writing of the Majority Banks) and the Company may enter into written agreements supplemental hereto for the purpose of adding or modifying any provisions to the Credit Documents or changing in any manner the rights of the Banks or the Company hereunder or waiving any Event of Default hereunder; provided that no such supplemental agreement shall, without the consent of all of the Banks: (a) Extend the maturity of any Loan or reduce the principal amount thereof, or extend the expiry date of any Facility LC to a date after the scheduled Termination Date, or reduce the rate or extend the time of payment of interest thereon or fees thereon or Reimbursement Obligations related thereto. 37 (b) Modify the percentage specified in the definition of Majority Banks. (c) Extend the Termination Date or increase the amount of the Commitment of any Bank hereunder or the commitment to issue Facility LCs, or permit the Company to assign its rights under this Agreement. (d) Amend Section 6.10, this Section 10.1 or Section 12.11. (e) Make any change in an express right in this Agreement of a single Bank to give its consent, make a request or give a notice. (f) Authorize the Agent to vote in favor of the release of all or substantially all of the collateral securing the Bonds. No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent, and no amendment of any provision relating to the LC Issuer shall be effective without the written consent of the LC Issuer. 10.2 Preservation of Rights. No delay or omission of the Banks, the LC Issuer or the Agent to exercise any right under the Credit Documents shall impair such right or be construed to be a waiver of any Default or Event of Default or an acquiescence therein, and the making of a Credit Extension notwithstanding the existence of a Default or Event of Default or the inability of the Company to satisfy the conditions precedent to such Credit Extension shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Credit Documents whatsoever shall be valid unless in writing signed by the Banks required pursuant to Section 10.1, and then only to the extent in such writing specifically set forth. All remedies contained in the Credit Documents or by law afforded shall be cumulative and all shall be available to the Agent, the LC Issuer and the Banks until the Obligations have been paid in full. ARTICLE XI CONDITIONS PRECEDENT 11.1 Initial Credit Extension. The Banks shall not be required to make the initial Credit Extension hereunder unless the Company has furnished to the Agent with sufficient copies for the Banks: (a) Counterparts of this Agreement executed by the Company and the Banks. (b) Copies of the Restated Articles of Incorporation of the Company, together with all amendments, certified by the Secretary or an Assistant Secretary of the Company, and a certificate of good standing, certified by the appropriate governmental officer in its jurisdiction of incorporation. 38 (c) Copies, certified by the Secretary or an Assistant Secretary of the Company, of its bylaws and of its Board of Directors' resolutions (and resolutions of other bodies, if any are deemed necessary by counsel for any Bank) authorizing the execution of the Credit Documents. (d) An incumbency certificate, executed by the Secretary or an Assistant Secretary of the Company, which shall identify by name and title and bear the original or facsimile signature of the officers of the Company authorized to sign the Credit Documents and the officers or other employees authorized to make borrowings hereunder, upon which certificate the Banks shall be entitled to rely until informed of any change in writing by the Company. (e) A certificate, signed by a Designated Officer of the Company, stating that on the date hereof no Default or Event of Default has occurred and is continuing. (f) Evidence satisfactory to the Agent of the issuance of the Bonds in the form set forth in the Supplemental Indenture and in an aggregate principal amount of $500,000,000 pursuant to the Bond Delivery Agreement. (g) Favorable opinions of: (i) Robert S. Shrosbree, Esq., Deputy General Counsel of CMS, as to the matters set forth in Exhibit B-1 and as to such other matters as the Agent may reasonably request; and (ii) Miller, Canfield, Paddock and Stone, P.L.C., as to the matters set forth in Exhibit B-2 and as to such other matters as the Agent may reasonably request. Such opinions shall be addressed to the Agent and the Banks and shall be satisfactory in form and substance to the Agent. (h) Evidence satisfactory to the Agent that the Prior Agreement shall have been or shall simultaneously on the Initial Borrowing Date be terminated (except for those provisions that expressly survive the termination thereof) and all loans outstanding and other amounts owed to the lenders or agents thereunder (other than contingent obligations with respect to Existing Facility LCs) shall have been, or shall simultaneously with the initial Credit Extension hereunder be, paid in full. (i) Evidence, in form and substance satisfactory to the Agent, that the Company has obtained all governmental approvals, if any, necessary for it to enter into the Credit Documents. (j) Such other documents as any Bank or its counsel may have reasonably requested. It shall be a further condition precedent to the making of the initial Credit Extension hereunder that the Company shall have paid (i) to the Agent for the account of the Banks the fees required to be paid on the Initial Borrowing Date and (ii) to the Agent and each Arranger the fees required to be paid to them pursuant to the Fee Letter. 11.2 Each Credit Extension. The Banks shall not be required to make any Credit Extension if on the applicable Borrowing Date, (i) any Default or Event of Default exists, (ii) any representation or warranty contained in Article V is not true and correct as of such Borrowing Date, (iii) prior to the FMB Release Date, after giving effect to such Credit Extension the Aggregate Outstanding Credit Exposure would exceed the face amount of all Bonds or (iv) all legal matters incident to the making of such Credit Extension are not satisfactory to the Banks 39 and their counsel; provided that, on any date following the Initial Borrowing Date on which the ratings of the Senior Debt from Moody's and S&P are Baa2 or higher and BBB or higher, respectively, the Company shall not be required to make the representation and warranty (x) regarding no Material Adverse Change set forth in Section 5.5 or (y) set forth in the first sentence of Section 5.6. Each Borrowing Notice and each request for issuance of a Facility LC shall constitute a representation and warranty by the Company that the conditions contained in clauses (i), (ii) and (iii) above will be satisfied on the relevant Borrowing Date. For the avoidance of doubt, the conversion or continuation of an Advance shall not be considered the making of a Credit Extension. ARTICLE XII GENERAL PROVISIONS 12.1 Successors and Assigns. (a) The terms and provisions of the Credit Documents shall be binding upon and inure to the benefit of the Company and the Banks and their respective successors and assigns, except that the Company shall not have the right to assign its rights under the Credit Documents. Any Bank may sell participations in all or a portion of its rights and obligations under this Agreement pursuant to clause (b) below and any Bank may assign all or any part of its rights and obligations under this Agreement pursuant to clause (c) below. (b) Any Bank may sell participations to one or more banks or other entities (each a "Participant") in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and its Outstanding Credit Exposure); provided that (i) such Bank's obligations under this Agreement (including its Commitment to the Company hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of the Outstanding Credit Exposure of such Bank for all purposes of this Agreement and (iv) the Company shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Each Bank shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Credit Documents other than any amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest which would require consent of all of the Banks pursuant to the terms of Section 10.1 or of any other Credit Document. The Company agrees that each Participant shall be deemed to have the right of setoff provided in Section 12.10 in respect of its participating interest in amounts owing under the Credit Documents to the same extent as if the amount of its participating interest were owing directly to it as a Bank under the Credit Documents; provided that each Bank shall retain the right of setoff provided in Section 12.10 with respect to the amount of participating interests sold to each Participant. The Banks agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 12.10, agrees to share with each Bank, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 12.10 as if each Participant were a Bank. The Company further agrees that each Participant shall be entitled to the benefits of Sections 4.1, 4.3, 4.4 and 4.5 to the same extent as if it were a Bank and had acquired its interest by assignment pursuant to Section 12.1(c); provided that (i) a Participant shall not be entitled to receive any greater payment under Section 4.1, 4.3, 4.4 or 4.5 than the Bank that sold the participating interest to such Participant would have received had it retained 40 such interest for its own account, unless the sale of such interest to such Participant is made with the prior written consent of the Company, and (ii) any Participant not incorporated under the laws of the United States of America or any State thereof agrees to comply with the provisions of Section 4.5 to the same extent as if it were a Bank. (c) Any Bank may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more financial institutions or other Persons all or any part of its rights and obligations under this Agreement; provided that (i) unless such assignment is to another Bank, an affiliate of such assigning Bank or any direct or indirect contractual counterparty in any swap agreement relating to the Loans to the extent required in connection with the settlement of such Bank's obligations pursuant thereto, such Bank has received the Agent's and, so long as no Event of Default exists, the Company's prior written consent to such assignment, which consent shall not be unreasonably withheld or delayed, and (ii) the minimum principal amount of any such assignment (other than assignments to a Federal Reserve Bank, to another Bank, to an affiliate of such assigning Bank or to any direct or indirect contractual counterparty in any swap agreement relating to the Loans to the extent required in connection with the settlement of such Bank's obligations pursuant thereto) shall be $5,000,000 (or such lesser amount consented to by the Agent and, so long as no Event of Default shall be continuing, the Company), which consents shall not be unreasonably withheld or delayed; provided that after giving effect to such assignment the assigning Bank shall have a Commitment of not less than $5,000,000 (unless otherwise consented to by the Agent and, so long as no Event of Default shall be continuing, the Company). Notwithstanding the foregoing sentence, (x) any Bank may at any time, without the consent of the Company or the Agent, assign all or any portion of its rights under this Agreement to a Federal Reserve Bank; provided that no such assignment shall release the transferor Bank from its obligations hereunder; and (y) no assignment by a Bank shall release such Bank from its obligations hereunder unless (I) the Agent and, so long as no Event of Default exists, the Company have approved such assignment or (II) the creditworthiness of such affiliate (as determined in accordance with customary standards of the banking industry) is no less than that of the assigning Bank. (d) Any Bank may, in connection with any sale or participation or proposed sale or participation pursuant to this Section 12.1, disclose to the purchaser or participant or proposed purchaser or participant any information relating to the Company furnished to such Bank by or on behalf of the Company; provided that prior to any such disclosure of non-public information, the purchaser or participant or proposed purchaser or participant (which purchaser or participant is not an affiliate of a Bank) shall agree to preserve the confidentiality of any confidential information (except any such disclosure as may be required by law or regulatory process) relating to the Company received by it from such Bank. (e) Assignments under this Section 12.1 shall be made pursuant to an agreement (an "Assignment Agreement") substantially in the form of Exhibit D 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 Agent by the assignee, which fee shall cover the cost of processing such assignment; provided that such fee shall not be incurred in the event of an assignment by any Bank of all or a portion of its rights under this Agreement to (i) a Federal Reserve Bank or (ii) a Bank or an affiliate of the assigning Bank or (iii) to any direct or indirect contractual counterparties in swap 41 agreements relating to the Loans to the extent required in connection with the settlement of any Bank's obligations pursuant thereto. 12.2 Survival of Representations. All representations and warranties of the Company contained in this Agreement shall survive the making of the Credit Extensions herein contemplated. 12.3 Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, neither the LC Issuer nor any Bank shall be obligated to extend credit to the Company in violation of any limitation or prohibition provided by any applicable statute or regulation. 12.4 Taxes. Any taxes (excluding income taxes) payable or ruled payable by any Federal or State authority in respect of the execution of the Credit Documents shall be paid by the Company, together with interest and penalties, if any. 12.5 Choice of Law. THE CREDIT DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF NEW YORK, BUT OTHERWISE WITHOUT REGARD TO THE LAW OF CONFLICTS) OF THE STATE OF NEW YORK, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY CREDIT DOCUMENT AND THE COMPANY HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. THE COMPANY HEREBY WAIVES ANY RIGHT TO A JURY TRIAL IN ANY ACTION OR ARISING HEREUNDER OR UNDER ANY CREDIT DOCUMENT. 12.6 Headings. Section headings in the Credit Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Credit Documents. 12.7 Entire Agreement. The Credit Documents embody the entire agreement and understanding between the Company, the LC Issuer, the Agent and the Banks and supersede all prior agreements and understandings between the Company, the LC Issuer, the Agent and the Banks relating to the subject matter thereof (other than those contained in the Fee Letter which shall survive and remain in full force and effect during the term of this Agreement). 12.8 Expenses; Indemnification. The Company shall reimburse the Agent and each Arranger for (a) any reasonable costs, internal charges and out-of-pocket expenses (including reasonable attorneys' fees and time charges of attorneys for the Agent) paid or incurred by the Agent or such Arranger in connection with the preparation, review, execution, delivery, syndication, distribution (including via the internet), amendment and modification of the Credit Documents and (b) any reasonable costs, internal charges and out-of-pocket expenses (including 42 reasonable attorneys' fees and time charges of attorneys for the Agent) paid or incurred by the Agent or such Arranger on its own behalf or on behalf of the LC Issuer or any Bank and, on or after the date upon which an Event of Default specified in Section 9.1(a) or 9.1(e) has occurred and is continuing, each Bank, in connection with the collection and enforcement of the Credit Documents. The Company further agrees to indemnify the Agent, each Arranger, the LC Issuer, each Bank and their respective Affiliates, and the directors, officers, employees and agents of the foregoing (all of the foregoing, the "Indemnified Persons), against all losses, claims, damages, penalties, judgments, liabilities and reasonable expenses (including all reasonable expenses of litigation or preparation therefor whether or not an Indemnified Person is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Credit Documents, the transactions contemplated hereby, the direct or indirect application or proposed application of the proceeds of any Credit Extension hereunder, any actual or alleged presence or release of any Hazardous Substance on or from any property owned or operated by the Company or any Subsidiary or any Environmental Liability related in any way to the Company or any Subsidiary; provided that the Company shall not be liable to any Indemnified Person for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of such Indemnified Person. Without limiting the foregoing, the Company 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 Person) incurred in connection with defense thereof, as a result of any breach or inaccuracy of the representation made in Section 5.15. The obligations of the Company under this Section shall survive the termination of this Agreement. 12.9 Severability of Provisions. Any provision in any Credit Document that is held to be inoperative, unenforceable or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability or validity of that provision in any other jurisdiction, and to this end the provisions of all Credit Documents are declared to be severable. 12.10 Setoff. In addition to, and without limitation of, any rights of the Banks under applicable law, if the Company becomes insolvent, however evidenced, or any Default or Event of Default occurs, any indebtedness from any Bank or any of its Affiliates to the Company (including all account balances, whether provisional or final and whether or not collected or available) may be offset and applied toward the payment of the Obligations owing to such Bank or such Affiliate, whether or not the Obligations, or any part hereof, shall then be due. The Company agrees that any purchaser or participant under Section 12.1 may, to the fullest extent permitted by law, exercise all its rights of payment with respect to such purchase or participation as if it were the direct creditor of the Company in the amount of such purchase or participation. 12.11 Ratable Payments. If any Bank, whether by setoff or otherwise, has payment made to it upon its Outstanding Credit Exposure in a greater proportion than that received by any other Bank, such Bank agrees, promptly upon demand, to purchase a portion of the Aggregate Outstanding Credit Exposure held by the other Banks so that after such purchase each Bank will hold its Pro Rata Share of the Aggregate Outstanding Credit Exposure. If any Bank, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, 43 such Bank agrees, promptly upon demand, to take such action necessary such that all Banks share in the benefits of such collateral ratably in proportion to their respective Pro Rata Share of the Aggregate Outstanding Credit Exposure. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. 12.12 Nonliability. The relationship between the Company, on the one hand, and the Banks, the Arrangers, the LC Issuer and the Agent, on the other hand, shall be solely that of borrower and lender. None of the Agent, either Arranger, the LC Issuer or any Bank shall have any fiduciary responsibilities to the Company. None of the Agent, either Arranger, the LC Issuer or any Bank undertakes any responsibility to the Company to review or inform the Company of any matter in connection with any phase of the Company's business or operations. The Company shall rely entirely upon its own judgment with respect to its business, and any review, inspection, supervision or information supplied to the Company by the Banks is for the protection of the Banks and neither the Company nor any third party is entitled to rely thereon. The Company agrees that none of the Agent, either Arranger, the LC Issuer or any Bank shall have liability to the Company (whether sounding in tort, contract or otherwise) for losses suffered by the Company in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Credit Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. None of the Agent, either Arranger, the LC Issuer or any Bank shall have any liability with respect to, and the Company hereby waives, releases and agrees not to sue for, any special, indirect, consequential or punitive damages suffered by the Company in connection with, arising out of, or in any way related to the Credit Documents or the transactions contemplated thereby. 12.13 Other Agents. The Banks identified on the signature pages of this Agreement or otherwise herein, or in any amendment hereof or other document related hereto, as being the "Syndication Agent" or a Co-Documentation Agent (the "Other Agents") shall have no rights, powers, obligations, liabilities, responsibilities or duties under this Agreement other than those applicable to all Banks as such. Without limiting the foregoing, the Other Agents shall not have or be deemed to have any fiduciary relationship with any Bank. Each Bank acknowledges that it has not relied, and will not rely, on the Other Agents in deciding to enter into this Agreement or in taking or refraining from taking any action hereunder or pursuant hereto. 12.14 USA Patriot Act. Each Bank hereby notifies the Company that pursuant to requirements of the USA Patriot Act, such Bank is required to obtain, verify and record information that identifies the Company, which information includes the name and address of the Company and other information that will allow such Bank to identify the Company in accordance with the USA Patriot Act. ARTICLE XIII THE AGENT 13.1 Appointment. JPMorgan Chase Bank, N.A. is hereby appointed Agent hereunder, and each of the Banks irrevocably authorizes the Agent to act as the contractual representative on 44 behalf of such Bank. The Agent agrees to act as such upon the express conditions contained in this Article XIII. The Agent shall not have a fiduciary relationship in respect of any Bank by reason of this Agreement. 13.2 Powers. The Agent shall have and may exercise such powers hereunder as are specifically delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. The Agent shall not have any implied duties to the Banks or any obligation to the Banks to take any action hereunder except any action specifically provided by this Agreement to be taken by the Agent. 13.3 General Immunity. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Banks or any Bank for any action taken or omitted to be taken by it or them hereunder or in connection herewith except for its or their own gross negligence or willful misconduct. 13.4 No Responsibility for Loans, Recitals, Etc. The Agent shall not be responsible to the Banks for any recitals, reports, statements, warranties or representations herein or in any Credit Document or be bound to ascertain or inquire as to the performance or observance of any of the terms of this Agreement. 13.5 Action on Instructions of Banks. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Credit Document in accordance with written instructions signed by the Majority Banks (or all of the Banks if required by Section 10.1), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. The Banks hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Credit Document unless it shall be requested in writing to do so by the Majority Banks. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Credit Document unless it shall first be indemnified to its satisfaction by the Banks pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action. 13.6 Employment of Agents and Counsel. The Agent may execute any of its duties as Agent hereunder by or through employees, agents and attorneys-in-fact and shall not be answerable to the Banks, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder. 13.7 Reliance on Documents; Counsel. The Agent shall be entitled to rely upon any notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. 45 13.8 Agent's Reimbursement and Indemnification. The Banks agree to reimburse and indemnify the Agent ratably in accordance with their respective Pro Rata Shares (i) for any amounts not reimbursed by the Company for which the Agent is entitled to reimbursement by the Company under the Credit Documents, (ii) for any other expenses reasonably incurred by the Agent on behalf of the Banks, in connection with the preparation, execution, delivery, administration and enforcement of the Credit Documents, and for which the Agent is not entitled to reimbursement by the Company under the Credit Documents, and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other document delivered in connection with this Agreement or the transactions contemplated hereby or the enforcement of any of the terms hereof or of any such other documents, and for which the Agent is not entitled to reimbursement by the Company under the Credit Documents; provided that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Agent. 13.9 Rights as a Bank. With respect to its Commitment and any Credit Extension made by it, the Agent shall have the same rights and powers hereunder as any Bank and may exercise the same as though it were not the Agent, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include JPMorgan in its individual capacity. The Agent may accept deposits from, lend money to, and generally engage in any kind of banking or trust business with the Company or any Subsidiary as if it were not the Agent. 13.10 Bank Credit Decision. (a) Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank and based on the financial statements prepared by the Company and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. (b) Without limiting clause (a) above, each Bank acknowledges and agrees that neither such Bank nor any of its Affiliates, participants or assignees may rely on the Agent to carry out such Bank's or other Person'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 amended or replaced, the "CIP Regulations"), or any other applicable law, rule, regulation or order of any governmental authority, including any program involving any of the following items relating to or in connection with the Company or any of its Subsidiaries or Affiliates or agents, the Credit Documents or the transactions contemplated hereby: (i) any identity verification procedure; (ii) any recordkeeping; (iii) any comparison with a government list; (iv) any customer notice or (v) any other procedure required under the CIP Regulations or such other law, rule, regulation or order. (c) Within 10 days after the date of this Agreement and at such other times as are required under the USA Patriot Act, each Bank and each assignee and participant that is not 46 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 (i) an affiliate of a depository institution or foreign bank that maintains a physical presence in the United States or foreign country and (ii) subject to supervision by a banking authority regulating such affiliated depository institution or foreign bank) shall deliver to the Agent a certification, or, if applicable, recertification, certifying that such Bank is not a "shell" and certifying as to other matters as required by Section 313 of the USA Patriot Act and the applicable regulations. 13.11 Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks and the Company, and the Agent may be removed at any time with or without cause by written notice received by the Agent from the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint, on behalf of the Banks, a successor Agent. If no successor Agent shall have been so appointed by the Majority Banks and shall have accepted such appointment within thirty days after the retiring Agent's giving notice of resignation, then the retiring Agent may appoint, on behalf of the Banks, a successor Agent. Such successor Agent shall be a commercial bank having capital and retained earnings of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article XIII shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder. 13.12 Agent and Arranger Fees. The Company agrees to pay to the Agent, J.P. Morgan Securities, Inc. ("JPMSI") and Barclays Capital ("Barclays"; together with JPMSI, the "Arrangers"), for their respective accounts, the fees agreed to by the Company, the Agent and the Arrangers pursuant to the letter agreement dated April 7, 2005, or as otherwise agreed from time to time. ARTICLE XIV NOTICES 14.1 Giving Notice. Except as otherwise permitted by Section 2.13 with respect to borrowing notices, all notices, requests and other communications to any party hereunder shall be in writing (including electronic transmission, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Company, the Agent or the LC Issuer, at its address or facsimile number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or facsimile number set forth in its Administrative Questionnaire or (z) in the case of any party, at such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Agent and the Company in accordance with the provisions of this Section 14.1. Each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered (or, in the case of electronic transmission, received) at the 47 address specified in this Section; provided that notices to the Agent under Article II shall not be effective until received. 14.2 Change of Address. The Company, the Agent and any Bank may each change the address for service of notice upon it by a notice in writing to the other parties hereto. ARTICLE XV TERMINATION OF PRIOR AGREEMENT The Company and the Banks which are parties to the Prior Agreement (which Banks constitute "Majority Banks" under the Prior Agreement) agree that notwithstanding any requirement for notice of termination of the Commitments under Section 2.5(b) of the Prior Agreement), simultaneously with the initial Credit Extension hereunder, the Prior Agreement shall terminate and be of no further force or effect (except for any provision thereof which by its terms survives termination thereof); it being understood that concurrently with such termination, each Existing Facility LC shall be deemed to be issued hereunder. ARTICLE XVI COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Company, the Agent, the LC Issuer and the Banks and each party has notified the Agent by facsimile or telephone that it has taken such action. ARTICLE XVII RELEASE OF BONDS The Agent will release the Bonds without any further action or consent by the Banks, and deliver, at the Company's expense, such documents to the Company or the trustee under the Indenture as the Company may reasonably require to evidence such release, upon written request by the Company accompanied by a certificate of a Designated Officer certifying that (a) no Default or Event of Default exists prior to or after giving effect to such release and (b) the then current ratings for the Company's senior unsecured long-term debt (without third-party credit enhancement) are Baa2 or higher in the case of Moody's and BBB or higher in the case of S&P. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] 48 IN WITNESS WHEREOF, the Company, the Banks, the LC Issuer and the Agent have executed this Agreement as of the date first above written. CONSUMERS ENERGY COMPANY By: /s/ Laura L. Mountcastle --------------------------------------- Name: Laura L. Mountcastle Title: Vice President and Treasurer ADDRESS: One Energy Plaza Jackson, MI 49201 Attention: Beverly S. Burger Facsimile No.: (517) 788-0412 Confirmation (Phone) No: (517) 788-2541 E-Mail Address: bsburger@cmsenergy.com S-1 JPMORGAN CHASE BANK, N.A., as Administrative Agent, as LC Issuer and as a Bank By: /s/ Thomas Casey --------------------------------------- Name: Thomas Casey Title: Vice President ADDRESS: 270 Park Avenue, 4th Floor New York, NY 10016 Attention: Thomas Casey, Vice President Facsimile No.: (212) 270-3089 Confirmation (Phone) No.: (212) 270-5305 E-Mail Address: thomas.casey@jpmorgan.com S-2 BARCLAYS BANK PLC, as Syndication Agent and as a Bank By: /s/ Sydney G. Dennis --------------------------------------- Name: Sydney G. Dennis Title: S-3 CITIBANK, N.A., as Co-Documentation Agent and as a Bank By: /s/ Amit Vasani --------------------------------------- Name: Amit Vasani Title: Vice President, Global Power 388 Greenwich Street/21st floor (212) 816-4166 S-4 UNION BANK OF CALIFORNIA, N.A., as Co-Documentation Agent and as a Bank By: /s/ Kevin M. Zitar --------------------------------------- Name: Kevin M. Zitar Title: Vice President S-5 WACHOVIA BANK, NATIONAL ASSOCIATION, as Co-Documentation Agent and as a Bank By: /s/ Lawrence N. Gross ------------------------------- Name: Lawrence N. Gross Title: Assistant Vice President S-6 MERRILL LYNCH BANK USA By: /s/ Louis Alder ------------------------------- Name: Louis Alder Title: Director S-7 HSBC BANK USA, NATIONAL ASSOCIATION By: /s/ Jose M. Aldeanueva ------------------------------- Name: Jose M. Aldeanueva Title: Vice President S-8 BANK OF AMERICA, N.A. By: /s/ Michelle A. Schoenfeld ------------------------------- Name: Michelle A. Schoenfeld Title: Senior Vice President S-9 BNP PARIBAS By: /s/ Mark A. Renaud ------------------------------- Name: Mark A. Renaud Title: Managing Director By: /s/ Francis J. DeLaney ------------------------------- Name: Francis J. DeLaney Title: Managing Director S-10 CREDIT SUISSE, Cayman Islands Branch By: /s/ Thomas R. Cantello ------------------------------- Name: Thomas R. Cantello Title: Vice President By: /s/ Gregory S. Richards ------------------------------- Name: Gregory S. Richards Title: Associate S-11 DEUTSCHE BANK TRUST COMPANY AMERICAS By: /s/ Marcus M. Tarkington ------------------------------- Name: Marcus M. Tarkington Title: Director By: /s/ Paul O'Leary ------------------------------- Name: Paul O'Leary Title: Vice President S-12 FIFTH THIRD BANK By: /s/ Kevin M. Paul ------------------------------- Name: Kevin M. Paul Title: Vice President S-13 STANDARD FEDERAL BANK N.A. By: /s/ Richard C. Northrup, III ------------------------------- Name: Richard C. Northrup, III Title: First Vice President S-14 SUMITOMO MITSUI BANKING CORPORATION, NEW YORK BRANCH By: /s/ William M. Ginn ------------------------------- Name: William M. Ginn Title: General Manager S-15 WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ Scott D. Bjelde ------------------------------- Name: Scott D. Bjelde Title: Senior Vice President Wells Fargo Bank, National Association By: /s/ James D. Heinz ------------------------------- Name: James D. Heinz Title: Senior Vice President Wells Fargo Bank, National Association S-16 ALLIED IRISH BANKS, p.l.c. By: /s/ Robert F. Moyle ------------------------------- Name: Rob Moyle Title: Vice President By: /s/ Mark Connelly ------------------------------- Name: Mark Connelly Title: Vice President S-17 BANK HAPOALIM B.M. By: /s/ Marc Bosc ------------------------------- Name: Marc Bosc Title: Vice President By: /s/ Lenroy Hackett ------------------------------- Name: Lenroy Hackett Title: First Vice President S-18 COMERICA BANK By: /s/ Blake W. Arnett ------------------------------- Name: Blake W. Arnett Title: Account Officer S-19 HUNTINGTON NATIONAL BANK By: /s/ Patrick T. Barbour ------------------------------- Name: Patrick T. Barbour Title: Vice President S-20 MORGAN STANLEY BANK By: /s/ Daniel Twenge ------------------------------- Name: Daniel Twenge Title: Vice President Morgan Stanley Bank S-21 THE NORINCHUKIN BANK By: /s/ Toshifumi Tsukitani ------------------------------- Name: Toshifumi Tsukitani Title: General Manager S-22 UBS LOAN FINANCE LLC By: /s/ Wilfred V. Saint ------------------------------- Name: Wilfred V. Saint Title: Director Banking Products Services, US By: /s/ Joselin Fernandes ------------------------------- Name: Joselin Fernandes Title: Associate Director Banking Products Services, US S-23 UFJ BANK LIMITED, NEW YORK BRANCH By: /s/ John T. Feeney ------------------------------- Name: John T. Feeney Title: Vice President S-24 GOLDMAN SACHS CREDIT PARTNERS L.P. By: /s/ William Archer ------------------------------- Name: William Archer Title: Authorized Signatory S-25 EXHIBIT A [FORM OF SUPPLEMENTAL INDENTURE] ONE HUNDRED THIRD SUPPLEMENTAL INDENTURE PROVIDING AMONG OTHER THINGS FOR FIRST MORTGAGE BONDS, 2005-1 COLLATERAL SERIES (INTEREST BEARING) -------------- DATED AS OF MAY 18, 2005 -------------- CONSUMERS ENERGY COMPANY TO JPMORGAN CHASE BANK, N.A., TRUSTEE Counterpart ____ of 80 THIS ONE HUNDRED THIRD SUPPLEMENTAL INDENTURE, dated as of May 18, 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, in the Borough of Manhattan, The City of 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 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 Company has entered into a Third Amended and Restated Credit Agreement dated as of May 18, 2005 (as amended or otherwise modified from time to time, the "Credit Agreement") with various financial institutions and JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, the "Agent") for the Banks (as such term is defined in the Credit Agreement), providing for the making of certain financial accommodations thereunder, and pursuant to such Credit Agreement the Company has agreed to issue to the Agent, as evidence of and security for the Obligations (as such term is defined in the Credit Agreement), a new series of bonds under the Indenture; and A-2 WHEREAS, for such purposes the Company desires to issue a new series of bonds, to be designated First Mortgage Bonds, 2005-1 Collateral Series (Interest Bearing), each of which bonds shall also bear the descriptive title "First Mortgage Bond" (hereinafter provided for and hereinafter sometimes referred to as the "2005-1 Collateral 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 herein and are to mature on the Termination Date (as such term is defined in the Credit Agreement); and WHEREAS, each of the registered bonds without coupons of the 2005-1 Collateral Bonds and the Trustee's Authentication Certificate thereon are to be substantially in the following form, to wit: A-3 [FORM OF REGISTERED BOND OF THE 2005-1 COLLATERAL BONDS] [FACE] CONSUMERS ENERGY COMPANY FIRST MORTGAGE BOND 2005-1 COLLATERAL SERIES (INTEREST BEARING) No. 1 $500,000,000 CONSUMERS ENERGY COMPANY, a Michigan corporation (hereinafter called the "Company"), for value received, hereby promises to pay to JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, the "Agent") for the Banks under and as defined in the Third Amended and Restated Credit Agreement dated as of May 18, 2005 among the Company, the Banks and the Agent (as amended or otherwise modified from time to time, the "Credit Agreement"), or registered assigns, the principal sum of Five Hundred Million Dollars ($500,000,000) or such lesser principal amount as shall be equal to the aggregate principal amount of the Loans (as defined in the Credit Agreement) and Reimbursement Obligations (as defined in the Credit Agreement) included in the Obligations (as defined in the Credit Agreement) outstanding on the Termination Date (as defined in the Credit Agreement) (the "Maturity Date"), but not in excess, however, of the principal amount of this bond, and to pay interest thereon at the Interest Rate (as defined below) until the principal hereof is paid or duly made available for payment on the Maturity Date, or, in the event of redemption of this bond, until the redemption date, or, in the event of default in the payment of the principal hereof, until the Company's obligations with respect to the payment of such principal shall be discharged as provided in the Indenture (as defined on the reverse hereof). Interest on this bond shall be payable on each Interest Payment Date (as defined below), commencing on the first Interest Payment Date next succeeding May 18, 2005. If the Maturity Date falls on a day which is not a Business Day, as defined below, principal and any interest and/or fees payable with respect to the Maturity Date will be paid on the immediately preceding Business Day. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, subject to certain exceptions, be paid to the person in whose name this bond (or one or more predecessor bonds) is registered at the close of business on the Record Date (as defined below); provided, however, that interest payable on the Maturity Date will be payable to the person to whom the principal hereof shall be payable. Should the Company default in the payment of interest ("Defaulted Interest"), the Defaulted Interest shall be paid to the person in whose name this bond (or one or more predecessor bonds) is registered on a subsequent record date fixed by the Company, which subsequent record date shall be fifteen (15) days prior to the payment of such Defaulted Interest. As used herein, (A) "Business Day" shall mean 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 A-4 be made on the Fedwire system; (B) "Interest Payment Date" shall mean each date on which Obligations constituting interest and/or fees are due and payable from time to time pursuant to the Credit Agreement; (C) "Interest Rate" shall mean a rate of interest per annum, adjusted as necessary, to result in an interest payment equal to the aggregate amount of Obligations constituting interest and fees due under the Credit Agreement on the applicable Interest Payment Date; and (D) "Record Date" with respect to any Interest Payment Date shall mean the day (whether or not a Business Day) immediately next preceding such Interest Payment Date. Payment of the principal of and interest on this bond will be made in immediately available funds at the office or agency of the Company maintained for that purpose in the City of Jackson, Michigan, 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. 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. A-5 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 A-6 [REVERSE] CONSUMERS ENERGY COMPANY FIRST MORTGAGE BOND 2005-1 COLLATERAL SERIES (INTEREST BEARING) This bond is one of the bonds of a series designated as First Mortgage Bonds, 2005-1 Collateral Series (Interest Bearing) (sometimes herein referred to as the "2005-1 Collateral Bonds") issued 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 2005-1 Collateral Bonds are to be issued and delivered to the Agent in order to evidence and secure the obligation of the Company under the Credit Agreement to make payments to the Banks under the Credit Agreement and to provide the Banks the benefit of the lien of the Indenture with respect to the 2005-1 Collateral Bonds. The obligation of the Company to make payments with respect to the principal of 2005-1 Collateral Bonds shall be fully or partially, as the case may be, satisfied and discharged to the extent that, at the time that any such payment shall be due, the then due principal of the Loans and/or the Reimbursement Obligations included in the Obligations shall have been fully or partially paid. Satisfaction of any obligation to the extent that payment is made with respect to the Loans and/or the Reimbursement Obligations means that if any payment is made on the principal of the Loans and/or the Reimbursement Obligations, a corresponding payment obligation with respect to the principal of the 2005-1 Collateral Bonds shall be deemed discharged in the same amount as the payment with respect to the Loans and/or the Reimbursement Obligations discharges the outstanding obligation with respect to such Loans and/or Reimbursement Obligations. No such payment of principal shall reduce the principal amount of the 2005-1 Collateral Bonds. The obligation of the Company to make payments with respect to the interest on 2005-1 Collateral Bonds shall be fully or partially, as the case may be, satisfied and discharged to the extent that, at the time that any such payment shall be due, the then due interest and/or fees under the Credit Agreement shall have been fully or partially paid. Satisfaction of any obligation to the extent that payment is made with respect to the interest and/or fees under the Credit Agreement means that if any payment is made on the interest and/or fees under the Credit Agreement, a A-7 corresponding payment obligation with respect to the interest on the 2005-1 Collateral Bonds shall be deemed discharged in the same amount as the payment with respect to the Loans and/or the Reimbursement Obligations discharges the outstanding obligation with respect to such Loans and/or Reimbursement Obligations. The Trustee may at any time and all times conclusively assume that the obligation of the Company to make payments with respect to the principal of and interest on this bond, so far as such payments at the time have become due, has been fully satisfied and discharged unless and until the Trustee shall have received a written notice from the Agent stating (i) that timely payment of principal and interest on the 2005-1 Collateral Bonds has not been made, (ii) that the Company is in arrears as to the payments required to be made by it to the Agent in connection with the Obligations pursuant to the Credit Agreement, and (iii) the amount of the arrearage. If an Event of Default (as defined in the Credit Agreement) with respect to the payment of the principal of the Loans and/or the Reimbursement Obligations shall have occurred, it shall be deemed to be a default for purposes of Section 11.01 of the Indenture in the payment of the principal of the 2005-1 Collateral Bonds equal to the amount of such unpaid principal or Reimbursement Obligations (but in no event in excess of the principal amount of the 2005-1 Collateral Bonds). If an Event of Default (as defined in the Credit Agreement) with respect to the payment of interest on the Loans and/or the Reimbursement Obligations or any fees shall have occurred, it shall be deemed to be a default for purposes of Section 11.01 of the Indenture in the payment of the interest on the 2005-1 Collateral Bonds equal to the amount of such unpaid interest or fees. This bond is not redeemable except upon written demand of the Agent following the occurrence of an Event of Default under the Credit Agreement and the acceleration of the Obligations, as provided in Section 9.2 of the Credit Agreement. This bond is not redeemable by the operation of the improvement fund or the maintenance and replacement provisions of the Indenture or with the proceeds of released property. 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 A-8 extend the time of payment of interest hereon or reduce the amount of the principal hereof, or (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 the holders of which are required to approve any such supplemental indenture. The Company reserves the right, without any consent, vote or other action by holders of the 2005-1 Collateral 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 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. This bond shall be exchangeable for other registered bonds of the same series, in the manner and upon the conditions prescribed in the Indenture, upon the surrender of such bonds at the Investor Services Department of the Company, as transfer agent. However, notwithstanding the provisions of Section 2.05 of the Indenture, no charge shall be made upon any registration of transfer or exchange of bonds of said series other than for any tax or taxes or other governmental charge required to be paid by the Company. The Agent shall surrender this bond to the Trustee when all of the principal of and interest on the Loans and Reimbursement Obligations arising under the Credit Agreement, and all of the fees payable pursuant to the Credit Agreement with respect to the Obligations shall have been duly paid, and the Credit Agreement shall have been terminated. [END OF FORM OF REGISTERED BOND OF THE 2005-1 COLLATERAL BONDS] --------------- A-9 AND WHEREAS all acts and things necessary to make the 2005-1 Collateral Bonds (the "Collateral 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, and this Supplemental Indenture provided, 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, and of the sum of One Dollar 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 $500,000,000 principal amount of the Collateral 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, alien 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. 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; A-10 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 a series of bonds (the "2005-1 Collateral Bonds") designated as hereinabove provided, which shall also bear the descriptive title "First Mortgage Bond", and the forms thereof shall be substantially as hereinbefore set forth (collectively, the "Sample Bond"). The 2005-1 Collateral Bonds shall be issued in the aggregate principal amount of $500,000,000, shall mature on the Termination Date (as such term is defined in the Credit Agreement) and shall be issued only as registered bonds without coupons in denominations of $1,000 and any multiple thereof. The serial numbers of the Collateral 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 Collateral Bonds are to be issued to and registered in the name of the Agent under the Credit Agreement (as such terms are defined in the Sample Bonds) to evidence and secure any and all Obligations (as such term is defined in the Credit Agreement) of the Company under the Credit Agreement. The 2005-1 Collateral Bonds shall bear interest as set forth in the Sample Bond. The principal of and the interest on said bonds shall be payable as set forth in the Sample Bond. The obligation of the Company to make payments with respect to the principal of 2005-1 Collateral Bonds shall be fully or partially, as the case may be, satisfied and discharged to the extent that, at the time that any such payment shall be due, the then due principal of the Loans and/or the Reimbursement Obligations included in the Obligations shall have been fully or partially paid. Satisfaction of any obligation to the extent that payment is made with respect to the Loans and/or the Reimbursement Obligations means that if any payment is made on the A-11 principal of the Loans and/or the Reimbursement Obligations, a corresponding payment obligation with respect to the principal of the 2005-1 Collateral Bonds shall be deemed discharged in the same amount as the payment with respect to the Loans and/or the Reimbursement Obligations discharges the outstanding obligation with respect to such Loans and/or Reimbursement Obligations. No such payment of principal shall reduce the principal amount of the 2005-1 Collateral Bonds. The obligation of the Company to make payments with respect to interest on 2005-1 Collateral Bonds shall be fully or partially, as the case may be, satisfied and discharged to the extent that, at the time that any such payment shall be due, the then due interest and/or fees under the Credit Agreement shall have been fully or partially paid. Satisfaction of any obligation to the extent that payment is made with respect to the interest and/or fees under the Credit Agreement means that if any payment is made on the interest and/or fees under the Credit Agreement, a corresponding payment obligation with respect to the interest on the 2005-1 Collateral Bonds shall be deemed discharged in the same amount as the payment with respect to the interest and/or fees discharges the outstanding obligation with respect to such interest and/or fees. The Trustee may at any time and all times conclusively assume that the obligation of the Company to make payments with respect to the principal of and interest on the Collateral Bonds, so far as such payments at the time have become due, has been fully satisfied and discharged unless and until the Trustee shall have received a written notice from the Agent stating (i) that timely payment of principal and interest on the 2005-1 Collateral Bonds has not been made, (ii) that the Company is in arrears as to the payments required to be made by it to the Agent pursuant to the Credit Agreement, and (iii) the amount of the arrearage. The Collateral Bonds shall be exchangeable for other registered bonds of the same series, in the manner and upon the conditions prescribed in the Indenture, upon the surrender of such bonds at the Investor Services Department of the Company, as transfer agent. However, notwithstanding the provisions of Section 2.05 of the Indenture, no charge shall be made upon any registration of transfer or exchange of bonds of said series other than for any tax or taxes or other governmental charge required to be paid by the Company. SECTION 2. The Collateral Bonds are not redeemable by the operation of the maintenance and replacement provisions of this Indenture or with the proceeds of released property. SECTION 3. Upon the occurrence of an Event of Default under the Credit Agreement and the acceleration of the Obligations, the Collateral Bonds shall be redeemable in whole upon receipt by the Trustee of a written demand from the Agent stating that there has occurred under the Credit Agreement both an Event of Default and a declaration of acceleration of the Obligations and demanding redemption of the Collateral Bonds (including a description of the amount of principal, interest and fees which comprise such Obligations). The Company waives any right it may have to prior notice of such redemption under the Indenture. Upon surrender of the Collateral Bonds by the Agent to the Trustee, the Collateral Bonds shall be redeemed at a redemption price equal to the aggregate amount of the Obligations. A-12 SECTION 4. The Company reserves the right, without any consent, vote or other action by the holder of the Collateral 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 such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee A-13 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 5. 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 6. Nothing contained in this Supplemental Indenture shall, or shall be construed to, confer upon any person other than a holder of bonds issued under the Indenture, as supplemented and amended as above set forth, the Company, the Trustee and the Agent, for the benefit of the Banks (as such term is defined in the Credit Agreement), any right or interest to avail himself of any benefit under any provision of the Indenture, as so supplemented and amended. A-14 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 and eighth recitals hereof), all of which recitals and statements are made solely by the Company. 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, 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 Collateral 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 A-15 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 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 A-16 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. 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. A-17 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, 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. A-18 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: 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: A-19 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. 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. A-20 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. 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 degrees21'E 250 feet, thence North along a line parallel with the said North and South quarter line of said section 200 feet, thence N89 degrees21'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 A-21 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. 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: A-22 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 degrees53'30" East along North section line 105.78 feet to point of beginning; thence South 89 degrees53'30" 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. 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 A-23 degrees42'56"W and 50 feet measured S88 degrees14'04"W from the South quarter corner, Section 8, T5N, R5E; thence S88 degrees14'04"W a distance of 550 feet; thence N01 degrees42'56"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 degrees14'04"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 degrees42'56"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. 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 degrees19'15" E along the North line of said section and the center line of Clouss Road 225 feet, thence South 400 feet, thence N 89 degrees19'15" 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. A-24 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 degrees54'45" East along said centerline 2282.38 feet to the place of beginning of this description; thence continuing South 89 degrees54'45" East along said centerline and said centerline extended 660.00 feet to the North-South 1/4 line of said section; thence South 00 degrees07'20" West 1461.71 feet; thence North 89 degrees34'58" West 660.00 feet; thence North 00 degrees07'20" East 1457.91 feet to the centerline of Sitts Road and the place of beginning. 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 A-25 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 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 A-26 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" 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 A-27 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 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 A-28 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 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: A-29 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 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.) A-30 MONROE COUNTY Certain land in Whiteford Township, Monroe County, Michigan described as: A parcel of land in the SW1/4 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. 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 A-31 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. OTSEGO COUNTY Certain land in Corwith Township, Otsego County, Michigan described as: A-32 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 degrees15'47" E, 507.42 feet, along the East line of said Section 24 to the point of beginning; thence S 88 degrees15'36" W, 400.00 feet, parallel with the North 1/8 line of said Section 24; thence N 00 degrees15'47" E, 800.00 feet, parallel with said East line of Section 24; thence N 88 degrees15'36"E, 800.00 feet, along said North 1/8 line of Section 24 and said line extended; thence S 00 degrees15'47" W, 800.00 feet, parallel with said East line of Section 24; thence S 88 degrees15'36" 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 being the place of intersection of the West 1/8 A-33 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. A-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 A-35 degrees22' 20" W, 660 feet; thence S 86 degrees 36' 57" W, 660.91 feet to the place of beginning. 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. A-36 CONSUMERS ENERGY COMPANY (SEAL) By ________________________________ Name ________________________________ Attest: Title ________________________________ _________________________________ Joyce H. Norkey Assistant Secretary Signed, sealed and delivered by CONSUMERS ENERGY COMPANY in the presence of _________________________________ Kimberly C. Wilson _________________________________ Sammie B. Dalton STATE OF MICHIGAN ) ss. COUNTY OF JACKSON ) The foregoing instrument was acknowledged before me this ____ day of May, 2005, by __________________________________, ________________________ of CONSUMERS ENERGY COMPANY, a Michigan corporation, on behalf of the corporation. ______________________________________ Margaret Hillman, Notary Public [SEAL] Jackson County, Michigan My Commission Expires: ______________ S-1 JPMORGAN CHASE BANK, N.A., AS TRUSTEE (SEAL) By ___________________________________ L. O'Brien Attest: Vice President _________________________________ Trust Officer Signed, sealed and delivered by JPMORGAN CHASE BANK, N.A. in the presence of _________________________________ _________________________________ STATE OF NEW YORK ) ss. COUNTY OF NEW YORK ) The foregoing instrument was acknowledged before me this ____ day of May, 2005, by L. O'Brien, a Vice President of JPMORGAN CHASE BANK, N.A., a national banking association, on behalf of the bank, as trustee. ______________________________________ Notary Public [Seal] New York County, New York My Commission Expires: Prepared by: When recorded, return to: Kimberly C. Wilson Consumers Energy Company One Energy Plaza Business Services Real Estate Dept. Jackson, MI 49201 Attn: Nancy Fisher EP7-439 One Energy Plaza Jackson, MI 49201 S-2 EXHIBIT B-1 REQUIRED OPINIONS FROM ROBERT S. SHROSBREE, ESQ. 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Michigan. 2. The execution and delivery of the Credit Documents by the Company and the performance by the Company of the Obligations have been duly authorized by all necessary corporate action and proceedings on the part of the Company and will not: (a) contravene the Company's Restated Articles of Incorporation, as amended, or bylaws; (b) contravene any law or any contractual restriction imposed by any indenture or any other agreement or instrument evidencing or governing indebtedness for borrowed money of the Company (including but not limited to the Company Indentures (as defined below)); or (c) result in or require the creation of any Lien upon or with respect to any of the Company's properties except the lien of the Indenture securing the Bonds and any Lien in favor of the Agent on the Facility LC Collateral Account or any funds therein. As used in this paragraph 2, "Company Indentures" means, collectively, (i) the Indenture dated as of January 1, 1996, as supplemented and amended from time to time, between the Company (formerly known as Consumers Power Company) and The Bank of New York, as Trustee, and (ii) the Indenture dated as of February 1, 1998, as supplemented and amended from time to time, between the Company and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as Trustee. 3. The Credit Documents have been duly executed and delivered by the Company. 4. To the best of my knowledge, there is no pending or threatened action or proceeding against the Company or any of its Consolidated Subsidiaries before any court, governmental agency or arbitrator (except (i) to the extent described in the Company's annual report on Form 10-K for the year ended December 31, 2004, and Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, in each case as filed with the SEC, and (ii) such other similar actions, suits and proceedings predicated on the occurrence of the same events giving rise to any actions, suits and proceedings described in the reports referred to in clause (i) of this paragraph 4) which might reasonably be expected to materially adversely affect the financial condition or results of operations of the Company and its Consolidated Subsidiaries, taken as a whole, or that would materially adversely affect the Company's ability to perform its obligations under any Credit Document. To the best of my knowledge, there is no litigation challenging the validity or the enforceability of any of the Credit Documents. B-1-1 5. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company of any Credit Document, except for the authorization to issue, sell or guarantee secured and/or unsecured long-term debt granted by the Federal Energy Regulatory Commission (hereinafter the "FERC") in Docket No. ES04-32-000 as amended by the FERC in Docket No. ES04-32-001 (hereinafter the "FERC Order"). The FERC Order is in full force and effect as of the date hereof. 6. The Bonds, assuming due authentication in accordance with the terms of the Indenture, are in due and proper form and, when delivered to the Agent pursuant to the Bond Delivery Agreement, will evidence and secure the Obligations owing under the Agreement and will be valid and enforceable obligations of the Company in accordance with their terms, secured by the lien of the Indenture on an equal and ratable basis with all other bonds issued thereunder and otherwise entitled to the benefits provided by the Indenture. 7. The Indenture has been qualified under the Trust Indenture Act of 1939, as amended, and the execution and delivery of the Supplemental Indenture will not cause the Indenture to not be so qualified. 8. The Company is not an "investment company" or a company "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. 9. The Company (i) is a "public utility" and a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended (the "Holding Company Act"), and (ii) is currently exempt from all provisions of the Holding Company Act, except Section 9(a)(2) thereof. 10. In a properly presented case, a Michigan court or a federal court applying Michigan choice of law rules should give effect to the choice of law provisions of the Agreement and should hold that the Agreement is to be governed by the laws of the State of New York rather than the laws of the State of Michigan, except in the case of those provisions set forth in the Agreement the enforcement of which would contravene a fundamental policy of the State of Michigan. In the course of our review of the Agreement, nothing has come to my attention to indicate that any of such provisions would do so. Notwithstanding the foregoing, even if a Michigan court or a federal court holds that the Agreement is to be governed by the laws of the State of Michigan, the Agreement constitutes a legal, valid and binding obligation of the Company, enforceable under Michigan law (including usury provisions) against the Company in accordance with its terms, subject to (a) the effect of applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (b) the application of general principles of equity (regardless of whether considered in a proceeding in equity or at law). B-1-2 EXHIBIT B-2 REQUIRED OPINION FROM MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. 1. The Bonds, assuming due authentication in accordance with the terms of the Indenture, are in due and proper form and, when delivered to the Agent pursuant to the Bond Delivery Agreement, will evidence and secure the Obligations owing under the Agreement and will be valid and enforceable obligations of the Company in accordance with their terms, secured by the lien of the Indenture on an equal and ratable basis with all other bonds issued thereunder and otherwise entitled to the benefits provided by the Indenture. B-3-1 EXHIBIT C FORM OF COMPLIANCE CERTIFICATE I, _________________, ______________ of Consumers Energy Company, a Michigan corporation (the "Company"), DO HEREBY CERTIFY in connection with the Third Amended and Restated Credit Agreement dated as of May 18, 2005 (the "Credit Agreement"; the terms defined therein being used herein as so defined) among the Company, various financial institutions and JPMorgan Chase Bank, N.A., as Agent, that: I. Section 8.1 of the Credit Agreement provides that the Company shall: "At all times, maintain a ratio of Total Consolidated Debt to Total Consolidated Capitalization of not greater than 0.70 to 1.0." The following calculations are made in accordance with the definitions of Total Consolidated Debt and Total Consolidated Capitalization in the Credit Agreement and are correct and accurate as of _____________, ___: A. Total Consolidated Debt (a) Indebtedness for borrowed money $ plus (b) Indebtedness for deferred purchase price of property/services plus (c) Liabilities for accumulated funding deficiencies plus (d) Liabilities in connection with withdrawal liability under ERISA plus (e) Obligations under acceptance facilities plus (f) Obligations under Capital Leases plus (g) Obligations under interest rate swap, "cap", "collar" or other hedging agreement plus (h) Guaranties, endorsements and other contingent obligations minus (i) Principal amount of any Securitized Bonds minus (j) Junior Subordinated Debt owned by any Hybrid Preferred Securities Subsidiary minus (k) Subordinated guaranties by the Company of C-1 payments with respect to Hybrid Preferred Securities minus (l) Agreed upon percentage of Net Proceeds from issuance of hybrid debt/equity securities (other than Junior Subordinated Debt and Hybrid Preferred Securities) TOTAL $ B. Total Consolidated Capitalization: (a) Total Consolidated Debt $ plus (b) The sum of Items A(j) through A(l) above plus (c) Equity of common stockholders plus (d) Equity of preference stockholders ________ plus (e) Equity of preferred stockholders _________ TOTAL $ C. Debt to Capital Ratio _____ to 1.00 (total of A divided by total of B) II. Section 8.2 of the Credit Agreement provides that the Company shall: "Not permit the ratio, determined as of the end of each of its fiscal quarters for the then most-recently ended four fiscal quarters, of (i) Consolidated EBIT to (ii) cash Consolidated Interest Expense to be less than 2.0 to 1.0" The following calculations are made in accordance with the definitions of Consolidated EBIT and Consolidated Interest Expense in the Credit Agreement and are correct and accurate as of _____________, ___: A. Consolidated EBIT (a) Consolidated Net Income $ plus (b) Consolidated Interest Expense $ plus (c) Interest and dividends on Hybrid Preferred Securities and on securities of the type described in Item A(l) above (but only to the extent securities of the type described in C-2 Item A(l) are deemed equity) plus (d) Expense for taxes paid or accrued $ plus (e) Non-cash write-offs and write-downs $ contained in the Company's Consolidated Net Income, including write-offs or write-downs related to the sale of assets, impairment of assets and loss on contracts minus (f) Extraordinary gains realized other than in the $ ordinary course of business TOTAL $ B. Consolidated Interest Expense $ C. Interest Coverage Ratio ____ to 1.00 (total of A divided by total of B) IN WITNESS WHEREOF, I have signed this Certificate this ___ day of _________, ___. C-3 EXHIBIT D ASSIGNMENT AND ASSUMPTION AGREEMENT This Assignment and Assumption (the "Assignment and Assumption") is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the "Assignor") and [Insert name of Assignee] (the "Assignee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Third Amended and Restated Credit Agreement identified below (as amended, the "Credit Agreement"), receipt of a copy of which is hereby acknowledged by the Assignee. The Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full. For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Agent as contemplated below, the interest in and to all of the Assignor's rights and obligations in its capacity as a Bank under the Credit Agreement and any other documents or instruments delivered pursuant thereto that represents the amount and percentage interest identified below of all of the Assignor's outstanding rights and obligations under the respective facilities identified below (including any letters of credit, guaranties and swingline loans included in such facilities and, to the extent permitted to be assigned under applicable law, all claims (including contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity), suits, causes of action and any other right of the Assignor against any Person whether known or unknown arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby) (the "Assigned Interest"). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor. 1. Assignor: _________________________________________________ 2. Assignee: __________________________________________________ [and is an affiliate of Assignor] 3. Borrower: Consumers Energy Company 4. Agent: JPMorgan Chase Bank, N.A., as the Agent under the Credit Agreement. D-1 5. Credit Agreement: The Third Amended and Restated Credit Agreement dated as of May 18, 2005 among Consumers Energy Company, the Banks party thereto, and JPMorgan Chase Bank, N.A., as Agent. 6. Assigned Interest:
Aggregate Amount of Amount of Commitment/ Percentage Assigned of Commitment/ Outstanding Outstanding Credit Exposure Commitment/ Outstanding Credit Credit Exposure for all Assigned* Exposure(1) Facility Assigned Banks* - ------------------------------- --------------------------- --------------------------------- --------------------------------- - ------------ $ $ -------% - ------------ $ $ -------% - ------------ $ $ -------%
7. Trade Date:______________________________________ 2 Effective Date: ____________________, 20__ TO BE INSERTED BY AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER BY THE AGENT.] - ------------------------------ * Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date. 1 Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Banks thereunder. 2 Insert if satisfaction of minimum amounts is to be determined as of the Trade Date. D-2 The terms set forth in this Assignment and Assumption are hereby agreed to: ASSIGNOR [NAME OF ASSIGNOR] By:_____________________________________________ Title: ASSIGNEE [NAME OF ASSIGNEE] By:_____________________________________________ Title: [Consented to and](3) Accepted: JPMORGAN CHASE BANK, N.A., as Agent By:_____________________________________________ Title: [Consented to:](4) [NAME OF RELEVANT PARTY] By:_____________________________________________ Title: - ------------------------- 3 To be added only if the consent of the Agent is required by the terms of the Credit Agreement. 4 To be added only if the consent of the Company and/or other parties (e.g. LC Issuer) is required by the terms of the Credit Agreement. D-3 ANNEX 1 TERMS AND CONDITIONS FOR ASSIGNMENT AND ASSUMPTION 1. Representations and Warranties. 1.1 Assignor. The Assignor represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby. Neither the Assignor nor any of its officers, directors, employees, agents or attorneys shall be responsible for (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Credit Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency, perfection, priority, collectibility, or value of the Credit Documents or any collateral thereunder, (iii) the financial condition of the Company, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Credit Document, (iv) the performance or observance by the Company, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Credit Document, (v) inspecting any of the property, books or records of the Company, or any guarantor, or (vi) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Credit Extensions or the Credit Documents. 1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Bank under the Credit Agreement, (ii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Bank thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Bank thereunder, (iii) agrees that its payment instructions and notice instructions are as set forth in Schedule 1 to this Assignment and Assumption, (iv) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are "plan assets" as defined under ERISA and that its rights, benefits and interests in and under the Credit Documents will not be "plan assets" under ERISA, (v) agrees to indemnify and hold the Assignor harmless against all losses, costs and expenses (including reasonable attorneys' fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee's non-performance of the obligations assumed under this Assignment and Assumption, (vi) it has received a copy of the Credit Agreement, together with copies of financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Agent or any other Bank, and (vii) attached as Schedule 1 to this Assignment and Assumption is any documentation required to be delivered by the Assignee with respect to its tax status pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee and (b) agrees that (i) it will, independently and without reliance on the Agent, the Assignor or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Documents, and (ii) it will Annex 1 perform in accordance with their terms all of the obligations which by the terms of the Credit Documents are required to be performed by it as a Bank. 2. Payments. The Assignee shall pay the Assignor, on the Effective Date, the amount agreed to by the Assignor and the Assignee. From and after the Effective Date, the Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, Reimbursement Obligations, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date. 3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York. Annex 1 ADMINISTRATIVE QUESTIONNAIRE (Schedule to be supplied by Closing Unit or Trading Documentation Unit) [(For Forms for Primary Syndication call Peterine Svoboda at 312-732-8844) (For Forms after Primary Syndication call Jim Bartz at 312-732-1242)] US AND NON-US TAX INFORMATION REPORTING REQUIREMENTS (Schedule to be supplied by Closing Unit or Trading Documentation Unit) [(For Forms for Primary Syndication call Peterine Svoboda at 312-732-8844) (For Forms after Primary Syndication call Jim Bartz at 312-732-1242)] EXHIBIT E TERMS OF SUBORDINATION [JUNIOR SUBORDINATED DEBT] ARTICLE ____ SUBORDINATION Section 1. Applicability of Article; Securities Subordinated to Senior Indebtedness. (a) This Article ____ shall apply only to the Securities of any series which, pursuant to Section ___, are expressly made subject to this Article. Such Securities are referred to in this Article ____ as "Subordinated Securities." (b) The Issuer covenants and agrees, and each Holder of Subordinated Securities by his acceptance thereof likewise covenants and agrees, that the indebtedness represented by the Subordinated Securities and the payment of the principal and interest, if any, on the Subordinated Securities is subordinated and subject in right, to the extent and in the manner provided in this Article, to the prior payment in full of all Senior Indebtedness. "Senior Indebtedness" means the principal of and premium, if any, and interest on the following, whether outstanding on the date hereof or thereafter incurred, created or assumed: (i) indebtedness of the Issuer for money borrowed by the Issuer (including purchase money obligations) or evidenced by debentures (other than the Subordinated Securities), notes, bankers' acceptances or other corporate debt securities, or similar instruments issued by the Issuer; (ii) all capital lease obligations of the Issuer; (iii) all obligations of the Issuer issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Issuer and all obligations of the Issuer under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) obligations with respect to letters of credit; (v) all indebtedness of others of the type referred to in the preceding clauses (i) through (iv) assumed by or guaranteed in any manner by the Issuer or in effect guaranteed by the Issuer; (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 the Issuer (whether or not such obligation is assumed by the Issuer), except for (1) any such indebtedness that is by its terms subordinated to or pari passu with the Subordinated Notes, as the case may be, including all other debt securities and guaranties in respect of those debt securities, issued to any other trusts, partnerships or other entities affiliated with the Issuer which act as a financing vehicle of the Issuer in connection with the issuance of preferred securities by such entity or other securities which rank pari passu with, or junior to, the Preferred Securities, and (2) any indebtedness between or among the Issuer and its affiliates; and/or (vii) renewals, extensions or refundings of any of the indebtedness referred to in the preceding clauses unless, in the case of any particular indebtedness, renewal, extension or refunding, under the express provisions of the instrument creating or evidencing the same or the assumption or guarantee of the same, or pursuant to which the same is outstanding, such E-1 indebtedness or such renewal, extension or refunding thereof is not superior in right of payment to the Subordinated Securities. This Article shall constitute a continuing obligation to all Persons who, in reliance upon such provisions become holders of, or continue to hold, Senior Indebtedness, and such provisions are made for the benefit of the holders of Senior Indebtedness, and such holders are made obligees hereunder and they and/or each of them may enforce such provisions. Section 2. Issuer Not to Make Payments with Respect to Subordinated Securities in Certain Circumstances. (a) Upon the maturity of any Senior Indebtedness by lapse of time, acceleration or otherwise, all principal thereof and premium and interest thereon shall first be paid in full, or such payment duly provided for in cash in a manner satisfactory to the holders of such Senior Indebtedness, before any payment is made on account of the principal of, or interest on, Subordinated Securities or to acquire any Subordinated Securities or on account of any sinking fund provisions of any Subordinated Securities (except payments made in capital stock of the Issuer or in warrants, rights or options to purchase or acquire capital stock of the Issuer, sinking fund payments made in Subordinated Securities acquired by the Issuer before the maturity of such Senior Indebtedness, and payments made through the exchange of other debt obligations of the Issuer for such Subordinated Securities in accordance with the terms of such Subordinated Securities, provided that such debt obligations are subordinated to Senior Indebtedness at least to the extent that the Subordinated Securities for which they are exchanged are so subordinated pursuant to this Article ____). (b) Upon the happening and during the continuation of any default in payment of the principal of, or interest on, any Senior Indebtedness when the same becomes due and payable or in the event any judicial proceeding shall be pending with respect to any such default, then, unless and until such default shall have been cured or waived or shall have ceased to exist, no payment shall be made by the Issuer with respect to the principal of, or interest on, Subordinated Securities or to acquire any Subordinated Securities or on account of any sinking fund provisions of Subordinated Securities (except payments made in capital stock of the Issuer or in warrants, rights, or options to purchase or acquire capital stock of the Issuer, sinking fund payments made in Subordinated Securities acquired by the Issuer before such default and notice thereof, and payments made through the exchange of other debt obligations of the Issuer for such Subordinated Securities in accordance with the terms of such Subordinated Securities, provided that such debt obligations are subordinated to Senior Indebtedness at least to the extent that the Subordinated Securities for which they are exchanged are so subordinated pursuant to this Article ____). (c) In the event that, notwithstanding the provisions of this Section ___.2, the Issuer shall make any payment to the Trustee on account of the principal of or interest on Subordinated Securities, or on account of any sinking fund provisions of such Securities, after the maturity of any Senior Indebtedness as described in Section ___.2(a) above or after the happening of a default in payment of the principal of or interest on any Senior Indebtedness as described in Section ___.2(b) above, then, unless and until all Senior Indebtedness which shall have matured, E-2 and all premium and interest thereon, shall have been paid in full (or the declaration of acceleration thereof shall have been rescinded or annulled), or such default shall have been cured or waived or shall have ceased to exist, such payment (subject to the provisions of Sections ___.6 and ___.7) shall be held by the Trustee, in trust for the benefit of, and shall be paid forthwith over and delivered to, the holders of such Senior Indebtedness (pro rata as to each of such holders on the basis of the respective amounts of Senior Indebtedness held by them) or their representative or the trustee under the indenture or other agreement (if any) pursuant to which such Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all such Senior Indebtedness remaining unpaid to the extent necessary to pay the same in full in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. The Issuer shall give prompt written notice to the Trustee of any default in the payment of principal of or interest on any Senior Indebtedness. Section 3. Subordinated Securities Subordinated to Prior Payment of All Senior Indebtedness on Dissolution, Liquidation or Reorganization of Issuer. Upon any distribution of assets of the Issuer in any dissolution, winding up, liquidation or reorganization of the Issuer (whether voluntary or involuntary, in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or otherwise): (a) the holders of all Senior Indebtedness shall first be entitled to receive payments in full of the principal thereof and premium and interest due thereon, or provision shall be made for such payment, before the Holders of Subordinated Securities are entitled to receive any payment on account of the principal of or interest on such Securities; (b) any payment or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities (other than securities of the Issuer as reorganized or readjusted or securities of the Issuer or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in this Article ____ with respect to Subordinated Securities, to the payment in full without diminution or modification by such plan of all Senior Indebtedness), to which the Holders of Subordinated Securities or the Trustee on behalf of the Holders of Subordinated Securities would be entitled except for the provisions of this Article ____ shall be paid or delivered by the liquidating trustee or agent or other person making such payment or distribution directly to the holders of Senior Indebtedness or their representative, or to the trustee under any indenture under which Senior Indebtedness may have been issued (pro rata as to each such holder, representative or trustee on the basis of the respective amounts of unpaid Senior Indebtedness held or represented by each), to the extent necessary to make payment in full of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution or provision thereof to the holders of such Senior Indebtedness; and (c) in the event that notwithstanding the foregoing provisions of this Section ___.3, any payment or distribution of assets of the Issuer of any kind or character, whether in cash, property or securities (other than securities of the Issuer as reorganized or readjusted or securities of the Issuer or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in this Article ____ with E-3 respect to Subordinated Securities, to the payment in full without diminution or modification by such plan of all Senior Indebtedness), shall be received by the Trustee or the Holders of the Subordinated Securities on account of principal of or interest on the Subordinated Securities before all Senior Indebtedness is paid in full, or effective provision made for its payment, such payment or distribution (subject to the provisions of Section ___.6 and ___.7) shall be received and held in trust for and shall be paid over to the holders of the Senior Indebtedness remaining unpaid or unprovided for or their representative, or to the trustee under any indenture under which such Senior Indebtedness may have been issued (pro rata as provided in clause (b) above), for application to the payment of such Senior Indebtedness until all such Senior Indebtedness shall have been paid in full, after giving effect to any concurrent payment or distribution or provision therefor to the holders of such Senior Indebtedness. The Issuer shall give prompt written notice to the Trustee of any dissolution, winding up, liquidation or reorganization of the Issuer. The consolidation of the Issuer with, or the merger of the Issuer into, another corporation or the liquidation or dissolution of the Issuer following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article ____ hereof shall not be deemed a dissolution, winding up, liquidation or reorganization for the purposes of this Section ___.3 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated such in Article ____. Section 4. Holders of Subordinated Securities to be Subrogated to Right of Holders of Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness, the Holders of Subordinated Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of the Issuer applicable to the Senior Indebtedness until all amounts owing on Subordinated Securities shall be paid in full, and for the purposes of such subrogation no payments or distributions to the holders of the Senior Indebtedness by or on behalf of the Issuer or by or on behalf of the Holders of Subordinated Securities by virtue of this Article ____ which otherwise would have been made to the Holders of Subordinated Securities shall, as between the Issuer, its creditors other than holders of Senior Indebtedness and the Holders of Subordinated Securities, be deemed to be payment by the Issuer to or on account of the Senior Indebtedness, it being understood that the provisions of this Article ____ are and are intended solely for the purpose of defining the relative rights of the Holders of the Subordinated Securities, on the one hand, and the holders of the Senior Indebtedness, on the other hand. Section 5. Obligation of the Issuer Unconditional. Nothing contained in this Article ____ or elsewhere in this Indenture or in any Subordinated Security is intended to or shall impair, as among the Issuer, its creditors other than holders of Senior Indebtedness and the Holders of Subordinated Securities, the obligation of the Issuer, which is absolute and unconditional, to pay to the Holders of Subordinated Securities the principal of, and interest on, Subordinated Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders of Subordinated Securities and creditors of the Issuer other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the Holder of any Subordinated Security from E-4 exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article ____ of the holders of Senior Indebtedness in respect of cash, property or securities of the Issuer received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Issuer referred to in this Article ____, the Trustee and Holders of Subordinated Securities shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding up, liquidation or reorganization proceedings are pending, or, subject to the provisions of Section ___ and ___, a certificate of the receiver, trustee in bankruptcy, liquidating trustee or agent or other Person making such payment or distribution to the Trustee or the Holders of Subordinated Securities, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Issuer, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article ____. Nothing contained in this Article ____ or elsewhere in this Indenture or in any Subordinated Security is intended to or shall affect the obligation of the Issuer to make, or prevent the Issuer from making, at any time except during the pendency of any dissolution, winding up, liquidation or reorganization proceeding, and, except as provided in subsections (a) and (b) of Section ___.2, payments at any time of the principal of, or interest on, Subordinated Securities. Section 6. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice. The Issuer shall give prompt written notice to the Trustee of any fact known to the Issuer which would prohibit the making of any payment or distribution to or by the Trustee in respect of the Subordinated Securities. Notwithstanding the provisions of this Article ____ or any provision of this Indenture, the Trustee shall not at any time be charged with knowledge of the existence of any facts which would prohibit the making of any payment or distribution to or by the Trustee, unless at least two Business Days prior to the making of any such payment, the Trustee shall have received written notice thereof from the Issuer or from one or more holders of Senior Indebtedness or from any representative thereof or from any trustee therefor, together with proof satisfactory to the Trustee of such holding of Senior Indebtedness or of the authority of such representative or trustee; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Sections ___ and ___, shall be entitled to assume conclusively that no such facts exist. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a representative or trustee on behalf of the holder) to establish that such notice has been given by a holder of Senior Indebtedness (or a representative of or trustee on behalf of any such holder). In the event that the Trustee determines, in good faith, that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payments or distribution pursuant of this Article ____, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, as to the extent to which such Person is entitled to participate in such payment or distribution, and as to other facts pertinent to the rights of such Person under this Article ____, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. The Trustee, however, shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness E-5 and nothing in this Article ____ shall apply to claims of, or payments to, the Trustee under or pursuant to Section ___. Section 7. Application by Trustee of Monies or Government Obligations Deposited with It. Money or Government Obligations deposited in trust with the Trustee pursuant to and in accordance with Section ____ shall be for the sole benefit of Securityholders and, to the extent allocated for the payment of Subordinated Securities, shall not be subject to the subordination provisions of this Article ____, if the same are deposited in trust prior to the happening of any event specified in Section ___.2. Otherwise, any deposit of monies or Government Obligations by the Issuer with the Trustee or any paying agent (whether or not in trust) for the payment of the principal of, or interest on, any Subordinated Securities shall be subject to the provisions of Section ___.1, ___.2 and ___.3 except that, if prior to the date on which by the terms of this Indenture any such monies may become payable for any purposes (including, without limitation, the payment of the principal of, or the interest, if any, on any Subordinated Security) the Trustee shall not have received with respect to such monies the notice provided for in Section ___.6, then the Trustee or the paying agent shall have full power and authority to receive such monies and Government Obligations and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such date. This Section ___.7 shall be construed solely for the benefit of the Trustee and paying agent and, as to the first sentence hereof, the Securityholders, and shall not otherwise effect the rights of holders of Senior Indebtedness. Section 8. Subordination Rights Not Impaired by Acts or Omissions of Issuer or Holders of Senior Indebtedness. No rights of any present or future holders of any Senior Indebtedness to enforce subordination as provided herein shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Issuer or by any act or failure to act, in good faith, by any such holders or by any noncompliance by the Issuer with the terms of this Indenture, regardless of any knowledge thereof which any such holder may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Issuer may, at any time and from time to time, without the consent of or notice to the Trustee or the Holders of the Subordinated Securities, without incurring responsibility to the Holders of the Subordinated Securities and without impairing or releasing the subordination provided in this Article ____ or the obligations hereunder of the Holders of the Subordinated Securities to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection for such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Issuer, as the case may be, and any other Person. Section 9. Securityholders Authorize Trustee to Effectuate Subordination of Securities. Each Holder of Subordinated Securities by his acceptance thereof authorizes and expressly E-6 directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article ____ and appoints the Trustee his attorney-in-fact for such purpose, including in the event of any dissolution, winding up, liquidation or reorganization of the Issuer (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or otherwise) the immediate filing of a claim for the unpaid balance of his Subordinated Securities in the form required in said proceedings and causing said claim to be approved. If the Trustee does not file a proper claim or proof of debt in the form required in such proceeding prior to 30 days before the expiration of the time to file such claim or claims, then the holders of Senior Indebtedness have the right to file and are hereby authorized to file an appropriate claim for and on behalf of the Holders of said Securities. Section 10. Right of Trustee to Hold Senior Indebtedness. The Trustee in its individual capacity shall be entitled to all of the rights set forth in this Article ____ in respect of any Senior Indebtedness at any time held by it to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness of the Issuer, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article ____, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Sections ___.2 and ___.3, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Holders of Subordinated Securities, the Issuer or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article ____ or otherwise. Section 11. Article ____ Not to Prevent Events of Defaults. The failure to make a payment on account of principal or interest by reason of any provision in this Article ____ shall not be construed as preventing the occurrence of an Event of Default under Section ____. E-7 EXHIBIT F TERMS OF SUBORDINATION [GUARANTY OF HYBRID PREFERRED SECURITIES] SECTION ___. This Guarantee will constitute an unsecured obligation of the Guarantor and will rank subordinate and junior in right of payment to all other liabilities of the Guarantor and pari passu with any guarantee now or hereafter entered into by the Guarantor in respect of the securities representing common beneficial interests in the assets of the Issuer or of any preferred or preference stock of any affiliate of the Guarantor. F-1 EXHIBIT G FORM OF BOND DELIVERY AGREEMENT BOND DELIVERY AGREEMENT CONSUMERS ENERGY COMPANY TO JPMORGAN CHASE BANK, N.A., AS AGENT Dated as of May 18, 2005 --------------- Relating to First Mortgage Bonds, 2005-1 Collateral Series (Interest Bearing) --------------- G-1 THIS BOND DELIVERY AGREEMENT (this "Agreement"), dated as of May 18, 2005, is between Consumers Energy Company (the "Company"), and JPMorgan Chase Bank, N.A., as administrative agent (the "Agent") under the Third Amended and Restated Credit Agreement (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") dated as of May 18, 2005 among the Company, the financial institutions parties thereto (the "Banks"), and the Agent. Capitalized terms used but not otherwise defined herein have the respective meanings assigned to such terms in the Credit Agreement. Whereas, the Company has entered into the Credit Agreement and may from time to time make borrowings thereunder in accordance with the provisions thereof; Whereas, the Company has established its First Mortgage Bonds, 2005-1 Collateral Series (Interest Bearing) in the aggregate principal amount of $500,000,000 (the "Bonds"), to be issued under and in accordance with the One Hundred Third Supplemental Indenture dated as of May 18, 2005 (the "Supplemental Indenture") to the Indenture of the Company to JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) dated as of September 1, 1945 (as amended and supplemented, the "Indenture"); and Whereas, the Company proposes to issue and deliver to the Agent, for the benefit of the Banks, the Bonds in order to provide the Bonds as evidence of (and the benefit of the lien of the Indenture with respect to the Bonds for) the Obligations of the Company arising under 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 Company and the Agent hereby agree as follows: ARTICLE I THE BONDS Section 1.1 Delivery of Bonds. In order to provide the Bonds as evidence of (and through the Bonds the benefit of the Lien of the Indenture for) the Obligations of the Company under the Credit Agreement as aforesaid, the Company hereby delivers to the Agent the Bonds in the aggregate principal amount of $500,000,000, maturing on the earlier of (a) May 18, 2010 or such later date as may be fixed as the "Termination Date" under and as defined in the Credit Agreement and (b) the "FMB Release Date" (as defined in the Credit Agreement) and bearing interest as provided in the Supplemental Indenture. The obligation of the Company to pay the principal of and interest on the Bonds shall be deemed to have been satisfied and discharged in full or in part, as the case may be, to the extent of payment by the Company of the Obligations, all as set forth in the Bonds and in Section 1 of the Supplemental Indenture. The Bonds are registered in the name of the Agent and shall be owned and held by the Agent, subject to the provisions of this Agreement, for the benefit of the Banks, and the G-2 Company shall have no interest therein. The Agent shall be entitled to exercise all rights of bondholders under the Indenture with respect to the Bonds. The Agent hereby acknowledges receipt of the Bonds. Section 1.2 Payments on the Bonds. Any payments received by the Agent on account of the principal of or interest on the Bonds shall be deemed to be and treated in all respects as payments of the Obligations, and such payments shall be distributed by the Agent to the Banks in accordance with the provisions of the Credit Agreement applicable to payments received by the Agent in respect of the Obligations (and the Company hereby consents to such distributions). ARTICLE II NO TRANSFER OF BONDS; SURRENDER OF BONDS Section 2.1 No Transfer of the Bonds. The Agent shall not sell, assign or otherwise transfer any Bonds delivered to it under this Agreement except to a successor administrative agent under the Credit Agreement. The Company may take such actions as it shall deem necessary, desirable or appropriate to effect compliance with such restrictions on transfer, including the issuance of stop-transfer instructions to the trustee under the Indenture or any other transfer agent thereunder. Section 2.2 Surrender of Bonds. (a) The Agent shall forthwith surrender to or upon the order of the Company all Bonds held by it at the first time at which the Commitments shall have been terminated and all Obligations shall have been paid in full. (b) Upon any permanent reduction in the Aggregate Commitment pursuant to the terms of the Credit Agreement, the Agent shall forthwith surrender to or upon the order of the Company Bonds in an aggregate principal amount equal to the excess of the aggregate principal amount of Bonds held by the Agent over the Aggregate Commitment. ARTICLE III GOVERNING LAW This Agreement shall construed in accordance with and governed by the internal laws (without regard to the conflict of laws provisions) of the State of New York, but giving effect to Federal laws applicable to national banks. [SIGNATURE PAGE FOLLOWS] G-3 IN WITNESS WHEREOF, the Company and the Agent have caused this Agreement to be executed and delivered as of the date first above written. CONSUMERS ENERGY COMPANY ________________________________________ Name: Title: JPMORGAN CHASE BANK, N.A., as Agent ________________________________________ Name: Title: G-4 EXHIBIT H FORM OF INCREASE REQUEST _________________________, 20___ JPMorgan Chase Bank, N.A., as Agent under the Credit Agreement referred to below Ladies/Gentlemen: Please refer to the Third Amended and Restated Credit Agreement dated as of May 18, 2005 among Consumers Energy Company (the "Company"), various financial institutions and JPMorgan Chase Bank, N.A., as Agent (as amended, modified, extended or restated from time to time, the "Credit Agreement"). Capitalized terms used but not defined herein have the respective meanings set forth in the Credit Agreement. In accordance with Section 2.5(c) of the Credit Agreement, the Company hereby requests an increase in the Aggregate Commitment from $__________ to $__________. Such increase shall be made by [increasing the Commitment of ____________ from $________ to $________] [adding _____________ as a Bank under the Credit Agreement with a Commitment of $____________] as set forth in the letter attached hereto. Such increase shall be effective three Business Days after the date that the Agent accepts the letter attached hereto or such other date as is agreed among the Company, the Agent and the [increasing] [new] Bank. Very truly yours, CONSUMERS ENERGY COMPANY By: _______________________ Name: _____________________ Title: ____________________ H-1 ANNEX I TO EXHIBIT H [Date] JPMorgan Chase Bank, N.A., as Agent under the Credit Agreement referred to below Ladies/Gentlemen: Please refer to the letter dated __________, 20__ from Consumers Energy Company (the "Company") requesting an increase in the Aggregate Commitment from $__________ to $__________ pursuant to Section 2.5(c) of the Credit Agreement dated as of May 18, 2005 among the Company, various financial institutions and JPMorgan Chase Bank, N.A., as Agent (as amended, modified, extended or restated from time to time, the "Credit Agreement"). Capitalized terms used but not defined herein have the respective meanings set forth in the Credit Agreement. The undersigned hereby confirms that it has agreed to increase its Commitment under the Credit Agreement from $__________ to $__________ effective on the date which is three Business Days after the acceptance hereof by the Agent or on such other date as may be agreed among the Company, the Agent and the undersigned. Very truly yours, [NAME OF INCREASING BANK] By:________________________ Title:_____________________ Accepted as of __________, _____ JPMORGAN CHASE BANK, N.A., as Agent By: ______________________________ Name: ____________________________ Title: ___________________________ H-2 ANNEX II TO EXHIBIT H [Date] JPMorgan Chase Bank, N.A., as Agent under the Credit Agreement referred to below Ladies/Gentlemen: Please refer to the letter dated __________, 20___ from Consumers Energy Company (the "Company") requesting an increase in the Aggregate Commitment from $__________ to $__________ pursuant to Section 2.5(c) of the Credit Agreement dated as of May 18, 2005 among the Company, various financial institutions and JPMorgan Chase Bank, N.A., as Agent (as amended, modified, extended or restated from time to time, the "Credit Agreement"). Capitalized terms used but not defined herein have the respective meanings set forth in the Credit Agreement. The undersigned hereby confirms that it has agreed to become a Bank under the Credit Agreement with a Commitment of $__________ effective on the date which is three Business Days after the acceptance hereof, and consent hereto, by the Agent or on such other date as may be agreed among the Company, the Agent and the undersigned. The undersigned (a) acknowledges that it has received a copy of the Credit Agreement and the Schedules and Exhibits thereto, together with copies of the most recent financial statements delivered by the Company pursuant to the Credit Agreement, and such other documents and information as it has deemed appropriate to make its own credit and legal analysis and decision to become a Bank under the Credit Agreement; and (b) agrees that it will, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit and legal decisions in taking or not taking action under the Credit Agreement. The undersigned represents and warrants that (i) it is duly organized and existing and it has full power and authority to take, and has taken, all action necessary to execute and deliver this letter and to become a Bank under the Credit Agreement; and (ii) no notices to, or consents, authorizations or approvals of, any Person are required (other than any already given or obtained) for its due execution and delivery of this letter and the performance of its obligations as a Bank under the Credit Agreement. The undersigned agrees to execute and deliver such other instruments, and take such other actions, as the Agent may reasonably request in connection with the transactions contemplated by this letter. H-3 The following administrative details apply to the undersigned: (A) Notice Address: Legal name: __________________________ Address: _____________________________ _____________________________ _____________________________ Attention: ___________________________ Telephone: (___) _____________________ Facsimile: (___) _____________________ (B) Payment Instructions: Account No.: _________________________ At: __________________________ _____________________________ _____________________________ Reference: ___________________________ Attention: ___________________________ The undersigned acknowledges and agrees that, on the date on which the undersigned becomes a Bank under the Credit Agreement as set forth in the second paragraph hereof, the undersigned will be bound by the terms of the Credit Agreement as fully and to the same extent as if the undersigned were an original Bank under the Credit Agreement. Very truly yours, [NAME OF NEW BANK] By:________________________ Title:_____________________ Accepted and consented to as of ______________, 20___ JPMORGAN CHASE BANK, N.A., as Agent By: _____________________________ Name: ___________________________ Title: __________________________ H-4 SCHEDULE 1 PRICING SCHEDULE The Applicable Margin shall be determined pursuant to the table below based on the lower of the S&P Rating and the Moody's Rating.
S&P Rating lower than BB S&P Rating of S&P Rating of S&P Rating of S&P Rating of S&P Rating of or Moody's BBB+ or Moody's BBB or Moody's BBB- or Moody's BB+ or Moody's BB or Moody's Rating lower Ratings Rating of Baa1 Rating of Baa2 Rating of Baa3 Rating of Ba1 Rating of Ba2 than Ba2 - --------------------- --------------- -------------- --------------- -------------- ------------- ------------- Commitment Fee Rate 0.125% 0.150% 0.175% 0.200% 0.225% 0.350% Eurodollar Rate +/LC Fee Rate 0.500% 0.625% 0.750% 1.000% 1.125% 2.250% Alternate Base Rate + 0.000% 0.000% 0.000% 0.000% 0.125% 1.250% Utilization Fee Rate (>50%) 0.125% 0.125% 0.125% 0.125% 0.125% 0.125%
For purposes of the forgoing table: "Moody's Rating" means (a) at any time prior to the FMB Release Date, the rating issued by Moody's and then in effect with respect to the Senior Debt, and (b) at any time thereafter, the rating issued by Moody's and then in effect with respect to the Company's senior unsecured long-term debt (without credit enhancement) or, if such rating is not available, the rating level immediately below the higher of the most recent ratings issued by S&P and Moody's with respect to the Senior Debt. "S&P Rating" means (a) at any time prior to the FMB Release Date, the rating issued by S&P and then in effect with respect to the Senior Debt, and (b) at any time thereafter, the rating issued by S&P and then in effect with respect to the Company's senior unsecured long-term debt (without credit enhancement) or, if such rating is not available, the rating level immediately below the higher of the most recent ratings issued by S&P and Moody's with respect to the Senior Debt. If the Company does not have an S&P Rating and does not have a Moody's Rating, then the pricing in the last column of the above table shall apply. H-i SCHEDULE 2 COMMITMENT SCHEDULE
BANK COMMITMENT - ---------------------------------------------------- ------------ JPMorgan Chase Bank, N.A. $ 30,000,000 Barclays Bank PLC $ 30,000,000 Citibank, N.A. $ 30,000,000 Union Bank of California, N.A. $ 30,000,000 Wachovia Bank, National Association $ 30,000,000 Merrill Lynch Bank USA $ 30,000,000 HSBC Bank USA, National Association $ 25,000,000 Bank of America, N.A. $ 20,000,000 BNP Paribas $ 20,000,000 Credit Suisse, Cayman Islands Branch $ 20,000,000 Deutsche Bank Trust Company Americas $ 20,000,000 Fifth Third Bank $ 20,000,000 Standard Federal Bank N.A. $ 20,000,000 Sumitomo Mitsui Banking Corporation, New York Branch $ 20,000,000 Wells Fargo Bank, National Association $ 20,000,000 Allied Irish Banks, p.l.c. $ 15,000,000 Bank Hapoalim B.M. $ 15,000,000 Comerica Bank $ 15,000,000 Huntington National Bank $ 15,000,000 Morgan Stanley Bank $ 15,000,000 The Norinchukin Bank $ 15,000,000 UBS Loan Finance LLC $ 15,000,000 UFJ Bank Limited, New York Branch $ 15,000,000 Goldman Sachs Credit Partners L.P. $ 15,000,000 ------------ AGGREGATE COMMITMENT $500,000,000 ============
H-ii SCHEDULE 3 EXISTING FACILITY LC SCHEDULE
FORECASTED EXPIRATION TERMINATION AMOUNT ENTITY / PROJECT BENEFICIARY DATE DATE OUTSTANDING - ---------------- -------------------------------------- ---------- ----------- ----------- Consumers Energy Michigan Dept of Environmental Quality 05/19/06 12/31/2019 $ 500,000 Consumers Energy Michigan Dept of Environmental Quality 05/19/06 12/31/2035 $ 1,000,000 Consumers Energy Michigan Dept of Environmental Quality 05/19/06 121/31/2035 $ 1,000,000 Consumers Energy Michigan Dept of Environmental Quality 05/19/06 12/31/2048 $ 1,000,000 Consumers Energy Michigan Dept of Environmental Quality 05/19/06 12/31/2034 $ 1,000,000 Consumers Energy City of Sterling Heights, Michigan 05/19/06 5/19/2007 $ 10,000 Consumers Energy Charter Township of Oakland 05/19/06 5/19/2007 $ 25,463 Consumers Energy Michigan Bureau of Workers 05/19/06 12/31/2035 $ 2,000,000 Consumers Energy Vector Pipeline LP 9/30/2005 9/30/2005 $ 3,102,500 Consumers Energy BP Canada Energy Company 10/31/2005 10/31/2005 $ 5,000,000 Consumers Energy Total Gas & Power North America Inc. 4/30/2006 4/30/2006 $15,000,000 Consumers Energy Michigan Dept of Environmental Quality 4/26/2006 5/31/2005 $ 1,040,620 Consumers Energy Michigan Dept of Environmental Quality 5/13/2005 12/31/2009 $ 205,620 Consumers Energy Michigan Dept of Environmental Quality 5/13/2005 12/31/2035 $ 47,880 Consumers Energy Michigan Dept of Environmental Quality 5/13/2005 12/31/2007 $ 1,363,800 Consumers Energy Michigan Dept of Environmental Quality 5/13/2005 12/31/2035 $ 90,000 ----------- TOTAL $32,385,883 ===========
EX-31.(A) 3 k97012exv31wxay.txt CMS ENERGY CORPORATION'S CERTIFICATION OF THE CEO TO SECTION 302 Exhibit (31)(a) CERTIFICATION OF DAVID W. JOOS I, David W. Joos, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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: August 4, 2005 By: /s/ David W. Joos ---------------------------------- David W. Joos President and Chief Executive Officer EX-31.(B) 4 k97012exv31wxby.txt CMS ENERGY CORPORATION'S CERTIFICATION OF THE CFO TO SECTION 302 Exhibit (31)(b) CERTIFICATION OF THOMAS J. WEBB I, Thomas J. Webb, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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: August 4, 2005 By /s/ Thomas J. Webb ------------------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer EX-31.(C) 5 k97012exv31wxcy.txt CONSUMERS ENERGY COMPANY'S CERTIFICATION OF THE CEO TO SECTION 302 Exhibit (31)(c) CERTIFICATION OF DAVID W. JOOS I, David W. Joos, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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: August 4, 2005 By: /s/ David W. Joos --------------------------------- David W. Joos Chief Executive Officer EX-31.(D) 6 k97012exv31wxdy.txt CONSUMERS ENERGY COMPANY'S CERTIFICATION OF THE CFO TO SECTION 302 Exhibit (31)(d) CERTIFICATION OF THOMAS J. WEBB I, Thomas J. Webb, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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: August 4, 2005 By /s/ Thomas J. Webb ----------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer EX-32.(A) 7 k97012exv32wxay.txt CMS ENERGY CORPORATION'S CERTIFICATION PUSUANT 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 Quarterly Report on Form 10-Q of CMS Energy Corporation (the "Company") for the quarterly period ended June 30, 2005 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: August 4, 2005 /s/ Thomas J. Webb - ------------------------------------------------ Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer Date: August 4, 2005 EX-32.(B) 8 k97012exv32wxby.txt CONSUMERS ENERGY COMPANY'S CERTIFICATION PUSUANT 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 Quarterly Report on Form 10-Q of Consumers Energy Company (the "Company") for the quarterly period ended June 30, 2005 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: August 4, 2005 /s/ Thomas J. Webb - ------------------------------------------------ Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer Date: August 4, 2005 -----END PRIVACY-ENHANCED MESSAGE-----