-----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, R7WFqCY0FAQE+slo5eEd/CRAG+UJktvn8SF2Z8f8fzdMKngIW6fpXBp9ve8tEz/5 9R6etUOrj0cLuyNFITrh0w== 0000950124-06-004182.txt : 20060804 0000950124-06-004182.hdr.sgml : 20060804 20060804153312 ACCESSION NUMBER: 0000950124-06-004182 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060804 DATE AS OF CHANGE: 20060804 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: 061005727 BUSINESS ADDRESS: STREET 1: ONE ENERGY PLAZA CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 5177881031 MAIL ADDRESS: STREET 1: ONE ENERGY PLAZA CITY: JACKSON STATE: MI ZIP: 49201 FORMER COMPANY: FORMER CONFORMED NAME: CONSUMERS POWER CO DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CMS ENERGY CORP CENTRAL INDEX KEY: 0000811156 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 382726431 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09513 FILM NUMBER: 061005728 BUSINESS ADDRESS: STREET 1: ONE ENERGY PLAZA CITY: JACKSON STATE: MI ZIP: 49201 BUSINESS PHONE: 5177881031 MAIL ADDRESS: STREET 1: ONE ENERGY PLAZA CITY: JACKSON STATE: MI ZIP: 49201 10-Q 1 k06781e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2006 ================================================================================ 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, 2006 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 Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. CMS ENERGY CORPORATION: Large accelerated filer [X] Accelerated filer [ ] Non-Accelerated filer [ ] CONSUMERS ENERGY COMPANY: Large accelerated filer [ ] Accelerated filer [ ] Non-Accelerated filer [X] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). CMS ENERGY CORPORATION: Yes [ ] No [X] CONSUMERS ENERGY COMPANY: Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock at August 1, 2006: CMS ENERGY CORPORATION: CMS Energy Common Stock, $.01 par value 221,587,738 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, 2006 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.................................................................................................. 3 PART I: FINANCIAL INFORMATION CMS Energy Corporation Management's Discussion and Analysis Executive Overview.............................................................................. CMS - 1 Forward-Looking Statements and Information...................................................... CMS - 2 Results of Operations........................................................................... CMS - 5 Critical Accounting Policies.................................................................... CMS - 13 Capital Resources and Liquidity................................................................. CMS - 18 Outlook......................................................................................... CMS - 20 Implementation of New Accounting Standards...................................................... CMS - 30 New Accounting Standards Not Yet Effective...................................................... CMS - 30 Consolidated Financial Statements Consolidated Statements of Income .............................................................. CMS - 32 Consolidated Statements of Cash Flows........................................................... CMS - 35 Consolidated Balance Sheets..................................................................... CMS - 36 Consolidated Statements of Common Stockholders' Equity.......................................... CMS - 38 Condensed Notes to Consolidated Financial Statements (Unaudited): 1. Corporate Structure and Accounting Policies................................................ CMS - 39 2. Contingencies.............................................................................. CMS - 41 3. Financings and Capitalization.............................................................. CMS - 59 4. Earnings Per Share......................................................................... CMS - 61 5. Financial and Derivative Instruments....................................................... CMS - 63 6. Retirement Benefits........................................................................ CMS - 70 7. Asset Retirement Obligations............................................................... CMS - 72 8. Executive Incentive Compensation........................................................... CMS - 73 9. Equity Method Investments.................................................................. CMS - 75 10. Reportable Segments ....................................................................... CMS - 76
1 TABLE OF CONTENTS (CONTINUED)
Page -------- Consumers Energy Company Management's Discussion and Analysis Executive Overview.............................................................................. CE - 1 Forward-Looking Statements and Information...................................................... CE - 2 Results of Operations........................................................................... CE - 5 Critical Accounting Policies.................................................................... CE - 10 Capital Resources and Liquidity................................................................. CE - 14 Outlook......................................................................................... CE - 16 Implementation of New Accounting Standards...................................................... CE - 24 New Accounting Standards Not Yet Effective...................................................... CE - 25 Consolidated Financial Statements Consolidated Statements of Income............................................................... CE - 26 Consolidated Statements of Cash Flows........................................................... CE - 27 Consolidated Balance Sheets..................................................................... CE - 28 Consolidated Statements of Common Stockholder's Equity.......................................... CE - 30 Condensed Notes to Consolidated Financial Statements (Unaudited): 1. Corporate Structure and Accounting Policies................................................. CE - 33 2. Contingencies............................................................................... CE - 35 3. Financings and Capitalization............................................................... CE - 48 4. Financial and Derivative Instruments........................................................ CE - 50 5. Retirement Benefits......................................................................... CE - 56 6. Asset Retirement Obligations................................................................ CE - 58 7. Executive Incentive Compensation............................................................ CE - 59 8. Reportable Segments......................................................................... CE - 62 Quantitative and Qualitative Disclosures about Market Risk................................................ CO - 1 Controls and Procedures................................................................................... CO - 1 PART II: OTHER INFORMATION Item 1. Legal Proceedings......................................................................... CO - 2 Item 1A. Risk Factors.............................................................................. CO - 5 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................... CO - 8 Item 3. Defaults Upon Senior Securities........................................................... CO - 8 Item 4. Submission of Matters to a Vote of Security Holders....................................... CO - 8 Item 5. Other Information......................................................................... CO - 9 Item 6. Exhibits.................................................................................. CO - 9 Signatures........................................................................................... CO - 11
2 GLOSSARY Certain terms used in the text and financial statements are defined below AFUDC............................. Allowance for Funds Used During Construction ALJ............................... Administrative Law Judge 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 Bay Harbor........................ a residential/commercial real estate area located near Petoskey, Michigan. In 2002, CMS Energy sold its interest in Bay Harbor. bcf............................... One billion cubic feet of gas Big Rock.......................... Big Rock Point nuclear power plant, owned by Consumers Board of Directors................ Board of Directors of CMS Energy CEO............................... Chief Executive Officer CFO............................... Chief Financial Officer CFTC.............................. Commodity Futures Trading Commission 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 Inc., 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 Midland....................... CMS Midland Inc., a subsidiary of Consumers that has a 49 percent ownership interest in the MCV Partnership CMS Midland Holdings Company...... CMS Midland Holdings Company, a subsidiary of Consumers that has a 46 percent ownership interest in First Midland Limited Partnership and a 35 percent lessor interest in the MCV Facility 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 Consumers......................... Consumers Energy Company, a subsidiary of CMS Energy CPEE.............................. Companhia Paulista de Energia Eletrica, a subsidiary of Enterprises Customer Choice Act............... Customer Choice and Electricity Reliability Act, a Michigan statute enacted in June 2000 DCCP.............................. Defined Company Contribution Plan Detroit Edison.................... The Detroit Edison Company, a non-affiliated company
3 DIG............................... Dearborn Industrial Generation, LLC, an indirect wholly owned subsidiary of CMS Energy DOE............................... U.S. Department of Energy DOJ............................... U.S. Department of Justice Dow............................... The Dow Chemical Company, a non-affiliated company 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 Entergy........................... Entergy Corporation, a non-affiliated company 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 Exchange Act...................... Securities Exchange Act of 1934, as amended FASB.............................. Financial Accounting Standards Board FASB Interpretation No. 46(R)..... Revised FASB Interpretation No. 46, Consolidation of Variable Interest Entities FERC.............................. Federal Energy Regulatory Commission FIN 47............................ FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations FIN 48............................ FASB Interpretation No. 48, Uncertainty in Income Taxes FMB............................... First Mortgage Bonds FMLP.............................. First Midland Limited Partnership, a partnership that holds a lessor interest in the MCV Facility and an indirect subsidiary of Consumers FTR............................... Financial transmission right GAAP.............................. Generally Accepted Accounting Principles GasAtacama........................ An integrated natural gas pipeline and electric generating plant 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 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 ISFSI............................. Independent Spent Fuel Storage Installation IRS............................... Internal Revenue Service ITC............................... ITC Holdings Corporation Jorf Lasfar....................... The 1,356 MW coal-fueled power plant in Morocco, jointly owned by CMS Generation and ABB Energy Ventures, Inc. Jubail............................ A 240 MW natural gas cogeneration power plant located in Saudi Arabia, in which CMS Generation owns a 25 percent interest
4 kWh............................... Kilowatt-hour (a unit of power equal to one thousand watt hours) Ludington......................... Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison mcf............................... One thousand cubic feet of gas 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 METC.............................. Michigan Electric Transmission Company, LLC 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 Transmission System Operator, Inc. MMBtu............................. Million British Thermal Units MPSC.............................. Michigan Public Service Commission MRV............................... Market-Related Value of Plan assets MSBT.............................. Michigan Single Business Tax MW................................ Megawatt (a unit of power equal to one million watts) NEIL.............................. Nuclear Electric Insurance Limited, an industry mutual insurance company owned by member utility companies Neyveli........................... CMS Generation Neyveli Ltd, a 250 MW lignite-fired power station located in Neyveli, Tamil Nadu, India, in which CMS International Ventures holds a 50 percent interest 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 OPEB.............................. Postretirement benefit plans other than pensions for retired employees Palisades......................... Palisades nuclear power plant, which is owned by Consumers
5 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 PJM RTO........................... Pennsylvania-Jersey-Maryland Regional Transmission Organization 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 SAB No. 107....................... Staff Accounting Bulletin No. 107, Share-Based Payment 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. 88........................ SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" SFAS No. 98........................ SFAS No. 98, "Accounting for Leases" SFAS No. 106....................... SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" SFAS No. 115....................... SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" SFAS No. 123(R).................... SFAS No. 123 (revised 2004), "Share-Based Payment" SFAS No. 132(R).................... SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits"
6 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 Takoradi........................... A 200 MW open-cycle combustion turbine crude oil power plant located in Ghana, in which CMS Generation owns a 90 percent interest Taweelah........................... Al Taweelah A2, a power and desalination plant of Emirates CMS Power Company, in which CMS Generation holds a 40 percent interest
7 (This page intentionally left blank) 8 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/A Amendment No. 1 for the year ended December 31, 2005. EXECUTIVE OVERVIEW CMS Energy is an energy company operating 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. We earn our revenue and generate cash from operations by providing electric and natural gas utility services, electric power generation, and gas distribution, 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 electric and gas utility operations, - energy commodity prices, - interest rates, and - our debt credit rating. During the past several years, our business strategy has involved improving our balance sheet and maintaining focus on our core strength: utility operations 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 selected assets, and to improve earnings and cash flow from the businesses we retain. In July 2006, we reached an agreement to sell the Palisades nuclear plant to Entergy for $380 million. We also signed a 15-year power purchase agreement for 100 percent of the plant's current electric output. We are targeting to close the sale in the first quarter of 2007. The sale will result in an immediate improvement in our cash flow, a reduction in our nuclear operating and decommissioning risk, and an improvement in our financial flexibility to support other utility investments. We expect that a portion of the proceeds will benefit our customers. We plan to use the cash that we retain from the sale to reduce debt. We are working to reduce Parent debt. During the first six months of 2006, we retired $76 million of CMS Energy senior notes. We also invested $200 million in Consumers, and Consumers extinguished, through a legal defeasance, $129 million of 9 percent related party notes. Working capital and cash flow continue to be a challenge for us. Natural gas prices continue to be volatile and remain at high levels. Although our natural gas purchases are recoverable from our utility customers, higher priced natural gas stored as inventory requires additional liquidity due to the lag in cost recovery. CMS-1 CMS Energy Corporation In addition to causing working capital issues for us, historically high natural gas prices caused the MCV Partnership to reevaluate the economics of operating the MCV Facility and to record an impairment charge in 2005. High gas prices could result in a further impairment of our interest in the MCV Partnership. Due to the impairment of the MCV Facility and operating losses from mark-to-market adjustments on derivative instruments, the equity held by a Consumers' subsidiary and the other minority interest owners in the MCV Partnership has decreased significantly and is now negative. As the MCV Partnership recognizes future losses, we will assume an additional 7 percent of the MCV Partnership's negative equity, which is a portion of the limited partners' negative equity, in addition to our proportionate share. In July 2006, we reached an agreement to sell our interests in the MCV Partnership and the FMLP. The sale is subject to various regulatory approvals including the MPSC. If the sale closes by the end of 2006, as expected, it will have a $56 million positive impact on our 2006 cash flow. The sale will reduce our exposure to sustained high natural gas prices. We will use the proceeds to reduce utility debt. If the sale is not completed, the viability of the MCV Facility is still in question. Going forward, our strategy will continue to focus on: - managing cash flow issues, - reducing parent company debt, - maintaining and growing earnings, - reducing risk, and - positioning us to make investments that complement our strengths. As we execute our strategy, we will need to overcome a sluggish Michigan economy that has been further hampered by recent negative developments in Michigan's automotive industry and limited growth in the non-automotive sectors of our economy. These negative effects will be offset somewhat by the reduction we are experiencing in ROA load in our service territory. At June 30, 2006, alternative electric suppliers were providing 311 MW of generation service to ROA customers. This is 4 percent of our total distribution load and represents a decrease of 62 percent of ROA load compared to June 30, 2005. It is, however, difficult to predict future ROA customer trends. Finally, successful execution of our strategy will require continuing earnings and cash flow contributions from our Enterprises businesses. FORWARD-LOOKING STATEMENTS AND INFORMATION This Form 10-Q and other written and oral statements that we make contain forward-looking statements as defined in Rule 3b-6 under the Securities Exchange Act of 1934, as amended, Rule 175 under the Securities Act of 1933, as amended, and relevant legal decisions. Our intention with the use of such words as "may," "could," "anticipates," "believes," "estimates," "expects," "intends," "plans," and other similar words is to identify forward-looking statements that involve risk and uncertainty. We designed this discussion of potential risks and uncertainties to highlight important factors that may impact our business and financial outlook. We have no obligation to update or revise forward-looking statements regardless of whether new information, future events, or any other factors affect the information contained in the statements. These forward-looking statements are subject to various factors that could cause our actual results to differ materially from the results anticipated in these statements. Such factors include our inability to predict and (or) control: CMS-2 CMS Energy Corporation - 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, including 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, including but not limited to Bay Harbor, - potentially adverse regulatory treatment and (or) regulatory lag concerning a number of significant questions presently before the MPSC including: - 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 increasing rapidly, - timely recognition in rates of additional equity investments in Consumers, - adequate and timely recovery of additional electric and gas rate-based investments, - adequate and timely recovery of higher MISO energy costs, and - recovery of Stranded Costs incurred due to customers choosing alternative energy suppliers, - the impact of adverse natural gas prices on the MCV Partnership and the FMLP investments, regulatory decisions that limit recovery of capacity and fixed energy payments, and our ability to complete the sale of our interests in the MCV Partnership and the FMLP, - if Consumers is successful in exercising the regulatory out clause of the MCV PPA, and if the sale of our interests in the MCV Partnership and the FMLP is not completed, the negative impact on the MCV Partnership's financial performance, - if Consumers exercises its regulatory out rights causing the MCV Partnership to terminate the MCV PPA, the effects on our ability to purchase capacity to serve our customers and recover the cost of these purchases, - 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, CMS-3 CMS Energy Corporation - energy markets, including availability of capacity and 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, - our ability to collect accounts receivable from our customers, - 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 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, - the effect on our electric utility of the direct and indirect impacts of the continued economic downturn experienced by our automotive and automotive parts manufacturing customers, - 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, - changes in available gas supplies or Argentine government regulations that could restrict natural gas exports to our GasAtacama electric generating plant and the operating and financial effects of the restrictions, - 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, - changes in tax laws or new IRS interpretations of existing tax laws, - outcome, cost, and other effects of legal and administrative proceedings, settlements, investigations and claims, including particularly claims, damages, and fines resulting from round-trip trading and inaccurate commodity price reporting, including investigations by the DOJ regarding round-trip trading and price reporting, - limitations on our ability to control the development or operation of projects in which our subsidiaries have a minority interest, - disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance and performance bonds, CMS-4 CMS Energy Corporation - 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, many of which are beyond our control. For additional information regarding these and other uncertainties, see the "Outlook" section included in this MD&A, Note 2, Contingencies, and Part II, Item 1A. Risk Factors. RESULTS OF OPERATIONS CMS ENERGY CONSOLIDATED RESULTS OF OPERATIONS
In Millions (except for per share amounts) -------------------------------- Three months ended June 30 2006 2005 Change - -------------------------- -------- -------- -------- Net Income Available to Common Stockholders $ 72 $ 27 $ 45 Basic Earnings Per Share $ 0.33 $ 0.12 $ 0.21 Diluted Earnings Per Share $ 0.31 $ 0.12 $ 0.19 -------- -------- -------- Electric Utility $ 37 $ 46 $ (9) Gas Utility (3) (3) - Enterprises (Includes the MCV Partnership and the FMLP interests) 4 29 (25) Corporate Interest and Other 32 (45) 77 Discontinued Operations 2 - 2 -------- -------- -------- Net Income Available to Common Stockholders $ 72 $ 27 $ 45 ======== ======== ========
For the three months ended June 30, 2006, net income available to common stockholders was $72 million compared to $27 million for 2005. The increase primarily reflects a $62 million impact from the resolution of an IRS income tax audit. The audit resolution resulted in an increase to net income of $46 million at our corporate interest and other segment, $8 million at Enterprises, $4 million at the electric utility, $3 million at the gas utility, and $1 million in discontinued operations. Also contributing to the increase was an insurance reimbursement for previously incurred legal expenses and a reduction in corporate interest and other expenses. At our electric utility, the positive effects of recent regulatory activities and the return to full service-rates of customers previously using alternative energy suppliers were more than offset by increased operating and maintenance expenses. Specific changes to net income available to common stockholders for the three months ended June 30, 2006 versus 2005 are: CMS-5 CMS Energy Corporation
In Millions ----------- - - effects of the resolution of an IRS income tax audit on corporate and Enterprises income taxes, primarily for the utilization or restoration of income tax credits, $ 54 - - additional decrease in corporate interest and other expenses due to a $15 million insurance reimbursement received in June 2006 for previously incurred legal expenses, and an additional $16 million reduction in other expenses primarily due to lower interest expenses, lower legal expenses, and a decrease in general taxes, 31 - - effects from other Enterprises operations, including equity method investments, 5 - - absence of income tax benefits recorded in 2005 at Enterprises resulting from the American Jobs Creation Act of 2004, (24) - - mark-to-market losses recorded at CMS ERM in 2006, and (12) - - decrease in net income from our electric utility primarily due to increased operating expenses, primarily driven by a planned refueling outage at Palisades, and a reduction in income from the regulatory return on capital expenditures, offset partially by an increase in revenue from an electric rate order, the return to full service-rates of customers previously using alternative energy suppliers, and the effects of the resolution of an IRS income tax audit. (9) ----- Total Change $ 45 =====
In Millions (except for per share amounts) --------------------------------- Six months ended June 30 2006 2005 Change - ------------------------ -------- -------- -------- Net Income Available to Common Stockholders $ 45 $ 177 $ (132) Basic Earnings Per Share $ 0.21 $ 0.86 $ (0.65) Diluted Earnings Per Share $ 0.20 $ 0.82 $ (0.62) -------- -------- -------- Electric Utility $ 66 $ 79 $ (13) Gas Utility 34 55 (21) Enterprises (Includes the MCV Partnership and the FMLP interests) (45) 134 (179) Corporate Interest and Other (13) (91) 78 Discontinued Operations 3 - 3 -------- -------- -------- Net Income Available to Common Stockholders $ 45 $ 177 $ (132) ======== ======== ========
For the six months ended June 30, 2006, net income available to common stockholders was $45 million compared to $177 million for 2005. The decrease reflects the impact of gas prices on the market value of certain long-term gas contracts and financial hedges. In order to reflect the market value of these contracts and hedges, mark-to-market losses were recorded in 2006 to reverse partially gains recorded on these assets in 2005. Further contributing to the decrease in net income were increased operating expenses at Enterprises, and decreases in net income at our electric and gas utilities. At our electric utility, the positive effects of recent regulatory activities, and the return to full service-rates of customers previously using alternative energy suppliers were more than offset by increased operating and maintenance expenses. At our gas utility, warmer weather and customer conservation efforts negatively impacted results. These decreases were offset partially by the $62 million impact from the resolution of an IRS income tax audit, an insurance reimbursement for previously incurred legal expenses and additional reductions in corporate interest and other expenses. CMS-6 CMS Energy Corporation Specific changes to net income available to common stockholders for the six months ended June 30, 2006 versus 2005 are:
In Millions ----------- - - decrease in earnings from our ownership interest in the MCV Partnership primarily due to mark-to-market losses on certain long-term gas contracts and financial hedges, which reduced partially gains recorded in 2005, $ (122) - - mark-to-market losses recorded at CMS ERM in 2006 versus gains recorded in 2005, (40) - - absence of income tax benefits recorded in 2005 at Enterprises resulting from the American Jobs Creation Act of 2004, (24) - - decrease in net income from our gas utility primarily due to a reduction in deliveries resulting from increased customer conservation efforts and warmer weather in 2006, (21) - - decrease in net income from our electric utility primarily due to increased operating expenses, and a reduction in income from the regulatory return on capital expenditures, offset partially by an increase in revenue from an electric rate order, the return to full service-rates of customers previously using alternative energy suppliers, and the effects of the resolution of an IRS income tax audit, (13) - - decrease in equity earnings from Enterprises investments, (3) - - effects of the resolution of an IRS income tax audit on corporate and Enterprises income taxes, primarily for the utilization or the restoration of income tax credits, 54 - - additional decrease in corporate interest and other expenses due to a $15 million insurance reimbursement received in June 2006 for previously incurred legal expenses, and an additional $17 million reduction in other expenses primarily due to lower interest expenses, lower legal expenses, and a decrease in general taxes, and 32 - - effects from other Enterprises operations. 5 ------ Total Change $ (132) ======
CMS-7 CMS Energy Corporation ELECTRIC UTILITY RESULTS OF OPERATIONS
In Millions -------------------- June 30 2006 2005 Change - ------- ---- ---- ------ Three months ended $ 37 $ 46 $ (9) Six months ended $ 66 $ 79 $ (13) ==== ==== ======
Three Months Ended Six Months Ended Reasons for the change: June 30, 2006 vs. 2005 June 30, 2006 vs. 2005 - ----------------------- ---------------------- ---------------------- Electric deliveries $ 60 $ 119 Power supply costs and related revenue 3 12 Other operating expenses, other income, and non-commodity revenue (71) (130) Regulatory return on capital expenditures (8) (21) General taxes (1) (1) Interest charges (3) (2) Income taxes 11 10 ---------- --------- Total change $ (9) $ (13) ========== ==========
ELECTRIC DELIVERIES: For the three months ended June 30, 2006, electric deliveries, excluding intersystem sales, decreased 0.2 billion kWh or 2.1 percent versus 2005. For the six months ended June 30, 2006, electric deliveries, excluding intersystem sales, decreased 0.3 billion kWh or 1.8 percent versus 2005. The decrease in electric deliveries for both periods is primarily due to weather. Despite lower electric deliveries, electric delivery revenue increased primarily due to an electric rate order, increased surcharge revenue, and the return to full-service rates of customers previously using alternative energy suppliers. In December 2005, the MPSC issued an order authorizing an annual rate increase of $86 million for service rendered on and after January 11, 2006. As a result of this order, electric delivery revenues increased $23 million for the three months ended June 30, 2006 and $43 million for the six months ended June 30, 2006 versus the same periods in 2005. Effective January 1, 2006, we started collecting a surcharge that the MPSC authorized under Section 10d(4) of the Customer Choice Act. This surcharge increased electric delivery revenue by $12 million for the three months ended June 30, 2006 and $23 million for the six months ended June 30, 2006 versus the same periods in 2005. In addition, on January 1, 2006, we began recovering customer choice transition costs from our residential customers, thereby increasing electric delivery revenue by another $2 million for the three months ended June 30, 2006 and $5 million for the six months ended June 30, 2006 versus the same periods in 2005. The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. At June 30, 2006, alternative electric suppliers were providing 311 MW of generation service to ROA customers. This amount represents a decrease of 62 percent of ROA load compared to June 30, 2005. The return of former ROA customers to full-service rates increased electric revenues $15 million for the three months ended June 30, 2006 and $28 million for the six months ended June 30, 2006 versus the same periods in 2005. CMS-8 CMS Energy Corporation POWER SUPPLY COSTS AND RELATED REVENUE: In 2005, power supply costs exceeded power supply revenue due to rate caps for our residential customers. Rate caps for our residential customers expired on December 31, 2005. In 2006, the absence of rate caps allows us to record power supply revenue to offset fully our power supply costs. Our ability to recover fully these power supply costs resulted in a $3 million increase to electric revenue for the three months ended June 30, 2006 and $12 million for the six months ended June 30, 2006 versus the same periods in 2005. OTHER OPERATING EXPENSES, OTHER INCOME AND NON-COMMODITY REVENUE: For the three months ended June 30, 2006, other operating expenses increased $73 million, other income increased $3 million, and non-commodity revenue decreased $1 million versus 2005. For the six months ended June 30, 2006, other operating expenses increased $135 million, other income increased $8 million, and non-commodity revenue decreased $3 million versus 2005. The increase in other operating expenses reflects higher operating and maintenance expense, customer service expense, depreciation and amortization expense, and pension and benefit expense. Operating and maintenance expense increased primarily due to costs related to a planned refueling outage at our Palisades nuclear plant, and higher tree trimming and storm restoration costs. Higher customer service expense reflects contributions, which started in January 2006 pursuant to a December 2005 MPSC order, to a fund that provides energy assistance to low-income customers. Depreciation and amortization expense increased due to higher plant in service and greater amortization of certain regulatory assets. Pension and benefit expense reflects changes in actuarial assumptions in 2005, and the latest collective bargaining agreement between the Utility Workers Union of America and Consumers. The increase in other income is primarily due to higher interest income and the absence, in 2006, of expenses recorded in 2005 associated with the early retirement of debt. The decrease in non-commodity revenue is primarily due to a decrease in capital-related services provided to METC in 2006 versus 2005. REGULATORY RETURN ON CAPITAL EXPENDITURES: The $8 million decrease for the three months ended June 30, 2006 and $21 million decrease for the six months ended June 30, 2006 versus the same periods in 2005, is due to lower income associated with recording a return on capital expenditures in excess of our depreciation base as allowed by the Customer Choice Act. In December 2005, the MPSC issued an order that authorized us to recover $333 million of Section 10d(4) costs. The order authorized recovery of a lower level of costs versus the level used to record 2005 income. GENERAL TAXES: For the three and six months ended June 30, 2006, the increase in general taxes reflect higher MSBT expense, offset partially by lower property tax expense. INTEREST CHARGES: For the three and six months ended June 30, 2006, interest charges increased primarily due to adjustments made in connection with an IRS income tax audit. The settlement recognized that Consumers' taxable income for prior years was higher than originally filed, resulting in the accrual of interest on the additional tax liability for these prior years. INCOME TAXES: For the three and six months ended June 30, 2006, income taxes decreased versus 2005 primarily due to lower earnings by the electric utility and the resolution of an IRS income tax audit, which resulted in a $4 million income tax benefit primarily for the utilization or restoration of income tax credits. CMS-9 CMS Energy Corporation GAS UTILITY RESULTS OF OPERATIONS
In Millions ---------------------- June 30 2006 2005 Change - ------- ---- ---- ------ Three months ended $ (3) $ (3) $ - Six months ended $ 34 $ 55 $ (21) ==== ==== ======
Three Months Ended Six Months Ended Reasons for the change: June 30, 2006 vs. 2005 June 30, 2006 vs. 2005 - ----------------------- ---------------------- ---------------------- Gas deliveries $ (5) $ (36) Gas wholesale and retail services, other gas revenues and other income 6 11 Operation and maintenance 1 (2) General taxes and depreciation (2) (5) Interest charges (3) (3) Income taxes 3 14 -------- -------- Total change $ - $ (21) ======== ========
GAS DELIVERIES: For the three months ended June 30, 2006, gas deliveries, including miscellaneous transportation to end-use customers, decreased 6 bcf or 12 percent. The decrease in gas deliveries is due to increased customer conservation efforts in response to higher gas prices and warmer than normal weather. For the six months ended June 30, 2006, gas deliveries, including miscellaneous transportation to end-use customers, decreased 28 bcf or 14.4 percent. The decrease in gas deliveries is primarily due to warmer weather in 2006 versus 2005 and increased customer conservation efforts in response to higher gas prices. Average temperatures during the six-month period in 2006 were 4.3 percent warmer than 2005. GAS WHOLESALE AND RETAIL SERVICES, OTHER GAS REVENUES AND OTHER INCOME: For the three and six months ended June 30, 2006, the increase is related primarily to increased gas wholesale and retail services revenue. OPERATION AND MAINTENANCE: For the three months ended June 30, 2006, operation and maintenance expenses decreased versus 2005 primarily due to a reduction in our injuries and damages expense, offset partially by higher pension and benefit expense and customer service expense. Pension and benefit expense reflects changes in actuarial assumptions, and the latest collective bargaining agreement between the Utility Workers Union of America and Consumers. Customer service expense increased primarily due to higher uncollectible accounts expense. For the six months ended June 30, 2006, operation and maintenance expenses increased versus 2005 primarily due to higher pension and benefit expense and customer service expense. Pension and benefit expense reflects changes in actuarial assumptions, and the latest collective bargaining agreement between the Utility Workers Union of America and Consumers. Customer service expense increased primarily due to higher uncollectible accounts expense. GENERAL TAXES AND DEPRECIATION: For the three and six months ended June 30, 2006, depreciation expense increased versus 2005 primarily due to higher plant in service. The increase in general taxes reflects higher MSBT expense, partially offset by lower property tax expense. CMS-10 CMS Energy Corporation INTEREST CHARGES: For the three and six months ended June 30, 2006, interest charges increased primarily due to adjustments made in connection with an IRS income tax audit. INCOME TAXES: For the three and six months ended June 30, 2006, income taxes decreased versus 2005 primarily due to lower earnings by the gas utility and the resolution of an IRS income tax audit, which resulted in a $3 million income tax benefit primarily for the utilization or restoration of income tax credits. ENTERPRISES RESULTS OF OPERATIONS
In Millions ------------------------- June 30 2006 2005 Change - ------- ------ ------ ------ Three months ended $ 4 $ 29 $ (25) Six months ended $ (45) $ 134 $ (179) ====== ====== ======
Three Months Ended Six Months Ended Reasons for the change: June 30, 2006 vs. 2005 June 30, 2006 vs. 2005 - ----------------------- ---------------------- ---------------------- Operating revenues $ 84 $ 121 Cost of gas and purchased power (95) (197) Fuel costs mark-to-market at the MCV Partnership (3) (368) Earnings from equity method investees (14) (9) Gain on sale of assets (2) (5) Operation and maintenance - (17) General taxes, depreciation, and other income, net 15 47 Fixed charges 14 3 Minority interest (14) 167 Income taxes (10) 79 -------- -------- Total change $ (25) $ (179) ======== ========
OPERATING REVENUES: For the three and six months ended June 30, 2006, operating revenues increased versus 2005 due to the impact of increased production at our Takoradi plant, which is contracted to provide power when local hydro-generating plants are unable to meet demand. Also contributing to the increase was increased customer demand at our South American facilities and increased third-party gas sales at CMS ERM. These increases were offset partially by mark-to-market losses on gas contracts at CMS ERM compared to gains in 2005. COST OF GAS AND PURCHASED POWER: For the three and six months ended June 30, 2006, cost of gas and purchased power increased versus 2005. The increase in expense is primarily due to increased fuel costs related to increased production at Takoradi. Also contributing to the increase are higher gas prices and an increase in fuel and power purchases in order to meet customer demand, primarily in South America. FUEL COSTS MARK-TO-MARKET AT THE MCV PARTNERSHIP: For the three months ended June 30, 2006, the fuel costs mark-to-market adjustments of certain long-term gas contracts and financial hedges at the MCV Partnership decreased operating earnings due to decreased gas prices versus smaller losses in 2005. For the six months ended June 30, 2006, the fuel costs mark-to-market adjustments at the MCV Partnership CMS-11 CMS Energy Corporation decreased operating earnings due to the impact of gas prices on the market value of certain long-term gas contracts and financial hedges. In order to reflect the market value of these contracts and hedges, mark-to-market losses were recorded in 2006 to reduce partially gains recorded on these assets in 2005. The 2005 gains were primarily due to the marking-to-market of certain long term gas contracts and financial hedges that, as a result of the implementation of the RCP, no longer qualified as normal purchases or cash flow hedges. EARNINGS FROM EQUITY METHOD INVESTEES: For the three months ended June 30, 2006, equity earnings decreased by $14 million versus 2005. Contributing to this decrease was the establishment of a tax reserve related to some of our foreign investments and lower earnings at GasAtacama. These decreases were offset partially by mark-to-market gains on interest rate swaps associated with our investment in Taweelah, compared to losses recorded on these instruments in the same period of 2005. For the six months ended June 30, 2006, equity earnings decreased $9 million versus 2005. This decrease was due to the establishment of a tax reserve related to some of our foreign investments and lower earnings at GasAtacama. These decreases were offset partially by mark-to-market gains on interest rate swaps associated with our investment in Taweelah, compared to losses recorded on these instruments in the same period of 2005. The decreases were also reduced partially by higher earnings at Neyveli, due to the absence in 2006 of expenses related to a forced outage and a penalty on coal purchase commitments, which were recorded in 2005. GAIN ON SALE OF ASSETS: For the three months ended June 30, 2006, there were no gains or losses on asset sales versus a $2 million gain on the sale of SLAP in 2005. For the six months ended June 30, 2006, there were no gains or losses on asset sales versus a $3 million gain on the sale of GVK and a $2 million gain on the sale of SLAP in 2005. OPERATION AND MAINTENANCE: For the six months ended June 30, 2006, operation and maintenance expenses increased due to higher salaries and benefits, primarily at South American subsidiaries, and increased expenditures related to prospecting initiatives. GENERAL TAXES, DEPRECIATION AND OTHER INCOME, NET: For the three and six months ended June 30, 2006, the net of general tax expense, depreciation and other income increased operating income compared to 2005. This is primarily due to lower depreciation expense at the MCV Partnership resulting from the impairment of property, plant, and equipment and higher interest income. These increases were offset partially by higher general taxes, primarily at South American subsidiaries. FIXED CHARGES: For the three and six months ended June 30, 2006, fixed charges decreased due to lower interest expense at the MCV Partnership as the result of lower debt levels, offset partially by higher interest expense from an increase in subsidiary debt and interest rates. MINORITY INTEREST: For the three months ended June 30, 2006, minority owners shared in a portion of the losses at our subsidiaries. The allocation of losses to minority owners increased our net income for the period. For the three months ended June 30, 2005, minority interest owners shared in a portion of larger losses at our subsidiaries. The losses in 2006 and 2005 were primarily due to activities at the MCV Partnership. For the six months ended June 30, 2006, minority owners shared in a portion of the losses at our subsidiaries versus sharing in the profits of these subsidiaries in 2005. The losses in 2006 and the profits in 2005 were primarily due to activities at the MCV Partnership. CMS-12 CMS Energy Corporation INCOME TAXES: For the three months ended June 30, 2006, the income tax benefit was lower versus 2005. The benefit in 2006 was due to the resolution of an IRS income tax audit, which resulted in an $8 million income tax benefit primarily for the utilization or restoration of income tax credits. The 2005 benefit was due to income tax benefits related to the American Jobs Creation Act of 2004, offset partially by higher earnings. For the six months ended June 30, 2006, we recognized income tax benefits versus income tax expense in 2005. The benefit in 2006 was due to the resolution of an IRS income tax audit, which resulted in an $8 million income tax benefit primarily for the utilization or restoration of income tax credits. The income tax expense in 2005 was due to higher earnings offset partially by the income tax benefits related to the American Jobs Creation Act of 2004. CORPORATE INTEREST AND OTHER RESULTS OF OPERATIONS
In Millions ---------------------- June 30 2006 2005 Change - ------- ---- ---- ------ Three months ended $ 32 $(45) $ 77 Six months ended $(13) $(91) $ 78 ==== ==== ======
For the three months ended June 30, 2006, net income from corporate interest and other was $32 million versus net expenses of $45 million in 2005. The $77 million change reflects the resolution of an IRS income tax audit, which resulted in a $46 million income tax benefit primarily for the utilization or restoration of income tax credits. Also contributing to the change was an insurance reimbursement received in June 2006 for previously incurred legal expenses. For the six months ended June 30, 2006, net expense from corporate interest and other was $13 million versus net expenses of $91 million in 2005. The decrease reflects the resolution of an IRS income tax audit, which resulted in a $46 million income tax benefit primarily for the utilization or restoration of income tax credits. Also contributing to the change was an insurance reimbursement received in June 2006 for previously incurred legal expenses. CRITICAL ACCOUNTING POLICIES The following accounting policies are important to an understanding of our results of operations and financial condition and should be considered an integral part of our MD&A. USE OF ESTIMATES AND ASSUMPTIONS In preparing our financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. We use accounting estimates 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. CONTINGENCIES: We are involved in various regulatory and legal proceedings that arise in the ordinary course of our business. We record a liability for contingencies based upon our assessment that a loss is CMS-13 CMS Energy Corporation 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 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. In July 2006, the FASB issued a new interpretation on the recognition and measurement of uncertain tax positions. For additional details, see the "New Accounting Standards Not Yet Effective" section included in this MD&A. 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. For additional details on accounting for financial instruments, see Note 5, Financial and Derivative Instruments. DERIVATIVE INSTRUMENTS: We account for derivative instruments in accordance with SFAS No. 133. Except as noted within this section, there have been no material changes to the accounting for derivative instruments since the year ended December 31, 2005. For additional details on accounting for derivatives, see Note 5, Financial and Derivative Instruments. To determine the fair value of our derivatives, we use information from external sources (i.e., quoted market prices and third-party valuations), if available. For certain contracts, this information is not available and we use mathematical valuation models to value our derivatives. These models require various inputs and assumptions, including commodity market prices and volatilities, as well as interest rates and contract maturity dates. Changes in forward prices or volatilities could significantly change the calculated fair value of our derivative contracts. The cash returns we actually realize on these contracts may vary, either positively or negatively, from the results that we estimate using these models. As part of valuing our derivatives at market, we maintain reserves, if necessary, for credit risks arising from the financial condition of our counterparties. The following table summarizes the interest rate and volatility rate assumptions we used to value these contracts at June 30, 2006:
Interest Rates (%) Volatility Rates (%) ------------------ -------------------- Long-term gas contracts associated with the MCV Partnership 5.33 - 5.68 31 - 69 Gas-related option contracts 4.90 59 Electricity-related option contracts 4.90 119 - 158
Establishment of the Midwest Energy Market: In 2005, the MISO began operating the Midwest Energy Market. As a result, the MISO now centrally dispatches electricity and transmission service throughout much of the Midwest and provides day-ahead and real-time energy market information. At this time, we believe that the establishment of this market does not represent the development of an active energy market in Michigan, as defined by SFAS No. 133. However, as the Midwest Energy Market matures, we will CMS-14 CMS Energy Corporation continue to monitor its activity level and evaluate whether or not an active energy market may exist in Michigan. If an active market develops in the future, some of our electric purchase and sale contracts may qualify as derivatives. However, we believe that we would be able to apply the normal purchases and sales exception of SFAS No. 133 to these contracts and, therefore, would not be required to mark these contracts to market. Implementation of the RCP: As a result of implementing the RCP in 2005, a significant portion of the MCV Partnership's long-term gas contracts no longer qualify as normal purchases because the gas will not be used to generate electricity or steam. Accordingly, these contracts are accounted for as derivatives, with changes in fair value recorded in earnings each quarter. Additionally, certain of the MCV Partnership's natural gas futures and swap contracts, which are used to hedge variable-priced long-term gas contracts, no longer qualify for cash flow hedge accounting and we record any changes in their fair value in earnings each quarter. As a result of recording the changes in fair value of these long-term gas contracts and the related futures, options, and swaps to earnings, the MCV Partnership has recognized the following losses in 2006:
In Millions ------------------------------------- 2006 ------------------------------------- First Second Year to Quarter Quarter Date --------- --------- --------- Long-term gas contracts $ (111) $ (34) $ (145) Related futures, options, and swaps (45) (8) (53) --------- --------- --------- Total $ (156) $ (42) $ (198) ========= ========= =========
These losses, shown before consideration of tax effects and minority interest, are included in the total Fuel costs mark-to-market at the MCV Partnership on our Consolidated Statements of Income. Because of the volatility of the natural gas market, the MCV Partnership expects future earnings volatility on both its long-term gas contracts and its futures, options, and swap contracts, since gains and losses will be recorded each quarter. We will continue to record these gains and losses in our consolidated financial statements until we close the sale of our interest in the MCV Partnership. We have recorded derivative assets totaling $58 million associated with the fair value of these contracts on our Consolidated Balance Sheets at June 30, 2006. The MCV Partnership expects almost all of these assets, which represent cumulative net mark-to-market gains, to reverse as losses through earnings during 2006 and 2007 as the gas is purchased and the futures, options, and swaps settle, with the remainder reversing between 2008 and 2011. Due to the impairment of the MCV Facility and subsequent losses, the value of the equity held by all of the owners of the MCV Partnership has decreased significantly and is now negative. Since we are one of the general partners of the MCV Partnership, we have recognized a portion of the limited partners' negative equity. As the MCV Partnership recognizes future losses from the reversal of these derivative assets, we will continue to assume a portion of the limited partners' share of those losses, in addition to our proportionate share, but only until we close the sale of our interest in the MCV Partnership. At the closing of this sale, these assets, which represent cumulative net mark-to-market gains, will be sold in conjunction with the sale of our ownership interest. As a result, we will no longer record the fair value of these long-term gas contracts or the related futures, options, and swaps on our Consolidated Balance Sheets and will not be required to recognize gains or losses related to changes in the fair value of these contracts on our Consolidated Statements of Income. Additionally, at June 30, 2006, we have recorded a cumulative net gain of $39 million, net of tax and minority interest, in Accumulated other comprehensive loss representing our proportionate share of the cash flow hedges held by the MCV CMS-15 CMS Energy Corporation Partnership. At the closing of the sale of our interest, this amount, adjusted for any additional changes in fair value, will be reclassified and recognized in earnings. Any changes in the fair value of these contracts recognized before the closing will not affect the purchase price of our ownership interest in the MCV Partnership. For additional details on the sale of our interest in the MCV Partnership, see the "Other Electric Utility Business Uncertainties - MCV Underrecoveries" section in this MD&A and Note 2, Contingencies, "Other Consumers' Electric Utility Contingencies - The Midland Cogeneration Venture." CMS ERM CONTRACTS: CMS ERM enters into and owns energy contracts as a part of 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, 2005. We include the fair value of the derivative contracts held by CMS ERM 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, 2006:
In Millions ------------------------------- Non- Trading Trading Total ------- ------- ------- Fair value of contracts outstanding at December 31, 2005 $ (63) $ 100 $ 37 Fair value of new contracts when entered into during the period (a) - (1) (1) Contracts realized or otherwise settled during the period 7 (13) (6) Other changes in fair value (b) (8) (42) (50) ------- ------- ------- Fair value of contracts outstanding at June 30, 2006 $ (64) $ 44 $ (20) ======= ======= =======
(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 present value and credit reserves.
Fair Value of Non-Trading Contracts at June 30, 2006 In Millions - -------------------------------------------------------------------------------------------------------- Maturity (in years) Total ---------------------------------------------- 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 (64) (12) (21) (31) - ----- ----- ----- ----- ----- Total $ (64) $ (12) $ (21) $ (31) $ - ===== ===== ===== ===== =====
Fair Value of Trading Contracts at June 30, 2006 In Millions - -------------------------------------------------------------------------------------------------------- Maturity (in years) Total ---------------------------------------------- Source of Fair Value Fair Value Less than 1 1 to 3 4 to 5 Greater than 5 - -------------------- ---------- ----------- ------ ------- -------------- Prices actively quoted $ (54) $ (18) $ (36) $ - $ - Prices obtained from external sources or based on models and other valuation methods 98 22 45 31 - ----- ----- ----- ------ ----- Total $ 44 $ 4 $ 9 $ 31 $ - ===== ===== ===== ====== =====
CMS-16 CMS Energy Corporation MARKET RISK INFORMATION: The following is an update of our risk sensitivities since December 31, 2005. These sensitivities indicate the potential loss in fair value, cash flows, or future earnings from our financial instruments, including our derivative contracts, assuming a hypothetical adverse change in market rates or prices of 10 percent. Changes in excess of the amounts shown in the sensitivity analyses could occur if changes in market rates or prices exceed the 10 percent shift used for the analyses. Interest Rate Risk Sensitivity Analysis (assuming an adverse change in market interest rates of 10 percent):
In Millions ---------------------------------- June 30, 2006 December 31, 2005 ------------- ----------------- Variable-rate financing -- before-tax annual earnings exposure $ 2 $ 4 Fixed-rate financing -- potential REDUCTION in fair value (a) 222 223
(a) Fair value exposure could only be realized if we repurchased all of our fixed-rate financing. Certain equity method investees have entered into interest rate swaps. These instruments are not required to be included in the sensitivity analysis, but can have an impact on financial results. Commodity Price Risk Sensitivity Analysis (assuming an adverse change in market prices of 10 percent):
In Millions ----------------------------------- June 30, 2006 December 31, 2005 ------------- ----------------- Potential REDUCTION in fair value: Non-trading contracts Gas supply option contracts $ - $ 1 CMS ERM gas forward contracts 1 - Derivative contracts associated with the MCV Partnership: Long-term gas contracts 19 39 Gas futures, options, and swaps 34 48 Trading contracts Electricity-related option contracts - 2 Electricity-related swaps 11 13 Gas-related option contracts 1 1 Gas-related swaps and futures 2 4
Investment Securities Price Risk Sensitivity Analysis (assuming an adverse change in market prices of 10 percent):
In Millions ----------------------------------- June 30, 2006 December 31, 2005 ------------- ----------------- 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, for the purpose of funding certain costs of nuclear plant decommissioning. At June 30, 2006 and December 31, 2005, these funds were invested primarily in equity securities, fixed-rate, fixed-income debt securities, and cash and cash equivalents, and CMS-17 CMS Energy Corporation are recorded at fair value on our Consolidated Balance Sheets. These 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 our earnings or cash flows. For additional details on market risk and derivative activities, see Note 5, Financial and Derivative Instruments. For additional details on nuclear plant decommissioning at Big Rock and Palisades, see the "Other Electric Utility Business Uncertainties - Nuclear Matters" section included in this MD&A. OTHER Other accounting policies 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 pension and OPEB, - accounting for asset retirement obligations, and - accounting for nuclear decommissioning costs. These accounting policies were disclosed in our 2005 Form 10-K/A and there have been no subsequent material changes. CAPITAL RESOURCES AND LIQUIDITY Factors affecting our liquidity and capital requirements are: - results of operations, - capital expenditures, - energy commodity costs, - contractual obligations, - regulatory decisions, - debt maturities, - credit ratings, - 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. Although our prudent natural gas purchases are recoverable from our customers, the amount paid for natural gas stored as inventory requires additional liquidity due to the timing of the cost recoveries. We have credit agreements with our commodity suppliers and those agreements contain terms that have resulted in margin calls. Additional margin calls or other credit support may be required if agency ratings are lowered or if market conditions remain unfavorable relative to our obligations to those parties. Our current financial plan includes controlling operating expenses and capital expenditures and evaluating market conditions for financing opportunities. Due to the adverse impact of the MCV Partnership asset impairment charge recorded in 2005 and the MCV Partnership fuel cost mark-to-market charges during 2006, Consumers' ability to issue FMB as primary obligations or as collateral for financing is expected to be limited to $298 million through December 31, 2006. After December 31, 2006, Consumers' ability to CMS-18 CMS Energy Corporation issue FMB in excess of $298 million is based on achieving a two-times FMB interest coverage ratio. We believe the following items will be sufficient to meet our liquidity needs: - our current level of cash and revolving credit facilities, - our ability to access junior secured and unsecured borrowing capacity in the capital markets, and - our anticipated cash flows from operating and investing activities. 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. CASH POSITION, INVESTING, AND FINANCING Our operating, investing, and financing activities meet consolidated cash needs. At June 30, 2006, $918 million consolidated cash was on hand, which includes $67 million of restricted cash and $273 million from entities consolidated pursuant to FASB Interpretation No. 46(R). Our primary ongoing source of cash is dividends and other distributions from our subsidiaries. For the six months ended June 30, 2006, Consumers paid $40 million in common stock dividends to CMS Energy. SUMMARY OF CONSOLIDATED STATEMENTS OF CASH FLOWS:
In Millions -------------- Six months ended June 30 2006 2005 - ------------------------ ----- ----- Net cash provided by (used in): Operating activities $ 489 $ 480 Investing activities (250) (110) ----- ----- Net cash provided by operating and investing activities 239 370 Financing activities (236) (27) Effect of exchange rates on cash 1 1 ----- ----- Net Increase in Cash and Cash Equivalents $ 4 $ 344 ===== =====
OPERATING ACTIVITIES: For the six months ended June 30, 2006, net cash provided by operating activities was $489 million, an increase of $9 million versus 2005. This was the result of a decrease in accounts receivable, cash proceeds from the sale of excess sulfur dioxide allowances, and a return of funds formerly held as collateral under certain gas hedging arrangements. This activity was offset by decreases in accounts payable and the MCV Partnership gas supplier funds on deposit. The decrease in accounts receivable was primarily due to the expiration of emergency rules initiated by the MPSC, which delayed customer payments during the heating season. The decrease in the MCV Partnership gas supplier funds on deposit was the result of refunds to suppliers from decreased exposure due to declining gas prices in 2006. The decrease in accounts payable was mainly due to payments for higher priced gas that were accrued as of December 31, 2005. INVESTING ACTIVITIES: For the six months ended June 30, 2006, net cash used in investing activities was $250 million, an increase of $140 million versus 2005. This was primarily due to the absence of short-term investment proceeds, the absence of proceeds from asset sales, an increase in capital expenditures, and an increase in notes receivable. This activity was offset by a release of restricted cash in February 2006, which we used to extinguish long-term debt-related parties. CMS-19 CMS Energy Corporation FINANCING ACTIVITIES: For the six months ended June 30, 2006, net cash used in financing activities was $236 million, an increase of $209 million versus 2005. This was primarily due to a decrease in proceeds from common stock issuances of $271 million. For additional details on long-term debt activity, see Note 3, Financings and Capitalization. OBLIGATIONS AND COMMITMENTS DIVIDEND RESTRICTIONS: For details on dividend restrictions, see Note 3, Financings and Capitalization. DEBT CREDIT RATINGS: In June 2006, Moody's placed the debt ratings of CMS Energy under review for possible upgrade. Moody's also affirmed CMS Energy's liquidity rating and revised the debt rating outlook for Consumers to stable from negative. OFF-BALANCE SHEET ARRANGEMENTS: CMS Energy and certain of its subsidiaries enter into various arrangements in the normal course of business to facilitate commercial transactions with third-parties. These arrangements include indemnifications, letters of credit, surety bonds, and financial and performance guarantees. For details on guarantee arrangements, see Note 2, Contingencies, "Other Contingencies - FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." REVOLVING CREDIT FACILITIES: For details on revolving credit facilities, see Note 3, Financings and Capitalization. SALE OF ACCOUNTS RECEIVABLE: For details on the sale of accounts receivable, see Note 3, Financings and Capitalization. OUTLOOK CORPORATE OUTLOOK Over the next few years, our business strategy will focus on managing cash flow issues, reducing parent company debt, maintaining and growing earnings, reducing risk, and positioning us to make new investments that complement our strengths. ELECTRIC UTILITY BUSINESS OUTLOOK GROWTH: Summer 2005 temperatures were higher than historical averages, leading to increased demand from electric customers. In 2006, we project electric deliveries will decline less than one percent from 2005 levels. This short-term outlook assumes a stabilizing economy and normal weather conditions throughout the remainder of the year. Over the next five years, we expect electric deliveries to grow at an average rate of about one and one-half percent per year. However, such growth is dependent on a modestly growing customer base and a stabilizing Michigan 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. CMS-20 CMS Energy Corporation ELECTRIC RESERVE MARGIN: We have a reserve margin of approximately 11 percent for summer 2006, or supply resources equal to 111 percent of projected firm summer peak load. The 2006 supply resources of 111 percent come from our electric generating plants, long-term power purchase contracts, and other contractual arrangements. We have purchased capacity and energy contracts covering the reserve margin requirements for 2006 and covering partially the estimated reserve margin requirements for 2007 through 2010. As a result, we recognized an asset of $75 million for unexpired capacity and energy contracts at June 30, 2006. Upon the completion of the sale of the Palisades plant, the power purchase agreement will offset, for the term of the agreement, the reduction in the owned capacity represented by the Palisades plant. The MCV PPA is not affected by our agreement to sell our interest in the MCV Partnership. After September 15, 2007, we expect to exercise our claim for relief under the regulatory out provision in the MCV PPA. If we are successful in exercising our claim, the MCV Partnership has the right to terminate the MCV PPA, which could impact our reserve margin status. ELECTRIC TRANSMISSION EXPENSES: METC, which provides electric transmission service to us, increased substantially the transmission rates it charges us in 2006. The increased rates are subject to refund and to reduction based on the outcome of hearings at the FERC scheduled for December 2006. We are attempting to recover these costs through our 2006 PSCR plan case. The PSCR process allows recovery of all reasonable and prudent power supply costs. However, we cannot predict when recovery of these transmission costs will commence. To the extent that we incur and are unable to collect these increased costs in a timely manner, our cash flows from electric utility operations will be affected negatively. For additional details, see Note 2, Contingencies, "Consumers' Electric Utility Rate Matters - Power Supply Costs." In May 2006, ITC, a company that operates electric transmission facilities through a wholly owned subsidiary, including the transmission system within Detroit Edison's territory, filed an application with the FERC to acquire METC. The FERC subsequently delayed hearings concerning the METC transmission rates. We will continue to participate in the FERC proceeding concerning the METC transmission rates and the FERC proceeding concerning ITC's proposed acquisition of METC. We are unable to predict the nature and timing of any action by the FERC on transmission rates or if and when the ITC's purchase of METC will be completed. INDUSTRIAL REVENUE OUTLOOK: Our electric utility customer base includes a mix of residential, commercial, and diversified industrial customers. In November 2005, General Motors Corporation, a large industrial customer of Consumers, announced plans to reduce certain manufacturing operations in Michigan. However, since the targeted operations are outside of our service territory, we do not anticipate a significant impact on electric utility revenue. In March 2006, Delphi Corporation, also a large industrial customer of Consumers with six facilities in our service territory, announced plans to sell or close all but one of their manufacturing operations in Michigan as part of their bankruptcy restructuring. Our electric utility operations are not dependent upon a single customer, or even a few customers, and customers in the automotive sector constitute 4 percent of our total electric revenue. In addition, returning former ROA industrial customers will benefit our electric utility revenue. However, we cannot predict the impact of these restructuring plans or possible future actions by other industrial customers. THE ELECTRIC CAPACITY NEED FORUM: In January 2006, the MPSC Staff issued a report on future electric capacity in the state of Michigan. The report indicated that existing generation resources are adequate in the short term, but could be insufficient to maintain reliability standards by 2009. The report also indicated that new coal-fired baseload generation may be needed by 2011. The MPSC Staff recommended an approval and bid process for new power plants. To address revenue stability risks, the Staff also proposed a special reliability charge that a utility would assess on all electric distribution customers. In April 2006, the governor of Michigan issued an executive directive calling for the development of a comprehensive energy plan for the state of Michigan. The directive calls for the Chairman of the MPSC, working in cooperation CMS-21 CMS Energy Corporation with representatives from the public and private sectors, to make recommendations on Michigan's energy policy by the end of 2006. We will continue to participate as the MPSC addresses future electric capacity needs. BURIAL OF OVERHEAD POWER LINES: The City of Taylor, a municipality located in Wayne county, Michigan, passed an ordinance that required Detroit Edison to bury a section of overhead power lines at Detroit Edison's expense. In September 2004, the Michigan Court of Appeals upheld a lower court decision affirming the legality of the ordinance over Detroit Edison's objections. Other municipalities in our service territory adopted, or proposed the adoption of, similar ordinances. Detroit Edison appealed the Michigan Court of Appeals ruling to the Michigan Supreme Court. In May 2006, the Michigan Supreme Court ruled in favor of Detroit Edison. The Court found that the MPSC has primary jurisdiction over this issue and accordingly, the Taylor ordinance is subject to any applicable rules and regulations of the MPSC, including issues concerning who should bear the expense of underground facilities. If incurred, we would seek recovery of these costs from the municipality, or from our customers located in the municipality, subject to MPSC approval. 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 Act: 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 $819 million. As of June 2006, we have incurred $634 million in capital expenditures to comply with the federal Clean Air Act and resulting regulations and anticipate that the remaining $185 million of capital expenditures will be made in 2006 through 2011. In addition to modifying coal-fired electric generating plants, our compliance plan includes the use of nitrogen oxide emission allowances until all of the control equipment is operational in 2011. The nitrogen oxide emission allowance annual expense is projected to be $6 million per year, which we expect to recover from our customers through the PSCR process. Clean Air Interstate Rule: In March 2005, the EPA adopted the Clean Air Interstate Rule that requires additional coal-fired electric generating plant emission controls for nitrogen oxides and sulfur dioxide. We plan to meet this rule by year round operation of our selective catalytic reduction control technology units and installation of flue gas desulfurization scrubbers at an estimated total cost of $960 million, to be incurred by 2014. Clean Air Mercury Rule: Also in March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial reductions of mercury emissions from coal-fired electric generating plants by 2010 and further reductions by 2018. We anticipate our capital costs for mercury emissions reductions required by Phase I of the Clean Air Mercury Rule to be less than $50 million and implemented by 2010. Phase II requirements of the Clean Air Mercury Rule are not yet known and a cost estimate has not been determined. CMS-22 CMS Energy Corporation In April 2006, Michigan's governor announced a plan that would result in mercury emissions reductions of 90 percent by 2015. We are working with the MDEQ on the details of these rules. We will develop a cost estimate when the details of these rules are determined. Greenhouse gases: Several legislative proposals have been introduced in the United States Congress that would require reductions in emissions of greenhouse gases, including potentially carbon dioxide. We cannot predict whether any federal mandatory greenhouse gas emission reduction rules ultimately will be enacted, or the specific requirements of any of these rules and their effect on our operations and financial results. To the extent that greenhouse gas emission reduction rules come into effect, the 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 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 electric generating plant cooling water intake systems. The rules require significant reduction in fish killed by operating equipment. Fish kill reduction studies are required to be submitted to the EPA in 2007 and 2008. EPA compliance options in the rule are currently being challenged in court and we will finalize our cost estimates in 2008, when a decision on the final rule is anticipated. We expect to implement the EPA approved process from 2009 to 2011. For additional details on electric environmental matters, see Note 2, 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. At June 30, 2006, alternative electric suppliers were providing 311 MW of generation service to ROA customers, which represents 4 percent of our total distribution load. It is difficult to predict future ROA customer trends. Section 10d(4) Regulatory Assets: In December 2005, the MPSC issued an order that authorized us to recover $333 million in Section 10d(4) costs. Instead of collecting these costs evenly over five years, the order instructed us to collect 10 percent of the regulatory asset total in the first year, 15 percent in the second year, and 25 percent in each of the third, fourth, and fifth years. In January 2006, we filed a petition for rehearing with the MPSC that disputed the aspect of the order dealing with the timing of our collection of these costs. In April 2006, the MPSC issued an order that denied our petition for rehearing. Stranded Costs: Prior MPSC orders adopted a mechanism pursuant to the Customer Choice Act to provide recovery of Stranded Costs that occur when customers leave our system to purchase electricity from alternative suppliers. In November 2005, we filed an application with the MPSC related to the determination of 2004 Stranded Costs. In March 2006, the ALJ in our 2004 PSCR reconciliation case issued a Proposal for Decision recommending that we use a greater portion of our net sales of excess power into the bulk electricity market to offset our 2004 PSCR costs, rather than 2004 Stranded Costs. In June 2006, the ALJ issued a Proposal for Decision in our 2004 Stranded Cost case recommending that the MPSC find that we had no Stranded Costs in 2004. If the MPSC adopts the ALJ recommendations, earnings would be impacted adversely by $10 million. We cannot predict the outcome of these proceedings. CMS-23 CMS Energy Corporation Through and Out Rates: From December 2004 to March 2006, we paid a transitional charge pursuant to a FERC order eliminating regional "through and out" rates. In May 2006, the FERC approved an agreement between the PJM RTO transmission owners and Consumers concerning these transitional charges. The agreement resolves all issues regarding transitional charges for Consumers and eliminates the potential for refunds or additional charges to Consumers. In May 2006, Baltimore Gas & Electric filed a notice of withdrawal from the settlement. Consumers, PJM, and others filed responses with the FERC on this matter. The FERC has not ruled on whether the notice of withdrawal is effective, but we do not believe this action will have any material impact on us. For additional details and material changes relating to the restructuring of the electric utility industry and electric rate matters, see Note 2, 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. Sale of our Interest in the MCV Partnership and the FMLP: In July 2006, we reached an agreement to sell 100 percent of the stock of CMS Midland, Inc. and CMS Midland Holdings Company to an affiliate of GSO Capital Partners and Rockland Capital Energy Investments for $60.5 million. These Consumers' subsidiaries hold our interests in the MCV Partnership and the FMLP. The sales agreement calls for the purchaser, an affiliate of GSO Capital Partners and Rockland Capital Energy Investments to pay $85 million, subject to certain conditions and reimbursement rights, if Dow terminates an agreement under which it is provided power and steam by the MCV Partnership. The purchaser will secure their reimbursement obligation with an irrevocable letter of credit of up to $85 million. The MCV PPA and the associated customer rates are not affected by the sale. We are targeting to close on the sale before the end of 2006. The sale is subject to various regulatory approvals, including the MPSC's approval and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The MPSC has established a contested case proceeding schedule, which will allow for a decision from the MPSC by the end of 2006. We cannot predict the timing or the outcome of the MPSC's decision. We further cannot predict with certainty whether or when this transaction will be completed. For additional details on the sale of our interests in the MCV Partnership and the FMLP, see Note 2, Contingencies, "Other Consumers' Electric Utility Contingencies -- The Midland Cogeneration Venture", and the Stock Purchase Agreement, which is attached as Exhibit 10c to this filing. Financial Condition of the MCV Partnership: 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. Historically high natural gas prices have caused the MCV Partnership to reevaluate the economics of operating the MCV Facility and to record an impairment charge in 2005. If natural gas prices remain at present levels or increase, the operations of the MCV Facility would be adversely affected and could result in the MCV Partnership failing to meet its obligations under the sale and leaseback transactions and other contracts. Underrecoveries related to the MCV PPA: Further, the cost that we incur under the MCV PPA exceeds the recovery amount allowed by the MPSC. As a result, we estimate cash underrecoveries of capacity and fixed energy payments of $55 million in 2006 and $39 million in 2007. However, Consumers' direct savings CMS-24 CMS Energy Corporation from the RCP, after allocating a portion to customers, are used to offset a portion of our capacity and fixed energy underrecoveries expense. 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 the MCV Partnership's financial performance, 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. If we are successful in exercising the regulatory out clause, the MCV Partnership has the right to terminate the MCV PPA. The MPSC's future actions on the capacity and fixed energy payments recoverable from customers subsequent to September 15, 2007 may affect negatively the financial performance of the MCV Partnership. If the MCV Partnership terminates the MCV PPA, we would be required to replace the lost capacity to maintain an adequate electric reserve margin. This could involve entering into a new PPA and (or) entering into electric capacity contracts on the open market. We cannot predict our ability to enter into such contracts at a reasonable price. We are also unable to predict regulatory approval of the terms and conditions of such contracts, or that the MPSC would allow full recovery of our incurred costs. For additional details on the MCV Partnership, see Note 2, Contingencies, "Other Consumers' Electric Utility Contingencies - The Midland Cogeneration Venture." NUCLEAR MATTERS: Sale of Nuclear Assets: In July 2006, we reached an agreement to sell Palisades and the Big Rock Independent Spent Fuel Storage Installation (ISFSI) for $380 million to Entergy. The sales price reflects a $35 million premium above the estimated Palisades asset values at the closing date after accounting for estimated sales-related costs. This premium is expected to benefit our customers. Entergy will assume responsibility for the future decommissioning of the plant and for storage and disposal of spent nuclear fuel. At the date of close, decommissioning trust assets are estimated to be $566 million. Consumers will retain $200 million of these funds at the time of close and will be entitled to receive a return of $116 million of decommissioning trust fund assets, pending either a favorable federal tax ruling regarding the release of the funds or, if the funds are available, after decommissioning of the Palisades site is complete. The disposition of the retained and receivable nuclear decommissioning funds is subject to regulatory approval. We expect that a portion of the proceeds will benefit our customers. We plan to use the cash that we retain from the sale to reduce debt. As part of the transaction, Entergy will sell us 100 percent of the plant's output up to its current capacity of 798 MW under a 15-year power purchase agreement. During the term of the PPA, Entergy is obligated to supply, and we are obligated to take, all capacity and energy from the Palisades plant, exclusive of uprates above the plant's presently specified capacity. When the plant is not operating or is derated, under certain circumstances, Entergy can elect to provide replacement power from another source at the rates set in the PPA. Otherwise, we would have to obtain replacement power from the market. However, we are only obligated to pay Entergy for capacity and energy actually delivered by Entergy either from the plant or from an allowable replacement source chosen by Entergy. If Entergy schedules a plant outage in June, July or August, Entergy is required to provide replacement power at PPA rates. There are significant penalties incurred by Entergy if the delivered energy fails to achieve a minimum capacity factor level during July and August. Over the term of the PPA, the pricing is structured such that Consumers' ratepayers will retain the benefits of the Palisades plant's low-cost nuclear generation. CMS-25 CMS Energy Corporation The sale is subject to various regulatory approvals, including the MPSC's approval of the power purchase agreement, the FERC's approval for Entergy to sell power to us under the PPA and other related matters, the NRC's approval of the transfer of the operating license to Entergy and other related matters, and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The final purchase price will be subject to various closing adjustments such as working capital and capital expenditure adjustments, adjustments for nuclear fuel usage and inventory, and the date of closing. We are targeting to complete the sale in the first quarter of 2007. However, the sale agreement can be terminated if the closing does not occur within 18 months of the execution of the agreement. The closing can be extended for up to six months to accommodate delays in receiving regulatory approval. We cannot predict with certainty whether or when the closing conditions will be satisfied or whether or when this transaction will be completed. For additional details on the sale of Palisades and the Big Rock ISFSI, see the Asset Sale Agreement and the Power Purchase Agreement, which are attached as Exhibits 10a and 10b to this filing. Big Rock: Decommissioning of the site is nearing completion. Demolition of the last remaining plant structure, the containment building, and removal of remaining underground utilities and temporary office structures is expected to be complete by the end of the third quarter of 2006. Final radiological surveys will then be completed to ensure that the site meets all requirements for free, unrestricted release in accordance with the NRC approved License Termination Plan (LTP) for the project. We anticipate NRC approval to return approximately 475 acres of the site, including the area formerly occupied by the nuclear plant, to a natural setting for unrestricted use by early 2007. An area of approximately 105 acres encompassing the Big Rock ISFSI, where eight casks loaded with spent fuel and other high-level radioactive material are stored, has been sold to Entergy. We will be required to pay Entergy $30 million for accepting responsibility for the storage and disposal of these materials. Palisades: 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 2006, we have loaded 29 dry casks with spent nuclear fuel. Palisades' current license from the NRC expires in 2011. In March 2005, the NMC, which operates the Palisades plant, applied for a 20-year license renewal for the plant on behalf of Consumers. We expect a decision from the NRC on the license renewal application in 2007. For additional details on nuclear plant decommissioning at Big Rock and Palisades, see Note 2, Contingencies, "Other Consumers' Electric Utility Contingencies -- Nuclear Plant Decommissioning." GAS UTILITY BUSINESS OUTLOOK GROWTH: In 2006, we project gas deliveries will decline by four percent, on a weather-adjusted basis, from 2005 levels due to increased conservation and overall economic conditions in the state of Michigan. Over the next five years, we expect gas deliveries to be relatively flat. Actual gas deliveries in future periods may be affected by: - fluctuations in weather patterns, - use by independent power producers, - competition in sales and delivery, - changes in gas commodity prices, - Michigan economic conditions, CMS-26 CMS Energy Corporation - the price of competing energy sources or fuels, and - gas consumption per customer. GAS UTILITY BUSINESS UNCERTAINTIES Several gas business trends or uncertainties may affect our future financial results and financial condition. 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, "Consumers' Gas Utility Contingencies - Gas Environmental 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, policies, and practices for prudency in annual plan and reconciliation proceedings. For additional details on gas cost recovery, see Note 2, Contingencies, "Consumers' Gas Utility Rate Matters -- Gas Cost Recovery." 2001 GAS DEPRECIATION 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, - required us to undertake a study to determine why our plant removal costs are in excess of other regulated Michigan natural gas utilities, and - required us to file a study report with the MPSC Staff on or before December 31, 2005. We filed the study report with the MPSC Staff on December 29, 2005. We are also required to file our next gas depreciation case within 90 days after the MPSC issuance of a final order in the pending case related to ARO accounting. We cannot predict when the MPSC will issue a final order in the ARO accounting case. If the depreciation case order is issued after the gas general rate case order, we proposed to incorporate its results into the gas general rates using a surcharge mechanism, a process used to incorporate specialty items into customer rates. 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. As part of this filing, we also requested interim rate relief of $75 million. The MPSC Staff and intervenors filed interim rate relief testimony on October 31, 2005. In its testimony, the MPSC Staff recommended granting interim rate relief of $38 million. In February 2006, the MPSC Staff recommended granting final rate relief of $62 million. The MPSC Staff proposed that $17 million of this amount be contributed to a low income and energy efficiency fund. The MPSC Staff also recommended reducing our allowed return on common equity to 11.15 percent, from our current 11.4 percent. In March 2006, the MPSC Staff revised its recommended final rate relief to $71 million, which includes $17 million to be contributed to a low income and energy efficiency fund. In April 2006, we revised our request for final rate relief downward to $118 million. CMS-27 CMS Energy Corporation In May 2006, the MPSC issued an order granting us interim gas rate relief of $18 million annually, which is under bond and subject to refund if final rate relief is granted in a lesser amount. The order also extended the temporary two-year surcharge of $58 million granted in October 2004 until the issuance of a final order in this proceeding. The MPSC has not set a date for issuance of an order granting final rate relief. In July 2006, the ALJ issued a Proposal for Decision recommending final rate relief of $74 million above current rate levels, which include interim and temporary rate relief. The $74 million includes $17 million to be contributed to a low income and energy efficiency fund. The Proposal for Decision also recommended reducing our return on common equity to 11 percent, from our current 11.4 percent. ENTERPRISES OUTLOOK We are evaluating new development prospects outside of our current asset base to determine whether they fit within our business strategy. These and other investment opportunities for Enterprises will be considered for risk, rate of return, and consistency with our business strategy. Meanwhile, we plan to continue restructuring our Enterprises business with the objective of narrowing the focus of our operations to primarily North America and the Middle East/North Africa. We will continue to sell designated assets and investments that are not consistent with this focus. The percentage of our future earnings relating to our equity method investments may increase and our total future earnings may depend more significantly upon the performance of those investments. For summarized financial information of our equity method investments, see Note 9, Equity Method Investments. 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 electric generating plant, and - impact of indemnity and environmental remediation obligations at Bay Harbor. GASATACAMA: On March 24, 2004, the Argentine government authorized the restriction of exports of natural gas to Chile, giving priority to domestic demand in Argentina. This restriction has had a detrimental effect on GasAtacama's earnings since GasAtacama's gas-fired electric generating plant is located in Chile and uses Argentine gas for fuel. From April through December 2004, Bolivia agreed to export 4 million CMS-28 CMS Energy Corporation cubic meters of gas per day to Argentina, which allowed Argentina to minimize its curtailments to Chile. Argentina and Bolivia extended the term of that agreement through December 31, 2006. With the Bolivian gas supply, Argentina relaxed its export restrictions to GasAtacama, allowing GasAtacama to receive approximately 50 percent of its contracted gas quantities at its electric generating plant. On May 1, 2006, the Bolivian government announced its intention to nationalize the natural gas industry and raise prices under its existing gas export contracts. Since May, gas flow from Bolivia has been restricted as Argentina and Bolivia have been renegotiating the price for gas. Simultaneously, gas supply to GasAtacama has been further curtailed. In July 2006, Argentina agreed to increase the price it pays for gas from Bolivia through the term of the existing contract, December 31, 2006. Concurrently, Argentina announced that it would recover all of this price increase by a special tax on its gas exports. The decision of Argentina to pass all of these increased costs to exports, in addition to maintaining the current curtailment scheme, has increased the risk and cost of GasAtacama's fuel supply. We are analyzing this situation to determine what effect these actions may have on the value of our investment in GasAtacama, but at this time cannot determine the effect. If an appropriate resolution of this issue is not reached, it could result in an impairment of our investment in GasAtacama. At June 30, 2006, the carrying value of our investment in GasAtacama was $361 million. SENECA: SENECA operates an electric utility on Margarita Island, Venezuela under a Concession Agreement with the Venezuelan 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. In 2003, the MEP approved a fuel subsidy to offset partially the lower tariff revenue. This fuel subsidy originally expired on December 31, 2004, but has recently been approved through December 31, 2005. SENECA has informed the MEP that for 2006, 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 regulated by the MEP. Continued receipt of the fuel subsidy is part of SENECA's broader discussions with the MEP for appropriate financial relief. We have been informed that the MEP is examining other aspects of SENECA's financial relief proposal. The outcome of these discussions is uncertain and, if not favorable, could impact adversely SENECA's liquidity and the value of our investment. OTHER OUTLOOK MCV PARTNERSHIP NEGATIVE EQUITY: Due to the impairment of the MCV Facility and operating losses from mark-to-market adjustments on derivative instruments, the equity held by Consumers and by all of the owners of the MCV Partnership has decreased significantly and is now negative. Since Consumers is one of the general partners of the MCV Partnership, we have recognized a portion of the limited partners' negative equity. As the MCV Partnership recognizes future losses, we will continue to assume a portion of the limited partners' share of those losses, in addition to our proportionate share. LITIGATION AND REGULATORY INVESTIGATION: We are the subject of an investigation by the DOJ regarding round-trip trading transactions by CMS MST. Also, we are named as a party in various litigation matters including, but not limited to, securities class action lawsuits, and several lawsuits regarding alleged false natural gas price reporting and price manipulation. Additionally, the SEC is investigating the actions of former CMS Energy subsidiaries in relation to Equatorial Guinea. For additional details regarding these and other matters, see Note 2, Contingencies and Part II, Item 1. Legal Proceedings. PENSION REFORM: Both branches of Congress passed legislation aimed at reforming pension plans in 2005. The U.S. Senate passed The Pension Security and Transparency Act in November 2005 and The House of Representatives passed the Pension Protection Act of 2005 in December 2005. Although the Senate and House bills were similar, they did contain a number of differences. CMS-29 CMS Energy Corporation The House and Senate have passed the Pension Protection Act of 2006, which primarily reflects a bipartisan House-Senate pension conference agreement. The bill reforms the funding rules for employer-provided pension plans, effective for plan years beginning after 2007, and was sent to the President in August 2006 for his signature. We are in the process of determining the impact of this potential legislation on our financial statements. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS SFAS NO. 123(R) AND SAB NO. 107, SHARE-BASED PAYMENT: SFAS No. 123(R) requires companies to use the fair value of employee stock options and similar awards at the grant date to value the awards. SFAS No. 123(R) was effective for us on January 1, 2006. We elected to adopt the modified prospective method recognition provisions of this Statement instead of retrospective restatement. We adopted the fair value method of accounting for share-based awards effective December 2002. Therefore, SFAS No. 123(R) did not have a significant impact on our results of operations when it became effective. We applied the additional guidance provided by SAB No. 107 upon implementation of SFAS No. 123(R). For additional details, see Note 8, Executive Incentive Compensation. NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE FIN 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES: In June 2006, the FASB issued FIN 48. This interpretation provides a two-step approach for the recognition and measurement of uncertain tax positions taken, or expected to be taken, by a company on its income tax returns. The first step is to evaluate the tax position to determine if, based on management's best judgment, it is greater than 50 percent likely that the taxing authority will sustain the tax position. The second step is to measure the appropriate amount of the benefit to recognize. This is done by estimating the potential outcomes and recognizing the greatest amount that has a cumulative probability of at least 50 percent. We are presently evaluating the impacts, if any, of FIN 48. Any impacts of implementing FIN 48 will result in a cumulative adjustment to retained earnings. This interpretation is effective for us beginning January 1, 2007. PROPOSED ACCOUNTING STANDARD On March 31, 2006, the FASB released an exposure draft of a proposed SFAS entitled "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans." The proposed SFAS would amend SFAS Nos. 87, 88, 106, and 132(R) and is expected to be effective for us on December 31, 2006. The most significant requirement stated in the proposed SFAS is the balance sheet recognition of the underfunded portion of our defined benefit postretirement plans at the date of adoption. We expect that Consumers will be allowed to apply SFAS No. 71 and recognize the underfunded portion as a regulatory asset. If we determine that SFAS No. 71 does not apply, our other comprehensive income could be reduced significantly. We are in the process of determining the impact of this proposed SFAS on our financial statements. CMS-30 CMS Energy Corporation (This page intentionally left blank) CMS-31 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED -------------------- -------------------- June 30 2006 2005 2006 2005 - ------- ------- ------- ------- ------- In Millions OPERATING REVENUE $ 1,396 $ 1,230 $ 3,428 $ 3,075 EARNINGS FROM EQUITY METHOD INVESTEES 8 21 44 52 OPERATING EXPENSES Fuel for electric generation 257 178 482 355 Fuel costs mark-to-market at the MCV Partnership 42 39 198 (170) Purchased and interchange power 182 102 332 197 Cost of gas sold 297 334 1,243 1,173 Other operating expenses 247 257 526 491 Maintenance 87 58 167 116 Depreciation, depletion and amortization 127 122 289 278 General taxes 68 66 146 141 ------- ------- ------- ------- 1,307 1,156 3,383 2,581 ------- ------- ------- ------- OPERATING INCOME 97 95 89 546 OTHER INCOME (DEDUCTIONS) Accretion expense (2) (5) (4) (10) Gain on asset sales, net - 2 - 5 Interest and dividends 22 15 39 25 Regulatory return on capital expenditures 7 15 10 31 Foreign currency gains (losses), net 1 (3) 1 (4) Other income 15 10 22 18 Other expense (1) (5) (10) (12) ------- ------- ------- ------- 42 29 58 53 ------- ------- ------- ------- FIXED CHARGES Interest on long-term debt 120 121 239 243 Interest on long-term debt - related parties 4 6 8 16 Other interest 9 6 16 10 Capitalized interest (3) (1) (5) (2) Preferred dividends of subsidiaries 2 1 3 2 ------- ------- ------- ------- 132 133 261 269 ------- ------- ------- ------- INCOME (LOSS) BEFORE MINORITY INTERESTS 7 (9) (114) 330 MINORITY INTERESTS (OBLIGATIONS), NET - (14) (68) 99 ------- ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES 7 5 (46) 231 INCOME TAX EXPENSE (BENEFIT) (66) (25) (94) 49 ------- ------- ------- ------- INCOME FROM CONTINUING OPERATIONS 73 30 48 182 INCOME FROM DISCONTINUED OPERATIONS, NET OF $- AND $1 TAX EXPENSE IN 2006 2 - 3 - ------- ------- ------- ------- NET INCOME 75 30 51 182 PREFERRED DIVIDENDS 3 3 6 5 ------- ------- ------- ------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 72 $ 27 $ 45 $ 177 ======= ======= ======= =======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CMS-32
THREE MONTHS ENDED SIX MONTHS ENDED June 30 2006 2005 2006 2005 - ------- ------- ------ ------ ------- In Millions CMS ENERGY NET INCOME Net Income Available to Common Stockholders $ 72 $ 27 $ 45 $ 177 ======= ====== ====== ======= BASIC EARNINGS PER AVERAGE COMMON SHARE Income from Continuing Operations $ 0.32 $ 0.12 $ 0.19 $ 0.86 Gain from Discontinued Operations 0.01 - 0.02 - ------- ------ ------ ------- Net Income Attributable to Common Stock $ 0.33 $ 0.12 $ 0.21 $ 0.86 ======= ====== ====== ======= DILUTED EARNINGS PER AVERAGE COMMON SHARE Income from Continuing Operations $ 0.30 $ 0.12 $ 0.19 $ 0.82 Gain from Discontinued Operations 0.01 - 0.01 - ------- ------ ------ ------- Net Income Attributable to Common Stock $ 0.31 $ 0.12 $ 0.20 $ 0.82 ======= ====== ====== ======= DIVIDENDS DECLARED PER COMMON SHARE $ - $ - $ - $ - ------- ------ ------ -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CMS-33 CMS Energy Corporation (This page intentionally left blank) CMS-34 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED June 30 2006 2005 - ------- ------- ------- In Millions CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 51 $ 182 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization (includes nuclear decommissioning of $3 per period) 289 278 Deferred income taxes and investment tax credit (184) 42 Minority interests (obligations), net (68) 99 Fuel costs mark-to-market at the MCV Partnership 198 (170) Regulatory return on capital expenditures (10) (31) Capital lease and other amortization 23 21 Earnings from equity method investees (44) (52) Accretion expense 4 10 Gain on the sale of assets - (5) Changes in other assets and liabilities: Decrease (increase) in accounts receivable and accrued revenues 19 (78) Decrease in inventories 103 112 Increase (decrease) in accounts payable (105) 23 Increase (decrease) in accrued taxes 23 (56) Increase in accrued expenses 63 6 Increase (decrease) in the MCV Partnership gas supplier funds on deposit (100) 4 Cash distributions received from equity method investees 48 36 Decrease in other current and non-current assets 175 11 Increase in other current and non-current liabilities 4 48 ------- ------- Net cash provided by operating activities $ 489 $ 480 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) $ (320) $ (280) Cost to retire property (31) (18) Restricted cash and restricted short-term investments 127 (20) Investments in nuclear decommissioning trust funds (18) (3) Proceeds from nuclear decommissioning trust funds 13 24 Proceeds from short-term investments - 295 Purchase of short-term investments - (186) Maturity of the MCV Partnership restricted investment securities held-to-maturity 118 222 Purchase of the MCV Partnership restricted investment securities held-to-maturity (118) (223) Proceeds from sale of assets - 59 Other investing (21) 20 ------- ------- Net cash used in investing activities $ (250) $ (110) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes, bonds, and other long-term debt $ 43 $ 900 Issuance of common stock 12 283 Retirement of bonds and other long-term debt (271) (1,169) Payment of preferred stock dividends (6) (6) Payment of capital lease and financial lease obligations (5) (5) Debt issuance costs and financing fees (9) (30) ------- ------- Net cash used in financing activities $ (236) $ (27) ------- ------- EFFECT OF EXCHANGE RATES ON CASH 1 1 ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS $ 4 $ 344 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 847 669 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 851 $ 1,013 ======= =======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CMS-35 CMS ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
June 30 2006 December 31 (Unaudited) 2005 ------------ ------------ In Millions PLANT AND PROPERTY (AT COST) Electric utility $ 8,396 $ 8,204 Gas utility 3,179 3,151 Enterprises 1,060 1,068 Other 31 25 ------------ ------------ 12,666 12,448 Less accumulated depreciation, depletion and amortization 5,210 5,123 ------------ ------------ 7,456 7,325 Construction work-in-progress 572 520 ------------ ------------ 8,028 7,845 ------------ ------------ INVESTMENTS Enterprises 738 712 Other 10 13 ------------ ------------ 748 725 ------------ ------------ CURRENT ASSETS Cash and cash equivalents at cost, which approximates market 851 847 Restricted cash and restricted short-term investments 67 198 Accounts receivable, notes receivable and accrued revenue, less allowances of $32 and $31, respectively 790 824 Accounts receivable, dividends receivable, and notes receivable - related parties 67 54 Inventories at average cost Gas in underground storage 949 1,069 Materials and supplies 93 96 Generating plant fuel stock 129 110 Price risk management assets 59 113 Regulatory assets - postretirement benefits 19 19 Derivative instruments 95 242 Deferred property taxes 147 160 Prepayments and other 127 167 ------------ ------------ 3,393 3,899 ------------ ------------ NON-CURRENT ASSETS Regulatory Assets Securitized costs 538 560 Additional minimum pension 399 399 Postretirement benefits 105 116 Customer Choice Act 206 222 Other 475 484 Price risk management assets 114 165 Nuclear decommissioning trust funds 563 555 Goodwill 30 27 Notes receivable - related parties 185 187 Notes receivable 210 187 Other 672 649 ------------ ------------ 3,497 3,551 ------------ ------------ TOTAL ASSETS $ 15,666 $ 16,020 ============ ============
CMS-36 STOCKHOLDERS' INVESTMENT AND LIABILITIES
June 30 2006 December 31 (Unaudited) 2005 ------------ ------------ In Millions CAPITALIZATION Common stockholders' equity Common stock, authorized 350.0 shares; outstanding 221.5 shares and 220.5 shares, respectively $ 2 $ 2 Other paid-in capital 4,452 4,436 Accumulated other comprehensive loss (282) (288) Retained deficit (1,783) (1,828) ------------ ------------ 2,389 2,322 Preferred stock of subsidiary 44 44 Preferred stock 261 261 Long-term debt 6,851 6,800 Long-term debt - related parties 178 178 Non-current portion of capital and finance lease obligations 310 308 ------------ ------------ 10,033 9,913 ------------ ------------ MINORITY INTERESTS 362 333 ------------ ------------ CURRENT LIABILITIES Current portion of long-term debt, capital and finance leases 174 316 Current portion of long-term debt - related parties - 129 Accounts payable 496 597 Accounts payable - related parties 13 16 Accrued interest 157 145 Accrued taxes 354 331 Price risk management liabilities 66 80 Current portion of gas supply contract obligations 11 10 Deferred income taxes 72 55 MCV Partnership gas supplier funds on deposit 93 193 Other 242 241 ------------ ------------ 1,678 2,113 ------------ ------------ NON-CURRENT LIABILITIES Regulatory Liabilities Regulatory liabilities for cost of removal 1,166 1,120 Income taxes, net 468 455 Other regulatory liabilities 222 178 Postretirement benefits 424 382 Deferred income taxes 79 297 Deferred investment tax credit 64 67 Asset retirement obligations 496 496 Price risk management liabilities 127 161 Gas supply contract obligations 53 61 Other 494 444 ------------ ------------ 3,593 3,661 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 2, 3 and 5) TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $ 15,666 $ 16,020 ============ ============
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CMS-37 CMS ENERGY CORPORATION CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED June 30 2006 2005 2006 2005 - ------- ------- ------- ------- ------- In Millions COMMON STOCK At beginning and end of period $ 2 $ 2 $ 2 $ 2 ------- ------- ------- ------- OTHER PAID-IN CAPITAL At beginning of period 4,445 4,147 4,436 4,140 Common stock issued 7 275 15 281 Common stock reissued - - 1 1 ------- ------- ------- ------- At end of period 4,452 4,422 4,452 4,422 ------- ------- ------- ------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Minimum Pension Liability At beginning of period (19) (17) (19) (17) Minimum pension liability adjustments (a) - (9) - (9) ------- ------- ------- ------- At end of period (19) (26) (19) (26) ------- ------- ------- ------- Investments At beginning of period 11 8 9 9 Unrealized gain (loss) on investments (a) (1) - 1 (1) ------- ------- ------- ------- At end of period 10 8 10 8 ------- ------- ------- ------- Derivative Instruments At beginning of period 30 1 35 (9) Unrealized gain (loss) on derivative instruments (a) 4 (6) - 12 Reclassification adjustments included in net income (loss) (a) 1 2 - (6) ------- ------- ------- ------- At end of period 35 (3) 35 (3) ------- ------- ------- ------- Foreign Currency Translation At beginning of period (308) (315) (313) (319) Other foreign currency translations (a) - 3 5 7 ------- ------- ------- ------- At end of period (308) (312) (308) (312) ------- ------- ------- ------- At end of period (282) (333) (282) (333) ------- ------- ------- ------- RETAINED DEFICIT At beginning of period (1,855) (1,584) (1,828) (1,734) Net income (a) 75 30 51 182 Preferred stock dividends declared (3) (3) (6) (5) ------- ------- ------- ------- At end of period (1,783) (1,557) (1,783) (1,557) ------- ------- ------- ------- TOTAL COMMON STOCKHOLDERS' EQUITY $ 2,389 $ 2,534 $ 2,389 $ 2,534 ======= ======= ======= ======= (A) DISCLOSURE OF OTHER COMPREHENSIVE INCOME: Minimum Pension Liability Minimum pension liability adjustments, net of tax benefit of $-, $(5), $- and $(5), respectively $ - $ (9) $ - $ (9) Investments Unrealized gain (loss) on investments, net of tax of $1, $-, $- and $-, respectively (1) - 1 (1) Derivative Instruments Unrealized gain (loss) on derivative instruments, net of tax (tax benefit) of $(2), $4, $(7) and $13, respectively 4 (6) - 12 Reclassification adjustments included in net income, net of tax benefit of $(1), $-, $(2) and $(6), respectively 1 2 - (6) Foreign currency translation, net - 3 5 7 Net income 75 30 51 182 ------- ------- ------- ------- Total Other Comprehensive Income $ 79 $ 20 $ 57 $ 185 ======= ======= ======= =======
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CMS-38 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 consolidated 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 related Notes contained in CMS Energy's Form 10-K/A Amendment No. 1 for the year ended December 31, 2005. 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 energy company operating 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 of which we are the primary beneficiary, in accordance with FASB Interpretation No. 46(R). 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 2, Contingencies. REVENUE RECOGNITION POLICY: We recognize revenues from deliveries of electricity and natural gas, and the transportation, processing, and storage of natural gas when services are provided. Sales taxes are recorded as liabilities and are not included in revenues. Revenues on sales of marketed electricity, CMS-39 CMS Energy Corporation natural gas, and other energy products are recognized at delivery. Mark-to-market changes in the fair values of energy trading contracts that qualify as derivatives are recognized as revenues in the periods in which the changes occur. ACCOUNTING FOR MISO TRANSACTIONS: CMS ERM accounts for MISO transactions on a net basis for all of the generating units for which CMS ERM markets power. CMS ERM allocates other fixed costs associated with MISO settlements back to the generating units and records billing adjustments when invoices are received. Consumers accounts for MISO transactions on a net basis for all of its generating units combined. Consumers records billing adjustments when invoices are received and also records an expense accrual for future adjustments based on historical experience. 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. These foreign currency translation adjustments are shown in the stockholders' equity section on our Consolidated Balance Sheets. 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. At June 30, 2006, the cumulative Foreign Currency Translation component of stockholders' equity is $308 million, which primarily represents currency losses in Argentina and Brazil. The cumulative foreign currency loss due to the unfavorable exchange rate of the Argentine peso using an exchange rate of 3.092 pesos per U.S. dollar was $266 million, net of tax. The cumulative foreign currency loss due to the unfavorable exchange rate of the Brazilian real using an exchange rate of 2.217 reais per U.S. dollar was $45 million, net of tax. LONG-LIVED ASSETS AND EQUITY METHOD INVESTMENTS: Our assessment of the recoverability of long-lived assets and equity method investments involves critical accounting estimates. We periodically perform tests of impairment if certain conditions that are other than temporary exist that may indicate the carrying value may not be recoverable. Of our total assets, recorded at $15.666 billion at June 30, 2006, 56 percent represent long-lived assets and equity method investments that are subject to this type of analysis. There were no asset sales for the six months ended June 30, 2006. Gross cash proceeds received from the sale of assets totaled $59 million for the six months ended June 30, 2005. 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 ========= =========
CMS-40 CMS Energy Corporation DETERMINATION OF PENSION MRV OF PLAN ASSETS: We determine the MRV for pension plan assets, as defined in SFAS No. 87, as the fair value of plan assets on the measurement date, adjusted by the gains or losses that will not be admitted into MRV until future years. We reflect each year's assets gain or loss in MRV in equal amounts over a five-year period beginning on the date the original amount was determined. The MRV is used in the calculation of net pension cost. 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 2006 2005 2006 2005 - ------- ------ ------ ------ ------ Other income Interest and dividends - related parties $ 4 $ 3 $ 6 $ 5 Electric restructuring return 1 3 2 4 Return on stranded and security costs 2 2 3 3 Nitrogen oxide allowance sales 6 1 6 1 Refund of surety bond premium - - 1 - Reduction of contingent liability - - - 3 All other 2 1 4 2 ------ ------ ------ ------ Total other income $ 15 $ 10 $ 22 $ 18 ====== ====== ====== ======
In Millions --------------------------------------------------- Three Months Ended Six Months Ended --------------------- --------------------- June 30 2006 2005 2006 2005 - ------- ------ ------ ------ ------ Other expense Investment write-down $ - $ - $ - $ (1) Loss on SERP investment - (1) - (1) Loss on reacquired and extinguished debt - (1) (5) (6) Civic and political expenditures - - (1) (1) Donations - - (1) - All other (1) (3) (3) (3) ------ ------ ------ ------ Total other expense $ (1) $ (5) $ (10) $ (12) ====== ====== ====== ======
RECLASSIFICATIONS: Certain prior year amounts have been reclassified for comparative purposes. These reclassifications did not affect consolidated net income for the periods presented. NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE: FIN 48, Accounting for Uncertainty in Income Taxes: In June 2006, the FASB issued FIN 48. This interpretation provides a two-step approach for the recognition and measurement of uncertain tax positions taken, or expected to be taken, by a company on its income tax returns. The first step is to evaluate the tax position to determine if, based on management's best judgment, it is greater than 50 percent likely that the taxing authority will sustain the tax position. The second step is to measure the appropriate amount of the benefit to recognize. This is done by estimating the potential outcomes and recognizing the greatest amount that has a cumulative probability of at least 50 percent. We are presently evaluating the impacts, if any, of FIN 48. Any impacts of implementing FIN 48 will result in a cumulative adjustment to retained earnings. This interpretation is effective for us beginning January 1, 2007. 2: CONTINGENCIES SEC AND OTHER INVESTIGATIONS: During the period of May 2000 through January 2002, CMS MST engaged in simultaneous, prearranged commodity trading transactions in which energy commodities were sold and repurchased at the same price. These so called round-trip trades had no impact on previously reported consolidated net income, earnings per share, or cash flows but had the effect of increasing operating revenues and operating expenses by equal amounts. CMS-41 CMS Energy Corporation 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. Those individuals filed a motion to dismiss the SEC action, which was denied. 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. The cases were consolidated into a single lawsuit, which 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, the court granted a motion to dismiss Consumers and three of the individual defendants, but denied the motions to dismiss CMS Energy and the 13 remaining individual defendants. The court issued an opinion and order dated March 24, 2006, granting in part and denying in part plaintiffs' amended motion for class certification. The court conditionally certified a class consisting of "all persons who purchased CMS Common Stock during the period of October 25, 2000 through and including May 17, 2002 and who were damaged thereby." The court excluded purchasers of CMS Energy's 8.75 percent Adjustable Convertible Trust Securities ("ACTS") from the class. Trial has been scheduled for March 2007. In response to the court's opinion and order excluding purchasers of ACTS from the shareholder class, a new class action lawsuit was filed on behalf of ACTS purchasers. The new lawsuit names the same defendants as the shareholder action and contains essentially the same allegations and class period. CMS Energy and the individual defendants will defend themselves vigorously in this litigation but cannot predict its outcome. ERISA LAWSUITS: CMS Energy was a named defendant, along with Consumers, CMS MST, and certain named and unnamed officers and directors, in two lawsuits, filed in July 2002 in United States District Court for the Eastern District of Michigan, brought as purported class actions on behalf of participants and beneficiaries of the CMS Employees' Savings Plan (the Plan). Plaintiffs alleged breaches of fiduciary duties under ERISA and sought 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, as well as other equitable relief and legal fees. On March 1, 2006, CMS Energy and Consumers reached an agreement, subject to court and independent fiduciary approval, to settle the lawsuits. The settlement agreement required a $28 million cash payment by CMS Energy's primary insurer to be used to pay Plan participants and beneficiaries for alleged losses, as well as any legal fees and expenses. In addition, CMS Energy agreed to certain other steps regarding administration of the Plan. The hearing on final approval of the settlement was held on June 15, 2006. On June 27, 2006, the judge entered the Order and Final Judgment, approving the proposed settlement with minor modifications. 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 CMS-42 CMS Energy Corporation and what effect, if any, the investigation will have on its business. The CFTC filed a civil injunctive action against two former CMS Field Services employees in Oklahoma federal district court on February 1, 2005. The action alleges the two engaged in reporting false natural gas trade information, and seeks to enjoin such acts, compel compliance with the Commodities Exchange Act, and impose monetary penalties. CMS Energy is currently advancing legal defense costs to the two individuals in accordance with existing indemnification policies. BAY HARBOR: As part of the development of Bay Harbor by certain subsidiaries of CMS Energy, which went forward under an agreement with the MDEQ, third parties constructed a golf course and a park over several abandoned cement kiln dust (CKD) piles, left over from the former cement plant operation on the Bay Harbor site. Pursuant to the agreement with the MDEQ, a water collection system was constructed to recover seep water from one of the CKD piles and CMS Energy built a treatment plant to treat the seep water. 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. In September 2004, following an eight month shutdown of the treatment plant, the MDEQ issued a notice of noncompliance 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. In February 2005, the EPA executed an Administrative Order on Consent (AOC) to address problems at Bay Harbor, upon the consent of CMS Land Company, a subsidiary of Enterprises (CMS Land) and CMS Capital, LLC, a subsidiary of CMS Energy. Pursuant to the AOC, the EPA approved a final removal action work plan in July 2005. Among other things, the plan calls for the installation of collection trenches to intercept high-pH CKD leachate flow to the lake. Final installation of the trenches in the western-most section has been delayed because of the discovery of CKD on the beach. Regarding these areas, CMS Land submitted an Interim Response Plan, which was approved by the EPA on March 30, 2006. On May 30, 2006, the EPA approved a pilot carbon dioxide augmentation plan to augment the leachate recovery system by improving pH results in certain areas. The augmentation system was installed in June 2006. In February 2006, CMS Land submitted to the EPA a proposed Remedial Investigation and Feasibility Study for the East Park CKD pile. The EPA approved a schedule for near-term activities, which includes consolidating CKD materials and installing collection trenches in the East Park leachate release area. On June 19, 2006, the EPA approved an East CKD Removal Action Work Plan and Final Engineering Design for Consolidation. The work plan calls for completion of the collection trenches in East Park by November 15, 2006. Several property owners at Bay Harbor made claims for loss or damage to their property. The owner of one parcel has filed a lawsuit in Emmet County Circuit Court against CMS Energy and several of its subsidiaries, as well as Bay Harbor Golf Club Inc., Bay Harbor Company LLC, David C. Johnson, and David V. Johnson, one of the developers at Bay Harbor. Several of these defendants have demanded indemnification from CMS Energy and affiliates for the claims made against them in the lawsuit. After a March 28, 2006 hearing on motions filed by CMS Energy and other defendants, the judge dismissed various counts of the complaint. CMS Land has entered into various access, purchase and settlement agreements with several of the affected landowners at Bay Harbor and continues negotiations with other landowners for access as necessary to implement remediation measures. CMS Land completed the purchase of two unimproved lots and a lot with a house. CMS Energy will defend vigorously the existing case, and any other property damage and personal injury claims or lawsuits. CMS-43 CMS Energy Corporation CMS Energy has recorded a charge of $85 million for its obligations. An adverse outcome of this matter could, depending on the size of any indemnification obligation or liability under environmental laws, have a potentially significant adverse effect on CMS Energy's financial condition and liquidity and could negatively impact CMS Energy's financial results. CMS Energy cannot predict the ultimate cost or outcome of this matter. CONSUMERS' ELECTRIC UTILITY CONTINGENCIES ELECTRIC ENVIRONMENTAL MATTERS: Our operations are subject to environmental laws and regulations. Costs to operate our facilities in compliance with these laws and regulations generally have been recovered in customer rates. Clean Air Act: 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 $819 million through 2011. 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 - an AFUDC capitalization rate. Our current capital cost estimates include an escalation rate of 2.6 percent and an AFUDC capitalization rate of 8.4 percent. As of June 2006, we have incurred $634 million in capital expenditures to comply with the federal Clean Air Act and resulting regulations and anticipate that the remaining $185 million of capital expenditures will be made in 2006 through 2011. These expenditures include installing selective catalytic reduction control technology at four of our coal-fired electric generating plants. In addition to modifying coal-fired electric generating plants, our compliance plan includes the use of nitrogen oxide emission allowances until all of the control equipment is operational in 2011. The nitrogen oxide emission allowance annual expense is projected to be $6 million per year, which we expect to recover from our customers through the PSCR process. The projected annual expense is based on market price forecasts and forecasts of regulatory provisions, known as progressive flow control, that restrict the usage in any given year of allowances banked from previous years. The allowances and their cost are accounted for as inventory. The allowance inventory is expensed at the rolling average cost as the coal-fired electric generating plants emit nitrogen oxide. Clean Air Interstate Rule: In March 2005, the EPA adopted the Clean Air Interstate Rule that requires additional coal-fired electric generating plant emission controls for nitrogen oxides and sulfur dioxide. The rule involves a two-phase program to reduce emissions of nitrogen oxides by more than 60 percent and sulfur dioxide by more than 70 percent from 2003 levels by 2015. The final rule will require that we run our selective catalytic reduction control technology units year round beginning in 2009 and may require that we purchase additional nitrogen oxide allowances beginning in 2009. The additional nitrogen oxide allowances are estimated to cost $4 million per year for years 2009 through 2011, which we expect to recover from our customers through the PSCR process. In addition to the selective catalytic reduction control technology installed to meet the nitrogen oxide standards, our current plan includes installation of flue gas desulfurization scrubbers. The scrubbers CMS-44 CMS Energy Corporation are to be installed by 2014 to meet the Phase I reduction requirements of the Clean Air Interstate Rule, at an estimated total cost of $960 million. Our capital cost estimates include an escalation rate of 2.6 percent and an AFUDC capitalization rate of 8.4 percent. We currently have a surplus of sulfur dioxide allowances, which were granted by the EPA and are accounted for as inventory. In January 2006, we sold some of our excess sulfur dioxide allowances for $61 million and recognized the proceeds as a regulatory liability. Clean Air Mercury Rule: Also in March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial reductions of mercury emissions from coal-fired electric generating plants by 2010 and further reductions by 2018. The Clean Air Mercury Rule establishes a cap-and-trade system for mercury emissions that is similar to the system used in the Clean Air Interstate Rule. The industry has not reached a consensus on the technical methods for curtailing mercury emissions. However, we anticipate our capital costs for mercury emissions reductions required by Phase I of the Clean Air Mercury Rule to be less than $50 million and implemented by 2010. Phase II requirements of the Clean Air Mercury Rule are not yet known and a cost estimate has not been determined. In August 2005, the MDEQ filed a Motion to Intervene in a court challenge to certain aspects of EPA's Clean Air Mercury Rule, asserting that the rule is inadequate. We cannot predict the outcome of this proceeding. In April 2006, Michigan's governor announced a plan that would result in mercury emissions reductions of 90 percent by 2015. This plan would adopt the Clean Air Mercury Rule through its first phase. Beginning in year 2015, the mercury emissions reduction standards outlined in the governor's plan would become more stringent than those included in the Clean Air Mercury Rule. We are working with the MDEQ on the details of these rules. We will develop a cost estimate when the details of these rules are determined. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seeking permits to modify the plant 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 generating 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 our experience, we estimate that our share of the total liability for the known Superfund sites will be between $1 million and $10 million. At June 30, 2006, 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 Ludington. We removed and replaced part of the PCB material. CMS-45 CMS Energy Corporation 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 duct burner and failing to maintain certain records in the required format. The MCV Partnership there after declared five of the six duct burners in the MCV Facility as unavailable for operational use (which reduced the generation capability of the MCV Facility by approximately 100 MW) and took other corrective action to address the MDEQ's assertions. Testing of the one available duct burner occurred in April 2005, and its emissions met permitted levels due to the configuration of that particular unit. In July 2004, the MCV Partnership filed a response to the Letter of Violation, opposing its findings. On December 13, 2004, the MDEQ informed the MCV Partnership that it was pursuing an escalated enforcement action against the MCV Partnership. 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). Following voluntary settlement discussions, the MDEQ issued the MCV Partnership a new PTI, which established higher carbon monoxide emissions limits on the five duct burners that had been declared unavailable. The MCV Partnership has returned those duct burners to service. The MDEQ and the MCV Partnership are pursuing a settlement of the emission violation, which will also satisfy state and federal requirements and remove the MCV Partnership from the HPVL. At this time, we cannot predict the financial impact or outcome of this issue. LITIGATION: In October 2003, a group of eight PURPA qualifying facilities (the plaintiffs), which sell power to us, filed a lawsuit in Ingham County Circuit Court. The lawsuit alleged 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. The Michigan Court of Appeals upheld this order on the primary jurisdiction question, but remanded the case back on another issue. In February 2005, the MPSC issued an order in the 2004 PSCR plan case concluding that we CMS-46 CMS Energy Corporation have been correctly administering the energy charge calculation methodology. The plaintiffs have appealed the MPSC order to the Michigan Court of Appeals. The plaintiffs also filed suit in the United States Court for the Western District of Michigan, which the judge subsequently dismissed. The plaintiffs have appealed the dismissal to the United States Court of Appeals. We cannot predict the outcome of these appeals. CONSUMERS' ELECTRIC UTILITY RESTRUCTURING MATTERS ELECTRIC ROA: The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. At June 30, 2006, alternative electric suppliers were providing 311 MW of generation service to ROA customers, which represents 4 percent of our total distribution load. This represents a decrease of 11 percent of ROA load compared to March 31, 2006 and a decrease of 62 percent of ROA load compared to June 30, 2005. It is difficult to predict future ROA customer trends. STRANDED COSTS: Prior MPSC orders adopted a mechanism pursuant to the Customer Choice Act to provide recovery of Stranded Costs that occur when customers leave our system to purchase electricity from alternative suppliers. In November 2005, we filed an application with the MPSC related to the determination of 2004 Stranded Costs. Applying the Stranded Cost methodology used in prior MPSC orders, we concluded that we experienced Stranded Costs in 2004; however, we also concluded that these costs were offset completely by our net sales of excess power into the bulk electricity market. In March 2006, the ALJ in our 2004 PSCR reconciliation case issued a Proposal for Decision recommending that we use a greater portion of our net sales of excess power into the bulk electricity market to offset our 2004 PSCR costs, rather than 2004 Stranded Costs. We believe, if accepted, that this recommendation would lead to a greater amount of 2004 Stranded Costs to recover from ROA customers. However, in June 2006, the ALJ issued a Proposal for Decision in our 2004 Stranded Cost case recommending that the MPSC find that we had no Stranded Costs in 2004 because the ALJ did not believe we demonstrated that the Stranded Costs were caused by ROA. If the MPSC adopts the ALJ recommendations earnings would be impacted adversely by $10 million. In June 2006, we filed exceptions to this Proposal for Decision in the Stranded Cost case. We cannot predict the outcome of these proceedings. CONSUMERS' ELECTRIC UTILITY RATE MATTERS 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 reserve margin requirements for 2006 and covering partially the estimated reserve margin requirements for 2007 through 2010. As a result, we have recognized an asset of $75 million for unexpired capacity and energy contracts at June 30, 2006. At July 2006, we expect the total capacity cost of electric capacity and energy contracts for 2006 to be $19 million. CMS-47 CMS Energy Corporation PSCR: The PSCR process allows recovery of reasonable and prudent power supply costs. Revenues from the PSCR charges are subject to reconciliation after review of actual costs for reasonableness and prudence. In September 2005, we submitted our 2006 PSCR plan filing to the MPSC. In November 2005, we submitted an amended 2006 PSCR plan to the MPSC to include higher estimates for METC and coal supply costs. In December 2005, the MPSC issued an order that temporarily excluded these increased costs from our PSCR charge and further reduced the charge by one mill per kWh. We implemented the temporary order in January 2006. In April 2006, the MPSC Staff filed briefs in the 2006 PSCR plan case recommending inclusion of all filed costs in the 2006 PSCR charge, including those temporarily excluded in the December 2005 temporary order. In May 2006, the ALJ issued a Proposal for Decision with a recommendation similar to the MPSC Staff. However, the ALJ recommended that we continue to exclude those costs temporarily excluded until addressed in our 2006 PSCR reconciliation case, which we plan to file in March 2007. Depending on the action taken by the MPSC, our cash underrecoveries of power supply costs for 2006 could range from $39 million to $146 million. These underrecoveries are due to increased bundled sales, and other cost increases beyond those included in the September 2005 and November 2005 filings. We expect to recover fully all of our PSCR costs. When we incur and are unable to collect these costs in a timely manner, there is a negative impact on our cash flows from electric utility operations. In March 2006, we submitted our 2005 PSCR reconciliation filing to the MPSC. In July 2006, we submitted supplemental testimony in which we calculated an underrecovery of $37 million for commercial and industrial customers, which we expect to recover fully. 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 FASB Interpretation No. 46(R). Sale of our Interest in the MCV Partnership and the FMLP: In July 2006, we reached an agreement to sell 100 percent of the stock of CMS Midland, Inc. and CMS Midland Holdings Company to an affiliate of GSO Capital Partners and Rockland Capital Energy Investments for $60.5 million. These Consumers' subsidiaries hold our interest in the MCV Partnership and the FMLP. The MCV PPA and the associated customer rates are not affected by the sale. We are targeting to close on the sale by the end of 2006. The sale is subject to various regulatory approvals, including the MPSC's approval and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. On July 27, 2006, the MPSC issued an order establishing a contested case proceeding and provided a schedule, which will allow for a decision from the MPSC by the end of 2006. We cannot predict the timing or the outcome of the MPSC's decision. We further cannot predict with certainty whether or when this transaction will be completed. Further, because of the PPA in place between Consumers and the MCV Partnership, the transaction is effectively a sale and leaseback for accounting purposes. SFAS No. 98 specifies the accounting required for a seller's sale and simultaneous leaseback transaction involving real estate, CMS-48 CMS Energy Corporation including real estate with equipment. In accordance with SFAS No. 98, the transaction will be required to be accounted for as a financing and not a sale. This is due to forms of continuing involvement we will have with the MCV Partnership. At closing, we will remove from our Consolidated Balance Sheets all of the assets, liabilities, and minority interest associated with both the MCV Partnership and the FMLP except for the real estate assets and equipment of the MCV Partnership. Those assets will remain at their carrying value. If the fair value is determined to be less than the present carrying value, an impairment charge would result. Further, as disclosed in Note 5, Financial and Derivative Instruments, "Derivative Contracts Associated with the MCV Partnership," we will reflect in earnings certain cumulative amounts of MCV Partnership-related derivative fair value changes that are accounted for in other comprehensive income. We will also reflect in earnings a liability for the fair value of a guarantee, and income related to certain MCV Partnership gas contracts which are being sold. The transaction will not result in the MCV Partnership or the FMLP assets being classified as held for sale on our Consolidated Balance Sheets. Financial Condition of the MCV Partnership: 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. Historically high natural gas prices have caused the MCV Partnership to reevaluate the economics of operating the MCV Facility and to record an impairment charge in 2005. If natural gas prices remain at present levels or increase, the operations of the MCV Facility would be adversely affected and could result in the MCV Partnership failing to meet its obligations under the sale and leaseback transactions and other contracts. Due to the impairment of the MCV Facility and subsequent losses, the value of the equity held by all of the owners of the MCV Partnership has decreased significantly and is now negative. Since we are one of the general partners of the MCV Partnership, we have recognized a portion of the limited partners' negative equity. At June 30, 2006, the negative minority interest for the other general partners' share, including their portion of the limited partners' negative equity, is $112 million and is included in Other Non-current Assets on our Consolidated Balance Sheets. Underrecoveries related to the MCV PPA: Further, 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 underrecoveries of $55 million in 2006 and $39 million in 2007. Of the 2006 estimate, we expensed $28 million during the six months ended June 30, 2006. However, Consumers' direct savings from the RCP, after allocating a portion to customers, are used to offset our capacity and fixed energy underrecoveries expense. 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 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. If we are successful in exercising the regulatory out clause, the MCV Partnership has the right to terminate the MCV PPA. The MPSC's future actions on the capacity and fixed energy payments recoverable from customers subsequent to September 15, 2007 may affect negatively the financial performance of the MCV Partnership. 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 CMS-49 CMS Energy Corporation 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 benefits our interest in the MCV Partnership. In January 2005, we 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 approving the RCP. 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 City of Midland appealed the decision to the Michigan Court of Appeals, and the MCV Partnership 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 2006. The MCV Partnership estimates that the 1997 through 2005 tax year cases will result in a refund to the MCV Partnership of $87 million, inclusive of interest, if the decision of the Michigan Tax Tribunal is upheld. In February 2006, the Michigan Court of Appeals largely affirmed the Michigan Tax Tribunal decision, but remanded the case back to the Michigan Tax Tribunal to clarify certain aspects of the Tax Tribunal decision. In April 2006, the City of Midland filed an application for Leave to Appeal with the Michigan Supreme Court. The MCV Partnership filed a response in opposition to that application. The remanded proceedings may result in the determination of a greater refund to the MCV Partnership. In July 2006, the Michigan Supreme Court denied the City of Midland's application. The MCV Partnership cannot predict the outcome of these proceedings; therefore, this anticipated refund has not been recognized in earnings. NUCLEAR PLANT DECOMMISSIONING: The MPSC and the FERC regulate the recovery of costs to decommission, or remove from service, our Big Rock and Palisades nuclear plants. 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 in March 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, this estimated cost includes historical expenditures in nominal dollars and future costs in 2003 dollars, with all Palisades costs given in 2003 dollars. Updated cost projections for Big Rock indicate an anticipated decommissioning cost of $393 million as of June 2006. Big Rock: In December 2000, funding of the Big Rock trust fund stopped because the MPSC-authorized decommissioning surcharge collection period expired. In our March 2004 report to the MPSC, we indicated that we would manage the decommissioning trust fund to meet annual NRC financial assurance requirements by withdrawing NRC radiological decommissioning costs from the fund and initially funding non-NRC, greenfield costs out of corporate funds. In March 2006, we contributed $16 million to the trust fund from our corporate funds to support NRC radiological decommissioning costs. Excluding the additional nuclear fuel storage costs due to the DOE's failure to accept spent fuel on schedule, we are projecting that the level of funds provided by the trust will fall short of the amount needed to complete the decommissioning by $39 million, which is the amount projected for non-NRC, greenfield costs. We plan initially to fund the $39 million out of corporate funds. Therefore, at this time, we plan to provide a total of $55 million from corporate funds for costs associated with NRC CMS-50 CMS Energy Corporation radiological and non-NRC greenfield decommissioning work. We plan to seek recovery of such expenditures. We cannot predict the outcome of these efforts. Palisades: Excluding additional nuclear fuel storage costs due to the DOE's failure to accept spent fuel on schedule, we concluded, based on the cost estimates filed in March 2004, that the existing Palisades' surcharge of $6 million needed to be increased to $25 million annually, beginning January 2006. A settlement agreement was approved by the MPSC, providing for the continuation of the existing $6 million annual decommissioning surcharge through 2011, our current license expiration date, and for the next periodic review to be filed in March 2007. Amounts collected from electric retail customers and deposited in trusts, including trust earnings, are credited to a regulatory liability. In March 2005, the NMC, which operates the Palisades plant, applied for a 20-year license renewal for the plant on behalf of Consumers. We expect a decision from the NRC on the license renewal application in 2007. At this time, we cannot determine what impact this will have on decommissioning costs or the adequacy of funding. In July 2006, we reached an agreement to sell Palisades and the Big Rock ISFSI to Entergy. As part of the transaction, Entergy will sell us 100 percent of the plant's output up to its current capacity of 798 MW under a 15-year power purchase agreement. Because of the PPA that will be in place between Consumers and Entergy, the transaction is effectively a sale and leaseback for accounting purposes. SFAS No. 98 specifies the accounting required for a seller's sale and simultaneous leaseback transaction involving real estate, including real estate with equipment. In accordance with SFAS No. 98, the transaction will be accounted for as a financing and not a sale. This is due to forms of continuing involvement. As such, we will not classify the assets as held for sale on our Consolidated Balance Sheets. 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, 2006, our DOE liability is $148 million. This amount includes interest, which is payable upon the first delivery of spent nuclear fuel to the DOE. The amount of this liability, excluding a portion of interest, was recovered through electric rates. In conjunction with the sale of Palisades and the Big Rock ISFSI, we will retain this obligation and provide security to Entergy for this obligation in the form of either cash, a letter of credit, or other acceptable means. 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. 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. CMS-51 CMS Energy Corporation In 2002, the site at Yucca Mountain, Nevada was designated for the development of a repository for the disposal of high-level radioactive waste and spent nuclear fuel. We expect that the DOE, in due course, will submit a final license application to the NRC for 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 $28 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. 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 $15 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 up to $544 million through nuclear insurance and NRC indemnity, and maintains 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 2005, we estimated our remaining costs to be between $29 million and $71 million, based on 2005 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 proceeds derived from a settlement with insurers and MPSC-approved rates. At June 30, 2006, we have a liability of $28 million, net of $54 million of expenditures incurred to date, and a regulatory asset of $59 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. CMS-52 CMS Energy Corporation 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, policies, and practices for prudency in annual plan and reconciliation proceedings. The following table summarizes our GCR reconciliation filings with the MPSC: Gas Cost Recovery Reconciliation
Net Over- GCR Year Date Filed Order Date recovery Status - -------- ---------- ---------- --------- ------ 2004-2005 June 2005 April 2006 $2 million The net overrecovery includes interest expense through March 2005 and refunds that we received from our suppliers that are required to be refunded to our customers. 2005-2006 June 2006 Pending $3 million The net overrecovery includes $1 million interest income through March 2006, which resulted from a net underrecovery position during the majority of the GCR period.
GCR plan for year 2005-2006: In November 2005, the MPSC issued an order for our 2005-2006 GCR Plan year, which resulted in approval of a settlement agreement and established a fixed price cap of $10.10 per mcf for the December 2005 through March 2006 billing period. We were able to maintain our billing GCR factor below the authorized level for that period. The order was appealed to the Michigan Court of Appeals by one intervenor. No action has been taken by the Court of Appeals on the merits of the appeal and we are unable to predict the outcome. GCR plan for year 2006-2007: In December 2005, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2006 through March 2007. Our request proposed using a GCR factor consisting of: - a base GCR ceiling factor of $11.10 per mcf, plus - a quarterly GCR ceiling price adjustment contingent upon future events. In July 2006, all parties signed a partial settlement agreement, which calls for a base GCR ceiling factor of $9.48 per mcf. The settlement agreement is also subject to a quarterly GCR ceiling price adjustment of up to $3.50 per MMbtu, contingent upon future events. The settlement agreement is subject to MPSC approval. Our GCR factor for the billing month of August 2006 is $8.37 per mcf. 2001 GAS DEPRECIATION 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, CMS-53 CMS Energy Corporation - required us to undertake a study to determine why our plant removal costs are in excess of other regulated Michigan natural gas utilities, and - required us to file a study report with the MPSC Staff on or before December 31, 2005. We filed the study report with the MPSC Staff on December 29, 2005. We are also required to file our next gas depreciation case within 90 days after the MPSC issuance of a final order in the pending case related to ARO accounting. We cannot predict when the MPSC will issue a final order in the ARO accounting case. If the depreciation case order is issued after the gas general rate case order, we proposed to incorporate its results into the gas general rates using a surcharge mechanism, a process used to incorporate specialty items into customer rates. 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. As part of this filing, we also requested interim rate relief of $75 million. The MPSC Staff and intervenors filed interim rate relief testimony on October 31, 2005. In its testimony, the MPSC Staff recommended granting interim rate relief of $38 million. In February 2006, the MPSC Staff recommended granting final rate relief of $62 million. The MPSC Staff proposed that $17 million of this amount be contributed to a low income and energy efficiency fund. The MPSC Staff also recommended reducing our allowed return on common equity to 11.15 percent, from our current 11.4 percent. In March 2006, the MPSC Staff revised its recommended final rate relief to $71 million, which includes $17 million to be contributed to a low income and energy efficiency fund. In April 2006, we revised our request for final rate relief downward to $118 million. In May 2006, the MPSC issued an order granting us interim gas rate relief of $18 million annually, which is under bond and subject to refund if final rate relief is granted in a lesser amount. The order also extended the temporary two-year surcharge of $58 million granted in October 2004 until the issuance of a final order in this proceeding. The MPSC has not set a date for issuance of an order granting final rate relief. In July 2006, the ALJ issued a Proposal for Decision recommending final rate relief of $74 million above current rate levels, which include interim and temporary rate relief. The $74 million includes $17 million to be contributed to a low income and energy efficiency fund. The Proposal for Decision also recommended reducing our return on common equity to 11 percent, from our current 11.4 percent. CMS-54 CMS Energy Corporation 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, Colorado, Tennessee and Kansas. In February 2006, CMS MST and CMS Field Services reached an agreement to settle a similar action that had been filed in New York. The court approved the settlement in May 2006. The $6.975 million settlement was paid by CMS MST. CMS Energy had established a reserve for this amount in the fourth quarter of 2005. 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), the primary construction contractor for the DIG facility, presented DIG with a change order to their construction contract and filed an action in Michigan state court against DIG, claiming contractual damages in the amount of $110 million, plus interest and costs. DFD also filed a construction lien for the $110 million. DIG is contesting both of the claims made by DFD. In addition to drawing down on three letters of credit totaling $30 million that it obtained from DFD, DIG 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. The arbitration hearing began October 10, 2005 and is scheduled to continue through late-2006. 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. Appeals were filed of the original verdict and a subsequent decision of the court on remand. The court of appeals issued an opinion on May 26, 2005 remanding the case to the trial court for a new trial on damages. At a status conference on April 10, 2006, the judge set a six-month discovery period. On May 19, 2006, the court issued a scheduling order and the case has been set for trial in February 2007. The parties attended a court-ordered mediation on July 14, 2006 and the matter was not resolved. Enterprises has an indemnity obligation with regard to losses to Terra that might result from this litigation. 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 CMS-55 CMS Energy Corporation 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. The arbitration hearing was held in July 2005 and a decision from the arbitration panel is expected in 2006. 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 proceedings against the Republic of Argentina (Argentina) under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID) in mid-2001, citing breaches by Argentina of the Argentine-U.S. Bilateral Investment Treaty (BIT). In May 2005, an ICSID tribunal concluded, among other things, that Argentina's economic emergency did not excuse Argentina from liability for violations of the BIT. The ICSID tribunal found in favor of CMS Gas Transmission, and awarded damages of U.S. $133 million, plus interest. The ICSID Convention provides that either party may seek annulment of the award based upon five possible grounds specified in the Convention. Argentina's Application for Annulment was formally registered by ICSID on September 27, 2005 and will be considered by a newly constituted panel. On December 28, 2005, certain insurance underwriters paid the sum of $75 million to CMS Gas Transmission in respect of their insurance obligations resulting from non-payment of the ICSID award. The payment, plus interest, is subject to repayment by CMS Gas Transmission in the event that the ICSID award is annulled. Pending the outcome of the annulment proceedings, CMS Energy recorded the $75 million payment as deferred revenue at December 31, 2005. IRS AUDIT RESOLUTION: In August 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 have been using this tax accounting method, generally allowed by the IRS under section 263A of the Internal Revenue Code, with respect to the allocation of certain indirect overhead costs to the tax basis of self-constructed utility assets. In June 2006, the IRS concluded its most recent audit of CMS Energy and its subsidiaries and proposed changes to taxable income for the years ended December 31, 1987 through December 31, 2001. The proposed overall cumulative increase to taxable income related primarily to the disallowance of the simplified service cost method with respect to certain self-constructed utility assets. We have accepted these proposed adjustments to taxable income, which resulted in the payment of $76 million of tax in CMS-56 CMS Energy Corporation July 2006, and a reduction of our June 2006 income tax provision of $62 million, net of interest expense, primarily for the utilization or restoration of previously written off income tax credits. OTHER: 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. 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 following table describes our guarantees at June 30, 2006:
In Millions --------------------------------------------------------------------------- Issue Expiration Maximum Carrying Guarantee Description Date Date Obligation Amount - --------------------- ------------ ---------- ---------- -------- Indemnifications from asset sales and other agreements (a) October 1995 Indefinite $1,133 $ 1 Standby letters of credit and loans (b) Various Various through 131 - May 2010 Surety bonds and other indemnifications Various Indefinite 10 - Other guarantees (c) Various Various through 218 1 September 2027 Nuclear insurance retrospective premiums Various Indefinite 135 -
(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 claims resulting from tax disputes and the 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) Standby letters of credit include letters of credit issued under an amended credit agreement with Citicorp USA, Inc. The amended credit agreement is supported by a guaranty issued by certain subsidiaries of CMS Energy. At June 30, 2006, letters of credit issued on behalf of unconsolidated affiliates totaling $65 million were outstanding. (c) Maximum obligation includes $85 million related to the MCV Partnership's non-performance under a steam and electric power agreement with Dow. We have reached an agreement to sell our interests in the MCV Partnership and the FMLP, subject to certain regulatory and other closing conditions. The sales agreement calls for the purchaser, an affilate of GSO Capital Partners and Rockland Capital Energy Investments to pay $85 million, subject to certain reimbursement rights, if Dow terminates an agreement under which it is provided power and steam by the MCV Partenership. CMS-57 CMS Energy Corporation The purchaser will secure their reimbursement obligation with an irrevocable letter of credit of up to $85 million. The following table provides additional information regarding our guarantees:
Guarantee Description How Guarantee Arose Events That Would Require 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 Standby letters of credit and loans Credit agreement Non-payment by CMS Energy and Enterprises of obligations under the credit agreement Surety bonds and other indemnifications Normal operating activity, permits Nonperformance and licenses Other guarantees Normal operating activity Nonperformance or non-payment by a subsidiary under a related contract Agreement to provide power and steam MCV Partnership's nonperformance or to Dow non-payment under a related contract Bay Harbor remediation efforts Owners exercising put options requiring us to purchase property Nuclear insurance retrospective premiums Normal operations of nuclear plants Call by NEIL and Price-Anderson Act for nuclear incident
Project Financing: We enter into various project-financing security arrangements such as equity pledge agreements and share mortgage agreements to provide financial or performance assurance to third parties on behalf of certain unconsolidated affiliates. Expiration dates for these agreements vary from March 2015 to June 2020 or terminate upon payment or cancellation of the obligation. Non-payment or other act of default by an unconsolidated affiliate would trigger enforcement of the security. If we were required to perform under these agreements, the maximum amount of our obligation under these agreements would be equal to the value of the shares relinquished to the guaranteed party at the time of default. At June 30, 2006, certain contracts contained provisions allowing us to recover, from third-parties, amounts paid under the guarantees. For example, if we are required to purchase a property under a put option agreement, we may sell the property to recover the amount paid under the option. We enter into agreements containing tax and other indemnification provisions in connection with a variety of transactions. While we are unable to estimate the maximum potential obligation related to CMS-58 CMS Energy Corporation these indemnities, we consider the likelihood that we would be required to perform or incur significant losses related to these indemnities and the guarantees listed in the preceding tables to be remote. 3: FINANCINGS AND CAPITALIZATION Long-term debt is summarized as follows:
In Millions ------------------------------------ June 30, 2006 December 31, 2005 -------------- ------------------ CMS ENERGY CORPORATION Senior notes $ 2,271 $ 2,347 Other long-term debt 2 2 ---------- ---------- Total - CMS Energy Corporation 2,273 2,349 ---------- ---------- CONSUMERS ENERGY COMPANY First mortgage bonds 3,174 3,175 Senior notes and other 855 852 Securitization bonds 355 369 ---------- ---------- Total - Consumers Energy Company 4,384 4,396 ---------- ---------- OTHER SUBSIDIARIES 358 363 ---------- ---------- TOTAL PRINCIPAL AMOUNTS OUTSTANDING 7,015 7,108 Current amounts (147) (289) Net unamortized discount (17) (19) ---------- ---------- Total Long-term debt $ 6,851 $ 6,800 ========== ==========
FINANCINGS: The following is a summary of significant long-term debt retirements during the six months ended June 30, 2006:
Principal Interest (in millions) Rate (%) Retirement Date Maturity Date ------------- -------- --------------- ------------- CMS ENERGY Senior notes $ 76 9.875 January through October 2007 April 2006 CONSUMERS Long-term debt - related parties 129 9.000 February 2006 June 2031 ----- TOTAL $ 205 =====
REGULATORY AUTHORIZATION FOR FINANCINGS: In May 2006, the FERC issued an order authorizing Consumers to issue up to $2.0 billion of secured and unsecured short-term securities for the following purposes: - up to $1.0 billion for general corporate purposes, and - up to $1.0 billion of FMB or other securities to be issued solely as collateral for other short-term securities. Also in May 2006, the FERC issued an order authorizing Consumers to issue up to $5.0 billion of secured and unsecured long-term securities for the following purposes: - up to $1.5 billion for general corporate purposes, - up to $1.0 billion for purposes of refinancing or refunding existing long-term debt, and CMS-59 CMS Energy Corporation - up to $2.5 billion of FMB or other securities to be issued solely as collateral for other long-term securities. Any long-term issuances during the two-year authorization period are exempt from the FERC's competitive bidding and negotiated placement requirements. The authorizations are for a two-year period beginning July 1, 2006 and ending June 30, 2008. REVOLVING CREDIT FACILITIES: The following secured revolving credit facilities with banks are available at June 30, 2006:
In Millions Outstanding ----------- Amount of Amount Letters-of- Amount Company Expiration Date Facility Borrowed Credit Available ------- --------------- --------- -------- ----------- ----------- CMS Energy May 18, 2010 $ 300 $ - $ 103 $ 197 Consumers March 30, 2007 300 - - 300 Consumers May 18, 2010 500 - 42 458 MCV Partnership August 26, 2006 50 - 2 48
In March 2006, Consumers entered into a short-term secured revolving credit agreement with banks. This facility provides $300 million of funds for working capital and other general corporate purposes. 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, 2006, Consumers had $184 million of unrestricted retained earnings available to pay common stock dividends. Covenants in Consumers' debt facilities cap common stock dividend payments at $300 million in a calendar year. For the six months ended June 30, 2006, we received $40 million of common stock dividends from Consumers. Also, the provisions of the Federal Power Act and the Natural Gas Act effectively restrict dividends to the amount of Consumers' retained earnings. CAPITAL AND FINANCE LEASE OBLIGATIONS: Our capital leases are comprised mainly of leased service vehicles, power purchase agreements, and office furniture. At June 30, 2006, capital lease obligations totaled $56 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, 2006, finance lease obligations totaled $281 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, Consumers sells 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 at June 30, 2006 and $325 million of receivables at December 31, 2005. Consumers continues to service the receivables sold to the special purpose entity. The purchaser of the receivables has no recourse against Consumers' other assets for failure of a debtor to pay when due and no right to any receivables not sold. Consumers has neither CMS-60 CMS Energy Corporation recorded a gain or loss on the receivables sold nor retained interest in the receivables sold. Certain cash flows under Consumers' accounts receivable sales program are shown in the following table:
In Millions ---------------------- Six months ended June 30 2006 2005 - ------------------------ ------- ------- Net cash flow as a result of accounts receivable financing $ (325) $ (304) Collections from customers $3,232 $ 2,787
CONTINGENTLY CONVERTIBLE SECURITIES: In June 2006, the $11.87 per share conversion trigger price contingency was met for our $250 million 4.50 percent contingently convertible preferred stock. As a result, these securities are convertible at the option of the security holders for the three months ending September 30, 2006, with the par value payable in cash. As of July 2006, none of the security holders have notified us of their intention to convert these securities. In June 2006, the $12.81 per share conversion trigger price contingency was not met for our $150 million 3.375 percent contingently convertible senior notes. Therefore, they retained the characteristics of a long-term liability and we reclassified them as long-term debt. 4: EARNINGS PER SHARE The following table presents the basic and diluted earnings per share computations based on Income from Continuing Operations:
In Millions, Except Per Share Amounts ------------------------------------- Three Months Ended June 30 2006 2005 - -------------------------- ------- ------- EARNINGS AVAILABLE TO COMMON STOCKHOLDERS Income from Continuing Operations $ 73 $ 30 Less Preferred Dividends (3) (3) ------- ------- Income from Continuing Operations Available to Common Stockholders - Basic and Diluted $ 70 $ 27 ======= ======= AVERAGE COMMON SHARES OUTSTANDING APPLICABLE TO BASIC AND DILUTED EPS Weighted Average Shares - Basic 219.6 217.9 Add dilutive impact of Contingently Convertible Securities 8.6 10.2 Add dilutive Stock Options and Warrants 1.4 0.8 ------- ------- Weighted Average Shares - Diluted 229.6 228.9 ======= ======= EARNINGS PER AVERAGE COMMON SHARE AVAILABLE TO COMMON STOCKHOLDERS Basic $ 0.32 $ 0.12 Diluted $ 0.30 $ 0.12 ======= =======
CMS-61 CMS Energy Corporation
In Millions, Except Per Share Amounts ------------------------------------- Six Months Ended June 30 2006 2005 - ------------------------ ------- ------- EARNINGS AVAILABLE TO COMMON STOCKHOLDERS Income from Continuing Operations $ 48 $ 182 Less Preferred Dividends (6) (5) ------- ------- Income from Continuing Operations Available to Common Stockholders - Basic and Diluted $ 42 $ 177 ======= ======= AVERAGE COMMON SHARES OUTSTANDING APPLICABLE TO BASIC AND DILUTED EPS Weighted Average Shares - Basic 219.3 206.7 Add dilutive impact of Contingently Convertible Securities 9.6 8.2 Add dilutive Stock Options and Warrants 1.4 0.8 ------- ------- Weighted Average Shares - Diluted 230.3 215.7 ======= ======= EARNINGS PER AVERAGE COMMON SHARE AVAILABLE TO COMMON STOCKHOLDERS Basic $ 0.19 $ 0.86 Diluted $ 0.19 $ 0.82 ======= =======
Contingently Convertible Securities: 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. Stock Options and Warrants: Since the exercise price was greater than the average market price of our common stock, there was no impact to diluted EPS for additional options and warrants to purchase 1.8 million shares of common stock for the three months ended June 30, 2006, and 3.4 million shares of common stock for the three months ended June 30, 2005. There was also no impact to diluted EPS for additional options and warrants to purchase 1.8 million shares of common stock for the six months ended June 30, 2006, and 3.5 million shares of common stock for the six months ended June 30, 2005. Convertible Debentures: Due to accounting EPS dilution principles, for the three and six months ended June 30, 2006, there was no impact to diluted EPS from our 7.75 percent convertible subordinated debentures. Using the if-converted method, the debentures would have: - increased the numerator of diluted EPS by $2 million for the three months ended June 30, 2006 and $4 million for the six months ended June 30, 2006, from an assumed reduction of interest expense, net of tax, and - increased the denominator of diluted EPS by 4.2 million shares. We can revoke the conversion rights if certain conditions are met. CMS-62 CMS Energy Corporation 5: 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, 2006 December 31, 2005 ------------------------------------ ------------------------------------ Fair Unrealized Fair Unrealized Cost Value Gain (Loss) Cost Value Gain (Loss) ------ ------ ----------- ------ ------ ----------- Long-term debt, $6,998 $6,926 $ 72 $7,089 $7,315 $ (226) including current amounts Long-term debt - related parties, including current amounts 178 145 33 307 280 27 Available-for-sale securities: SERP: Equity securities 35 51 16 34 49 15 Debt securities 16 15 (1) 17 17 - Nuclear decommissioning investments: Equity securities 135 253 118 134 252 118 Debt securities 306 303 (3) 287 291 4
In July 2006, Consumers reached an agreement to sell Palisades and the Big Rock ISFSI to Entergy. Entergy will assume responsibility for the future decommissioning of the plant and for storage and disposal of spent nuclear fuel. Accordingly, upon completion of the sale, Consumers will transfer $366 million of nuclear decommissioning trust fund assets to Entergy and retain $200 million. Consumers will also be entitled to receive a return of $116 million of decommissioning trust fund assets pending either a favorable federal tax ruling regarding the release of the funds, or, if the funds are available, after decommissioning of the Palisades site is complete. The disposition of the retained and receivable nuclear decommissioning funds is subject to regulatory proceedings. DERIVATIVE INSTRUMENTS: In order to limit our exposure to certain market risks, we may enter into various risk management contracts, such as swaps, options, futures, and forward contracts. These contracts, used primarily to manage our exposure to changes in interest rates, commodity prices, and currency exchange rates, are classified as either non-trading or trading. We enter into these contracts 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. The contracts we use to manage market risks may qualify as derivative instruments that are subject to derivative and hedge accounting under SFAS No. 133. If a contract is a derivative, it is recorded on the balance sheet at its fair value. We then adjust the resulting asset or liability each quarter to reflect any change in the market value of the contract, a practice known as marking the contract to market. If a derivative qualifies for cash flow hedge accounting treatment, the changes in fair value (gains or CMS-63 CMS Energy Corporation losses) are reported in accumulated other comprehensive income; otherwise, the changes are reported in earnings. For a derivative instrument to qualify for hedge accounting: - the relationship between the derivative instrument and the item being hedged must be formally documented at inception, - the derivative instrument must be highly effective in offsetting the hedged item's cash flows or changes in fair value, and - if hedging a forecasted transaction, the forecasted transaction must be probable. If a derivative qualifies for cash flow hedge accounting treatment and gains or losses are recorded in accumulated other comprehensive income, those gains or losses will be reclassified into earnings in the same period or periods the hedged forecasted transaction affects earnings. If a cash flow hedge is terminated early because it is determined that the forecasted transaction will not occur, any gain or loss recorded in accumulated other comprehensive income at that date is recognized immediately in earnings. If a cash flow hedge is terminated early for other economic reasons, any gain or loss as of the termination date is deferred and then reclassified to earnings when the forecasted transaction affects earnings. The ineffective portion, if any, of all hedges is recognized in earnings. To determine the fair value of our derivatives, we use information from external sources (i.e., quoted market prices and third-party valuations), if available. For certain contracts, this information is not available and we use mathematical valuation models to value our derivatives. These models require various inputs and assumptions, including commodity market prices and volatilities, as well as interest rates and contract maturity dates. The cash returns we actually realize on these contracts may vary, either positively or negatively, from the results that we estimate using these models. As part of valuing our derivatives at market, we maintain reserves, if necessary, for credit risks arising from the financial condition of our counterparties. The majority of our commodity purchase and sale contracts are not subject to derivative accounting under SFAS No. 133 because: - they do not have a notional amount (that is, a number of units specified in a derivative instrument, such as MW of electricity or bcf of natural gas), - they qualify for the normal purchases and sales exception, or - there is not an active market for the commodity. Our coal purchase contracts are not derivatives because there is not an active market for the coal we purchase. Similarly, certain of our electric capacity and energy contracts are not derivatives due to the lack of an active energy market in Michigan. If active markets for these commodities develop in the future, some of these contracts may qualify as derivatives. For our coal purchase contracts, the resulting mark-to-market impact on earnings could be material. For our electric capacity and energy contracts, we believe that we would be able to apply the normal purchases and sales exception to the majority of these contracts (including the MCV PPA) and, therefore, would not be required to mark these contracts to market. In 2005, the MISO began operating the Midwest Energy Market. As a result, the MISO now centrally dispatches electricity and transmission service throughout much of the Midwest and provides day-ahead and real-time energy market information. At this time, we believe that the establishment of this CMS-64 CMS Energy Corporation market does not represent the development of an active energy market in Michigan, as defined by SFAS No. 133. However, as the Midwest Energy Market matures, we will continue to monitor its activity level and evaluate whether or not an active energy market may exist in Michigan. Derivative accounting is required for certain contracts used to limit our exposure to interest rate risk, commodity price risk, and foreign exchange risk. The following table summarizes our derivative instruments:
In Millions ------------------------------------------------------------------------------ June 30, 2006 December 31, 2005 ------------------------------------ ------------------------------------ Fair Unrealized Fair Unrealized Derivative Instruments Cost Value Gain (Loss) Cost Value Gain (Loss) - ---------------------- ----- ----- ----------- ----- ----- ---------- Non-trading: Gas supply option contracts $ - $ - $ - $ 1 $ (1) $ (2) FTRs - 1 1 - 1 1 Derivative contracts associated with the MCV Partnership: Long-term gas contracts (a) - 59 59 - 205 205 Gas futures, options, and swaps (a) - 121 121 - 223 223 CMS ERM contracts: Non-trading electric / gas contracts - (64) (64) - (63) (63) Trading electric / gas contracts (b) (3) 44 47 (3) 100 103 Derivative contracts associated with equity investments in: Shuweihat - (6) (6) - (20) (20) Taweelah (35) (6) 29 (35) (17) 18 Jorf Lasfar - (6) (6) - (8) (8) Other - 2 2 - 1 1
(a) The fair value of the MCV Partnership's long-term gas contracts and gas futures, options, and swaps has decreased significantly from December 31, 2005 partly due to a decrease in natural gas prices since that time. The decrease is also the result of the normal reversal of such derivative assets. As gas has been purchased under the long-term gas contracts and the gas futures, options, and swap contracts have been settled, the fair value of the contracts has decreased. (b) The fair value of CMS ERM's trading electric and gas contracts has decreased significantly from December 31, 2005 due to decreases in prices for natural gas and electricity since that time. We record the fair value of our gas supply option contracts, FTRs, and the derivative contracts associated with the MCV Partnership in Derivative instruments, Other assets, or Other liabilities on our Consolidated Balance Sheets. We include the fair value of the derivative contracts held by CMS ERM 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 SUPPLY OPTION 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. As part of the GCR process, the mark-to-market gains and losses associated with these options are reported directly in earnings as part of CMS-65 CMS Energy Corporation Other income, and then immediately reversed out of earnings and recorded on the balance sheet as a regulatory asset or liability. FTRS: With the establishment of the Midwest Energy Market, FTRs were established. FTRs are financial instruments that manage price risk related to electricity transmission congestion. An FTR entitles its holder to receive compensation (or, conversely, to remit payment) for congestion-related transmission charges. FTRs are marked-to-market each quarter, with changes in fair value reported to earnings as part of Other income. DERIVATIVE CONTRACTS ASSOCIATED WITH THE MCV PARTNERSHIP: Long-term gas contracts: The MCV Partnership uses long-term gas contracts to purchase and manage the cost of the natural gas it needs to generate electricity and steam. The MCV Partnership believes that certain of these contracts qualify as normal purchases under SFAS No. 133. Accordingly, we have not recognized these contracts at fair value on our Consolidated Balance Sheets at June 30, 2006. The MCV Partnership also holds certain long-term gas contracts that do not qualify as normal purchases because these contracts contain volume optionality. In addition, as a result of implementing the RCP in 2005, a significant portion of long-term gas contracts no longer qualify as normal purchases, because the gas will not be used to generate electricity or steam. Accordingly, all of these contracts are accounted for as derivatives, with changes in fair value recorded in earnings each quarter. For further details on the RCP, see Note 2, Contingencies, "Other Consumers' Electric Utility Contingencies - The Midland Cogeneration Venture." For the six months ended June 30, 2006, we recorded a $145 million loss, before considering tax effects and minority interest, associated with the decrease in fair value of these long-term gas contracts. This loss is included in the total Fuel costs mark-to-market at the MCV Partnership on our Consolidated Statements of Income. Because of the volatility of the natural gas market, the MCV Partnership expects future earnings volatility on these contracts, since gains and losses will be recorded each quarter. We will continue to record these gains and losses in our consolidated financial statements until we close the sale of our ownership interest in the MCV Partnership. We have recorded derivative assets totaling $59 million associated with the fair value of long-term gas contracts on our Consolidated Balance Sheets at June 30, 2006. The MCV Partnership expects almost all of these assets, which represent cumulative net mark-to-market gains, to reverse as losses through earnings during 2006 and 2007 as the gas is purchased, with the remainder reversing between 2008 and 2011. As the MCV Partnership recognizes future losses from the reversal of these derivative assets, we will continue to assume a portion of the limited partners' share of those losses, in addition to our proportionate share, but only until we close the sale of our ownership interest in the MCV Partnership. At the closing of this sale, these assets, which represent cumulative net mark-to-market gains, will be sold in conjunction with the sale of our ownership interest. Also at the closing, we will record any additional mark-to-market gains or losses associated with the long-term gas contracts and recognize the changes in fair value in earnings. Any such changes in the fair value of these contracts recognized before the closing will not affect the purchase price of our ownership interest in the MCV Partnership. After the closing of the sale, we will no longer record the fair value of these long-term gas contracts on our Consolidated Balance Sheets and will not be required to recognize gains or losses related to changes in the fair value of these contracts on our Consolidated Statements of Income. For further details on the sale of our interest in the MCV Partnership, see Note 2, Contingencies, "Other Consumers' Electric Utility Contingencies - The Midland Cogeneration Venture." CMS-66 CMS Energy Corporation Gas Futures, Options, and Swaps: The MCV Partnership enters into natural gas futures, options, and over-the-counter swap transactions in order to hedge against unfavorable changes in the market price of natural gas. The MCV Partnership uses these financial instruments to: - ensure an adequate supply of natural gas for the projected generation and sales of electricity and steam, and - manage price risk by fixing the price to be paid for natural gas on some of its long-term gas contracts. At June 30, 2006, the MCV Partnership held natural gas futures, options, and swaps. We have recorded a net derivative asset amount of $121 million on our Consolidated Balance Sheets at June 30, 2006 associated with the fair value of these contracts. Certain of the futures and swaps qualify for cash flow hedge accounting and we record our proportionate share of their mark-to-market gains and losses in Accumulated other comprehensive loss. The remaining contracts are not cash flow hedges and their mark-to-market gains and losses are recorded to earnings. Those contracts that qualify as cash flow hedges represent assets of $122 million of the net $121 million derivative assets recorded on our Consolidated Balance Sheets. We have recorded a cumulative net gain of $39 million, net of tax and minority interest, in Accumulated other comprehensive loss at June 30, 2006, representing our proportionate share of the cash flow hedges held by the MCV Partnership. If we have not closed the sale of our ownership interest in the MCV Partnership within the next 12 months, we can expect to reclassify $17 million of this balance, net of tax and minority interest, as an increase to earnings as the contracts settle, offsetting the costs of gas purchases. There was no ineffectiveness associated with any of these cash flow hedges. The remaining futures, options, and swap contracts, representing derivative liabilities of $1 million, do not qualify as cash flow hedges. The futures and swap contracts were previously accounted for as cash flow hedges. Since the RCP was implemented in 2005, these instruments no longer qualify for cash flow hedge accounting and we record any changes in their fair value in earnings each quarter. The MCV Partnership expects almost all of these derivative liabilities to be realized during 2006 as the contracts settle, with the remainder to be realized during 2007. For further details on the RCP, see Note 2, Contingencies, "Other Consumers' Electric Utility Contingencies - The Midland Cogeneration Venture." For the six months ended June 30, 2006, we recorded a $53 million loss, before considering tax effects and minority interest, associated with the decrease in fair value of these instruments. This loss is included in the total Fuel costs mark-to-market at the MCV Partnership on our Consolidated Statements of Income. Because of the volatility of the natural gas market, the MCV Partnership expects future earnings volatility on these contracts, since gains and losses will be recorded each quarter. We will continue to record these gains and losses in our consolidated financial statements until we close the sale of our ownership interest in the MCV Partnership. In conjunction with the sale of our ownership interest in the MCV Partnership, all of the futures, options, and swaps will be sold. At the closing of this sale, we will record any additional mark-to-market gains or losses associated with these contracts and recognize the changes in fair value in Accumulated other comprehensive loss or earnings, accordingly. Any such changes in the fair value of these contracts recognized before the closing will not affect the purchase price of our ownership interest in the MCV Partnership. Then, for those futures and swaps that qualify as cash flow hedges, the related balance of net cumulative gains recorded in Accumulated other comprehensive loss will be reclassified and recognized in earnings. After the sale of these assets, CMS-67 CMS Energy Corporation we will no longer record the fair value of these contracts on our Consolidated Balance Sheets and will not be required to recognize gains or losses related to changes in the fair value of these contracts on our Consolidated Statements of Income. For additional details on the sale of our interest in the MCV Partnership, see Note 2, Contingencies, "Other Consumers' Electric Utility Contingencies - The Midland Cogeneration Venture." CMS ERM CONTRACTS: CMS ERM enters into and owns energy contracts as a part of activities considered to be an integral part of CMS Energy's ongoing operations. CMS ERM holds certain contracts for the future purchase and sale of natural gas that will result in physical delivery of the commodity at contractual prices. These forward 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 commodity price risks associated with its forward purchase and sale contracts and with generation assets owned by CMS Energy or its subsidiaries. These financial contracts are classified as trading activities. In accordance with SFAS No. 133, non-trading and trading contracts that qualify as derivatives are recorded at fair value on our Consolidated Balance Sheets. The resulting assets and liabilities are marked to market each quarter, and changes in fair value are recorded in earnings as a component of Operating Revenue. For trading contracts, these gains and losses 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 (that is, on an accrual basis). DERIVATIVE CONTRACTS ASSOCIATED WITH EQUITY INVESTMENTS: At June 30, 2006, some of our equity method investees held: - interest rate contracts that hedged the risk associated with variable-rate debt, and - foreign exchange contracts that hedged the foreign currency risk associated with payments to be made under operating and maintenance service agreements. We record our proportionate share of the change in fair value of these contracts in Accumulated other comprehensive loss if the contracts qualify for cash flow hedge accounting; otherwise, we record our share in Earnings from Equity Method Investees. FOREIGN EXCHANGE DERIVATIVES: At times, we use forward exchange and option contracts to hedge the value of investments in foreign operations. These contracts limit the risk from currency exchange rate movements because gains and losses on such contracts offset losses and gains, respectively, on the hedged investments. At June 30, 2006, we had no outstanding foreign exchange contracts. However, the impact of previous 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 hedged investments. At June 30, 2006, our total foreign currency translation adjustment was a net loss of $308 million, which included a net hedging loss of $26 million, net of tax, related to settled contracts. CREDIT RISK: Our swaps, options, and forward contracts contain credit risk, which is the risk that counterparties will fail to perform their contractual obligations. We reduce this risk through established credit policies. For each counterparty, we assess credit quality by using credit ratings, financial condition, and other available information. We then establish a credit limit for each counterparty based upon our evaluation of credit quality. We monitor the degree to which we are CMS-68 CMS Energy Corporation exposed to potential loss under each contract and take remedial action, if necessary. CMS ERM and the MCV Partnership enter into contracts primarily with companies in the electric and gas industry. This industry concentration may have an impact on our exposure to credit risk, either positively or negatively, based on how these counterparties are affected by similar changes in economic conditions, the weather, or other conditions. CMS ERM and the MCV Partnership typically use industry-standard agreements that allow for netting positive and negative exposures associated with the same counterparty, thereby reducing exposure. These contracts also typically provide for the parties to demand adequate assurance of future performance when there are reasonable grounds for doing so. The following table illustrates our exposure to potential losses at June 30, 2006, if each counterparty within this industry concentration failed to perform its contractual obligations. This table includes contracts accounted for as financial instruments. It does not include trade accounts receivable, derivative contracts that qualify for the normal purchases and sales exception under SFAS No. 133, or other contracts that are not accounted for as derivatives.
In Millions ---------------------------------------------------------------------------------- Net Exposure Net Exposure Exposure from Investment from Investment Before Collateral Net Grade Grade Collateral (a) Held (b) Exposure Companies Companies (%) -------------- ---------- -------- --------------- --------------- CMS ERM $ 71 $ - $ 71 $ 9 (c) 13 MCV Partnership 181 96 85 82 (d) 96
(a) Exposure is reflected net of payables or derivative liabilities if netting arrangements exist. (b) Collateral held includes cash and letters of credit received from counterparties. (c) The majority of the remaining balance of CMS ERM's net exposure was from a counterparty whose credit rating fell below investment grade after December 31, 2005. (d) The remaining balance of the MCV Partnership's net exposure was from independent natural gas producers/suppliers that do not have published credit ratings. Based on our credit policies, our current exposures, and our credit reserves, we do not expect a material adverse effect on our financial position or future earnings as a result of counterparty nonperformance. CMS-69 CMS Energy Corporation 6: RETIREMENT BENEFITS We provide retirement benefits to our employees under a number of different plans, including: - a non-contributory, defined benefit Pension Plan, - a cash balance pension plan for certain employees hired between July 1, 2003 and August 31, 2005, - a DCCP for employees hired on or after September 1, 2005, - benefits to certain management employees under SERP, - a defined contribution 401(k) Savings Plan, - benefits to a select group of management under the EISP, and - health care and life insurance benefits under OPEB. Pension Plan: The Pension Plan includes funds for most of our current employees, the employees of our subsidiaries, and Panhandle, a former subsidiary. The Pension Plan's assets are not distinguishable by company. Effective January 11, 2006, the MPSC electric rate order authorized Consumers to include $33 million of electric pension expense in its electric rates. Due to the volatility of these particular costs, the order also established a pension equalization mechanism to track actual costs. If actual pension expenses are greater than the $33 million included in electric rates, the difference will be recognized as a regulatory asset for future recovery from customers. If actual pension expenses are less than the $33 million included in electric rates, the difference will be recognized as a regulatory liability, and refunded to our customers. The difference between pension expense allowed in our electric rates and pension expense under SFAS No. 87 resulted in a net reduction in pension expense of $2 million for the three months ended June 30, 2006 and $5 million for the six months ended June 30, 2006. We have established a corresponding regulatory asset of $5 million. OPEB: Effective January 11, 2006, the MPSC electric rate order authorized Consumers to include $28 million of electric OPEB expense in its electric rates. Due to the volatility of these particular costs, the order also established an OPEB equalization mechanism to track actual costs. If actual OPEB expenses are greater than the $28 million included in electric rates, the difference will be recognized as a regulatory asset for future recovery from our customers. If actual OPEB expenses are less than the $28 million included in electric rates, the difference will be recognized as a regulatory liability, and refunded to our customers. The difference between OPEB expense allowed in our electric rates and OPEB expense under SFAS No. 106 resulted in a $1 million net reduction in OPEB expense for the three months and the six months ended June 30, 2006. We have established a corresponding regulatory asset of $1 million. CMS-70 Costs: The following table recaps the costs incurred in our retirement benefits plans:
In Millions --------------------------------------------------- Pension --------------------------------------------------- Three Months Ended Six Months Ended ------------------ --------------------- June 30 2006 2005 2006 2005 - ------- ------ ------ ------ ------ Service cost $ 12 $ 15 $ 24 $ 25 Interest expense 21 30 42 49 Expected return on plan assets (21) (38) (43) (63) Amortization of: Net loss 11 7 22 14 Prior service cost 2 3 4 4 ------ ------ ------ ------ Net periodic cost 25 17 49 29 Regulatory adjustment (2) - (5) - ------ ------ ------ ------ Net periodic cost after regulatory adjustment $ 23 $ 17 $ 44 $ 29 ====== ====== ====== ======
In Millions --------------------------------------------------- OPEB --------------------------------------------------- Three Months Ended Six Months Ended ------------------ --------------------- June 30 2006 2005 2006 2005 - ------- ------ ------ ------ ------ Service cost $ 6 $ 5 $ 12 $ 11 Interest expense 16 16 32 32 Expected return on plan assets (15) (14) (29) (28) Amortization of: Net loss 5 5 10 9 Prior service cost (2) (2) (5) (4) ------ ------ ------ ------ Net periodic cost 10 10 20 20 Regulatory adjustment (1) - (1) - ------ ------ ------ ------ Net periodic cost after regulatory adjustment $ 9 $ 10 $ 19 $ 20 ====== ====== ====== ======
SERP: On April 1, 2006, we implemented a Defined Contribution Supplemental Executive Retirement Plan (DC SERP) and froze further new participation in the defined benefit SERP. The DC SERP provides promoted and newly hired participants benefits ranging from 5 to 15 percent of total compensation. The DC SERP requires a minimum of five years of participation before vesting. Our contributions to the plan, if any, will be placed in a grantor trust. For the six months ended June 30, 2006, no contributions were made to the plan. MCV: 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 three months and six months ended June 30, 2006 and 2005 was less than $1 million. CMS-71 CMS Energy Corporation 7: 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. 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 $25 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 or associated obligations related to potential future abandonment. 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. FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS: This Interpretation clarified 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. We determined that abatement of asbestos included in our plant investments qualifies as a conditional ARO, as defined by FASB Interpretation No. 47. The following tables describe our assets that have legal obligations to be removed at the end of their useful life:
June 30, 2006 In Millions - ---------------------------------------------------------------------------------------------------------------------------- In Service Trust ARO Description Date Long Lived Assets Fund - --------------- ---------- ----------------- ----- Palisades-decommission plant site 1972 Palisades nuclear plant $551 Big Rock-decommission plant site 1962 Big Rock nuclear plant 12 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 - Asbestos abatement 1973 Electric and gas utility plant - Natural gas-fired power plant 1997 Gas fueled power plant - Close gas treating plant and gas wells Various Gas transmission and storage -
CMS-72 CMS Corporation
In Millions -------------------------------------------------------------------------------- ARO ARO Liability Cash flow Liability ARO Description 12/31/05 Incurred Settled(a) Accretion Revisions 6/30/06 - --------------- --------- -------- ---------- --------- --------- --------- Palisades-decommission $ 375 $ - $ - $ 12 $ - $ 387 Big Rock-decommission 27 - (15) 2 - 14 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 1 - - 1 - 2 Asbestos abatement 36 - (2) 1 - 35 ------- ------- ------ -------- ------- ------- Total $ 496 $ - $ (18) $ 18 $ - $ 496 ======= ======= ====== ======== ======= =======
(a) These cash payments are included in the Other current and non-current liabilities line in Net cash provided by operating activities on our Consolidated Statements of Cash Flows. Cash payments for the six months ended June 30, 2005 were $26 million. In October 2004, the MPSC initiated a generic proceeding to review SFAS No. 143, FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing Requirements for Asset Retirement Obligations, and related accounting and ratemaking issues for MPSC-jurisdictional electric and gas utilities. In December 2005, the ALJ issued a Proposal for Decision recommending that the MPSC dismiss the proceeding. In March 2006, the MPSC remanded the case to the ALJ for findings and recommendations. We consider the proceeding a clarification of accounting and reporting issues that relate to all Michigan utilities. We cannot predict the outcome of the proceeding. 8: EXECUTIVE INCENTIVE COMPENSATION We provide a Performance Incentive Stock Plan (the Plan) to key employees and non-employee directors based on their contributions to the successful management of the company. The Plan has a five-year term, expiring in May 2009. All grants awarded under the Plan for the six months ended June 30, 2006 and in 2005 were in the form of restricted stock. Restricted stock awards are outstanding shares to which the recipient has full voting and dividend rights and vest 100 percent after three years of continued employment. Restricted stock awards granted to officers in 2005 and 2004 are also subject to the achievement of specified levels of total shareholder return, including a comparison to a peer group of companies. All restricted stock awards are subject to forfeiture if employment terminates before vesting. However, if certain minimum service requirements are met, restricted shares may continue to vest upon retirement or disability and vest fully if control of CMS Energy changes, as defined by the Plan. The Plan also allows for the following types of awards: - stock options, - stock appreciation rights, - phantom shares, and - performance units. CMS-73 CMS Energy Corporation For the six months ended June 30, 2006 and in 2005, we did not grant any of these types of awards. Select participants may elect to receive all or a portion of their incentive payments under the Officer's Incentive Compensation Plan in the form of cash, shares of restricted common stock, shares of restricted stock units, or any combination of these. These participants may also receive awards of additional restricted common stock or restricted stock units, provided the total value of these additional grants does not exceed $2.5 million for any fiscal year. Shares awarded or subject to stock options, phantom shares, and performance units may not exceed 6 million shares from June 2004 through May 2009, nor may such awards to any participant exceed 250,000 shares in any fiscal year. We may issue awards of up to 4,906,300 shares of common stock under the Plan at June 30, 2006. Shares for which payment or exercise is in cash, as well as shares or stock options that are forfeited, may be awarded or granted again under the Plan. SFAS NO. 123(R) AND SAB NO. 107, SHARE-BASED PAYMENT: SFAS No. 123(R) was effective for us on January 1, 2006. SFAS No. 123(R) 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 value over the required service period of the awards. As a result, future compensation costs for share-based awards with accelerated service provisions upon retirement will need to be fully expensed by the period in which the employee becomes eligible to retire. At January 1, 2006, unrecognized compensation cost for such share-based awards held by retirement-eligible employees was not material. We elected to adopt the modified prospective method recognition provisions of this Statement instead of retrospective restatement. The modified prospective method applies the recognition provisions to all awards granted or modified after the adoption date of this Statement. We adopted the fair value method of accounting for share-based awards effective December 2002. Therefore, SFAS No. 123(R) did not have a significant impact on our results of operations when it became effective. The SEC issued SAB No. 107 to express the views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations. Also, the SEC issued SAB No. 107 to provide the staff's views regarding the valuation of share-based payments, including assumptions such as expected volatility and expected term. We applied the additional guidance provided by SAB No. 107 upon implementation of SFAS No. 123(R) with no impact on our consolidated results of operations. The following table summarizes restricted stock activity under the Plan:
Weighted- Average Grant Date Fair Restricted Stock Number of Shares Value - ---------------- ---------------- ------------- Nonvested at December 31, 2005 1,682,056 $ 10.64 Granted 47,830 $ 13.00 Vested (19,886) $ 9.12 Forfeited (35,000) $ 10.92 --------- ---------- Nonvested at June 30, 2006 1,675,000 $ 10.72 ========= ==========
The total fair value of shares vested was less than $1 million for the six months ended June 30, 2006 and 2005. CMS-74 CMS Energy Corporation We calculate the fair value of restricted shares granted based on the price of our common stock on the grant date and expense the fair value over the required service period. Total compensation cost recognized in income related to restricted stock was $3 million for the six months ended June 30, 2006 and $2 million for the six months ended June 30, 2005. The total related income tax benefit recognized in income was $1 million for the six months ended June 30, 2006 and 2005. At June 30, 2006, there was $10 million of total unrecognized compensation cost related to restricted stock. We expect to recognize this cost over a weighted-average period of 2.0 years. The following table summarizes stock option activity under the Plan:
Weighted- Options Weighted- Average Aggregate Outstanding, Average Remaining Intrinsic Fully Vested, Exercise Contractual Value Stock Options and Exercisable Price Term (In Millions) - ------------- --------------- --------- ----------- ------------- Outstanding at December 31, 2005 3,541,338 $ 21.21 5.4 years $ (24) Granted - - Exercised (53,000) $ 7.08 Cancelled or Expired (392,640) $ 30.76 --------- -------- --------- ----- Outstanding at June 30, 2006 3,095,698 $ 20.24 5.1 years $ (23) ========= ======== ========= =====
Stock options give the holder the right to purchase common stock at a price equal to the fair value of our common stock on the grant date. Stock options are exercisable upon grant, and expire up to 10 years and one month from the grant date. We issue new shares when participants exercise stock options. The total intrinsic value of stock options exercised was less than $1 million for the six months ended June 30, 2006 and $1 million for the six months ended June 30, 2005. Cash received from exercise of these stock options was less than $1 million for the six months ended June 30, 2006 and $1 million for the six months ended June 30, 2005. Since we have utilized tax loss carryforwards, we were not able to realize the excess tax benefits upon exercise of stock options. Therefore, we did not recognize the related excess tax benefits in equity. 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. Earnings from equity method investments was $8 million for the three months ended June 30, 2006 and $21 million for the three months ended June 30, 2005. Earnings from equity method investments was $44 million for the six months ended June 30, 2006 and $52 million for the six months ended June 30, 2005. The most significant of these investments is our 50 percent interest in Jorf Lasfar. CMS-75 CMS Energy Corporation Summarized financial information for Jorf Lasfar is as follows: Income Statement Data
In Millions --------------------------------------------------- JORF LASFAR Three Months Ended Six Months Ended - ----------- ------------------ ------------------- June 30 2006 2005 2006 2005 - ------- ---- ---- ---- ---- Operating revenue $113 $129 $234 $259 Operating expenses 79 90 158 173 ---- ---- ---- ---- Operating income 34 39 76 86 Other expense, net 13 14 26 28 ---- ---- ---- ---- Net income $ 21 $ 25 $ 50 $ 58 ==== ==== ==== ====
10: REPORTABLE SEGMENTS Our reportable segments consist of business units organized and managed by their products and services. We evaluate performance based upon the net income of each segment. We operate principally in three reportable segments: electric utility, gas utility, and enterprises. The "Other" segment includes corporate interest and other and discontinued operations. The following tables show our financial information by reportable segment:
In Millions --------------------------------------------------------- Three Months Ended Six Months Ended ------------------------ ----------------------- June 30 2006 2005 2006 2005 - ------- ------- ------- ------- ------- Operating Revenue Electric utility $ 791 $ 644 $ 1,520 $ 1,272 Gas utility 334 355 1,375 1,347 Enterprises 271 231 533 456 ------- ------- ------- ------- Total Operating Revenue $ 1,396 $ 1,230 $ 3,428 $ 3,075 ======= ======= ======= ======= Net Income Available to Common Stockholders Electric utility $ 37 $ 46 $ 66 $ 79 Gas utility (3) (3) 34 55 Enterprises 4 29 (45) 134 Other 34 (45) (10) (91) ------- ------- ------- ------- Total Net Income Available to Common Stockholders $ 72 $ 27 $ 45 $ 177 ======= ======= ======= =======
In Millions ------------------------------- June 30, 2006 December 31, 2005 ------------- ----------------- Assets Electric utility (a) $ 7,925 $ 7,743 Gas utility (a) 3,503 3,600 Enterprises 3,695 4,130 Other 543 547 ------- ------- Total Assets $15,666 $16,020 ======= =======
CMS-76 CMS Energy Corporation (a) Amounts include a portion of Consumers' other common assets attributable to both the electric and gas utility businesses. CMS-77 CMS Energy Corporation (This page intentionally left blank) CMS-78 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, 2005. 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. We manage our business by the nature of services each provides and operate principally in two business segments: electric utility and gas utility. Our electric utility operations include the generation, purchase, distribution, and sale of electricity. Our gas utility operations 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 distribution, 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, - energy commodity prices, - interest rates, and - our debt credit rating. During the past several years, our business strategy has involved improving our balance sheet and maintaining focus on our core strength: utility operations and service. We are focused on growing the equity base of our company and have been refinancing our debt to reduce interest rate costs. In 2006, we received $200 million of cash contributions from CMS Energy and we extinguished, through a legal defeasance, $129 million of 9 percent related party notes. In July 2006, we reached an agreement to sell the Palisades nuclear plant to Entergy for $380 million. We also signed a 15-year power purchase agreement for 100 percent of the plant's current electric output. We are targeting to close the sale in the first quarter of 2007. The sale will result in an immediate improvement in our cash flow, a reduction in our nuclear operating and decommissioning risk, and an improvement in our financial flexibility to support other utility investments. We expect that a portion of the proceeds will benefit our customers. We plan to use the cash that we retain from the sale to reduce debt. CE-1 Consumers Energy Company Working capital and cash flow continue to be a challenge for us. Natural gas prices continue to be volatile and remain at high levels. Although our natural gas purchases are recoverable from our utility customers, higher priced natural gas stored as inventory requires additional liquidity due to the lag in cost recovery. In addition to causing working capital issues for us, historically high natural gas prices caused the MCV Partnership to reevaluate the economics of operating the MCV Facility and to record an impairment charge in 2005. High gas prices could result in a further impairment of our interest in the MCV Partnership. Due to the impairment of the MCV Facility, and operating losses from mark-to-market adjustments on derivative instruments, the equity held by a Consumers' subsidiary and the other minority interest owners in the MCV Partnership has decreased significantly and is now negative. As the MCV Partnership recognizes future losses, we will assume an additional 7 percent of the MCV Partnership's negative equity, which is a portion of the limited partners' negative equity, in addition to our proportionate share. In July 2006, we reached an agreement to sell our interests in the MCV Partnership and the FMLP. The sale is subject to various regulatory approvals including the MPSC. If the sale closes by the end of 2006, as expected, it will have a $56 million positive impact on our 2006 cash flow. The sale will reduce our exposure to sustained high natural gas prices. We will use the proceeds to reduce utility debt. If the sale is not completed, the viability of the MCV Facility is still in question. Going forward, our strategy will continue to focus on: - managing cash flow issues, - maintaining and growing earnings, and - investing in our utility system to enable us to meet our customer commitments, comply with increasing environmental performance standards, and maintain adequate supply and capacity. As we execute our strategy, we will need to overcome a sluggish Michigan economy that has been further hampered by recent negative developments in Michigan's automotive industry and limited growth in the non-automotive sectors of our economy. These negative effects will be offset somewhat by the reduction we are experiencing in ROA load in our service territory. At June 30, 2006, alternative electric suppliers were providing 311 MW of generation service to ROA customers. This is 4 percent of our total distribution load and represents a decrease of 62 percent of ROA load compared to June 30, 2005. It is, however, difficult to predict future ROA customer trends. FORWARD-LOOKING STATEMENTS AND INFORMATION 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: CE-2 Consumers Energy Company - 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, including 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 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 increasing rapidly, - timely recognition in rates of additional equity investments in Consumers, - adequate and timely recovery of additional electric and gas rate-based investments, - adequate and timely recovery of higher MISO energy costs, and - recovery of Stranded Costs incurred due to customers choosing alternative energy suppliers, - the impact of adverse natural gas prices on the MCV Partnership and the FMLP investments, regulatory decisions that limit recovery of capacity and fixed energy payments, and our ability to complete the sale of our interests in the MCV Partnership and the FMLP, - if successful in exercising the regulatory out clause of the MCV PPA, and if the sale of our interests in the MCV Partnership and the FMLP is not completed, the negative impact on the MCV Partnership's financial performance, - if we exercise our regulatory out rights causing the MCV Partnership to terminate the MCV PPA, the effects on our ability to purchase capacity to serve our customers and recover the cost of these purchases, - 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, CE-3 Consumers Energy Company - energy markets, including availability of capacity and 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, - our ability to collect accounts receivable from our customers, - 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, - the effect on our electric utility of the direct and indirect impacts of the continued economic downturn experienced by our automotive and automotive parts manufacturing customers, - 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, - changes in tax laws or new IRS interpretations of existing tax laws, - outcome, cost, and other effects of legal and administrative proceedings, settlements, investigations and claims, - disruptions in the normal commercial insurance and surety bond markets that may increase costs or reduce traditional insurance coverage, particularly terrorism and sabotage insurance and performance bonds, - other business or investment considerations that may be disclosed from time to time in Consumers' or CMS Energy's SEC filings, or in other publicly issued written documents, and - other uncertainties that are difficult to predict, many of which are beyond our control. For additional information regarding these and other uncertainties, see the "Outlook" section included in this MD&A, Note 2, Contingencies, and Part II, Item 1A. Risk Factors. CE-4 Consumers Energy Company RESULTS OF OPERATIONS NET INCOME AVAILABLE TO COMMON STOCKHOLDER
In Millions ------------------------------- Three months ended June 30 2006 2005 Change - -------------------------- ---- ---- ------ Electric $ 37 $ 46 $ (9) Gas (3) (3) - Other (Includes the MCV Partnership interest) 1 (11) 12 ---- ---- ---- Net income available to common stockholder $ 35 $ 32 $ 3 ==== ==== ====
For the three months ended June 30, 2006, net income available to our common stockholder was $35 million, compared to $32 million for the three months ended June 30, 2005. The increase reflects higher electric utility revenues due to an electric rate increase authorized in December 2005 and a $14 million impact from the resolution of an IRS income tax audit. The audit resolution resulted in an increase to net income of $4 million at the electric utility, $3 million at the gas utility, and $7 million in our other segment. Partially offsetting these increases are higher operating and maintenance costs at our electric utility. Specific changes to net income available to our common stockholder for 2006 versus 2005 are:
In Millions ----------- - - increase in electric delivery revenue primarily due to the MPSC's December 2005 electric rate order, $ 39 - - decrease in income taxes, offset by interest expense, primarily due to an IRS income tax audit, 14 - - increase in operating expenses primarily due to higher depreciation and amortization expense, expense, higher electric maintenance expense, and higher customer service expense, and (44) - - other net decreases (6) ---- Total Change $ 3 ====
In Millions ----------------------------------- Six months ended June 30 2006 2005 Change - ------------------------ ------ ------ ------ Electric $ 66 $ 79 $ (13) Gas 34 55 (21) Other (Includes the MCV Partnership interest) (55) 55 (110) ------ ------ ------ Net income available to common stockholder $ 45 $ 189 $ (144) ====== ====== ======
For the six months ended June 30, 2006, net income available to our common stockholder was $45 million, compared to $189 million for the six months ended June 30, 2005. The decrease reflects the impact of gas prices on the market value of certain long-term gas contracts and financial hedges. In order to reflect the market value, mark-to-market losses were recorded in 2006 to reduce partially gains CE-5 Consumers Energy Company recorded on these assets in 2005. The decrease also reflects a reduction in net income from our gas utility due to lower, weather-driven sales, and higher operating and maintenance costs at our electric utility. Partially offsetting these losses are higher electric utility revenues primarily due to an electric rate increase authorized in December 2005 and the $14 million impact from the resolution of an IRS income tax audit. Specific changes to net income available to our common stockholder for 2006 versus 2005 are:
In Millions ----------- - - 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 financial hedges, $ (122) - - increase in operating expenses primarily due to higher depreciation and amortization expense, expense, higher electric maintenance expense, and higher customer service expense, (88) - - decrease in gas delivery revenue primarily due to warmer weather and increased conservation efforts, (23) - - decrease in return on electric utility capital expenditures in excess of depreciation base as allowed by the Customer Choice Act, (14) - - increase in electric delivery revenue primarily due to the MPSC's December 2005 electric rate order, 77 - - decrease in income taxes, offset by interest expense, primarily due to an IRS income tax audit, 14 - - increase in earnings due to the expiration of rate caps that, in 2005, would not allow us to recover fully our power supply costs from our residential customers, and 8 - - other net increases 4 ------ Total Change $ (144) ======
CE-6 Consumers Energy Company ELECTRIC UTILITY RESULTS OF OPERATIONS
In Millions ---------------------------------- June 30 2006 2005 Change - ------- ------ ------ ------ Three months ended $ 37 $ 46 $ (9) Six months ended $ 66 $ 79 $ (13) ====== ====== ======
Three Months Ended Six Months Ended Reasons for the change: June 30, 2006 vs. 2005 June 30, 2006 vs. 2005 - ----------------------- ---------------------- ---------------------- Electric deliveries $ 60 $ 119 Power supply costs and related revenue 3 12 Other operating expenses, other income, and non-commodity revenue (71) (130) Regulatory return on capital expenditures (8) (21) General taxes (1) (1) Interest charges (3) (2) Income taxes 11 10 ------ ------ Total change $ (9) $ (13) ====== ======
ELECTRIC DELIVERIES: For the three months ended June 30, 2006, electric deliveries, excluding intersystem sales, decreased 0.2 billion kWh or 2.1 percent versus 2005. For the six months ended June 30, 2006, electric deliveries, excluding intersystem sales, decreased 0.3 billion kWh or 1.8 percent versus 2005. The decrease in electric deliveries for both periods is primarily due to weather. Despite lower electric deliveries, electric delivery revenue increased primarily due to an electric rate order, increased surcharge revenue, and the return to full-service rates of customers previously using alternative energy suppliers. In December 2005, the MPSC issued an order authorizing an annual rate increase of $86 million for service rendered on and after January 11, 2006. As a result of this order, electric delivery revenues increased $23 million for the three months ended June 30, 2006 and $43 million for the six months ended June 30, 2006 versus the same periods in 2005. Effective January 1, 2006, we started collecting a surcharge that the MPSC authorized under Section 10d(4) of the Customer Choice Act. This surcharge increased electric delivery revenue by $12 million for the three months ended June 30, 2006 and $23 million for the six months ended June 30, 2006 versus the same periods in 2005. In addition, on January 1, 2006, we began recovering customer choice transition costs from our residential customers, thereby increasing electric delivery revenue by another $2 million for the three months ended June 30, 2006 and $5 million for the six months ended June 30, 2006 versus the same periods in 2005. The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. At June 30, 2006, alternative electric suppliers were providing 311 MW of generation service to ROA customers. This amount represents a decrease of 62 percent of ROA load compared to June 30, 2005. The return of former ROA customers to full-service rates increased electric revenues $15 million for the three months ended June 30, 2006 and $28 million for the six months ended June 30, 2006 versus the same periods in 2005. CE-7 Consumers Energy Company POWER SUPPLY COSTS AND RELATED REVENUE: In 2005, power supply costs exceeded power supply revenue due to rate caps for our residential customers. Rate caps for our residential customers expired on December 31, 2005. In 2006, the absence of rate caps allows us to record power supply revenue to offset fully our power supply costs. Our ability to recover fully these power supply costs resulted in a $3 million increase to electric revenue for the three months ended June 30, 2006 and $12 million for the six months ended June 30, 2006 versus the same periods in 2005. OTHER OPERATING EXPENSES, OTHER INCOME AND NON-COMMODITY REVENUE: For the three months ended June 30, 2006, other operating expenses increased $73 million, other income increased $3 million, and non-commodity revenue decreased $1 million versus 2005. For the six months ended June 30, 2006, other operating expenses increased $135 million, other income increased $8 million, and non-commodity revenue decreased $3 million versus 2005. The increase in other operating expenses reflects higher operating and maintenance expense, customer service expense, depreciation and amortization expense, and pension and benefit expense. Operating and maintenance expense increased primarily due to costs related to a planned refueling outage at our Palisades nuclear plant, and higher tree trimming and storm restoration costs. Higher customer service expense reflects contributions, which started in January 2006 pursuant to a December 2005 MPSC order, to a fund that provides energy assistance to low-income customers. Depreciation and amortization expense increased due to higher plant in service and greater amortization of certain regulatory assets. Pension and benefit expense reflects changes in actuarial assumptions in 2005, and the latest collective bargaining agreement between the Utility Workers Union of America and Consumers. The increase in other income is primarily due to higher interest income and the absence, in 2006, of expenses recorded in 2005 associated with the early retirement of debt. The decrease in non-commodity revenue is primarily due to a decrease in capital-related services provided to METC in 2006 versus 2005. REGULATORY RETURN ON CAPITAL EXPENDITURES: The $8 million decrease for the three months ended June 30, 2006 and $21 million decrease for the six months ended June 30, 2006 versus the same periods in 2005, is due to lower income associated with recording a return on capital expenditures in excess of our depreciation base as allowed by the Customer Choice Act. In December 2005, the MPSC issued an order that authorized us to recover $333 million of Section 10d(4) costs. The order authorized recovery of a lower level of costs versus the level used to record 2005 income. GENERAL TAXES: For the three and six months ended June 30, 2006, the increase in general taxes reflect higher MSBT expense, offset partially by lower property tax expense. INTEREST CHARGES: For the three and six months ended June 30, 2006, interest charges increased primarily due to adjustments made in connection with an IRS income tax audit. The settlement recognized that Consumers' taxable income for prior years was higher than originally filed, resulting in the accrual of interest on the additional tax liability for these prior years. INCOME TAXES: For the three and six months ended June 30, 2006, income taxes decreased versus 2005 primarily due to lower earnings by the electric utility and the resolution of an IRS income tax audit, which resulted in a $4 million income tax benefit primarily for the utilization or restoration of income tax credits. CE-8 Consumers Energy Company GAS UTILITY RESULTS OF OPERATIONS
In Millions ------------------------------------ June 30 2006 2005 Change - ------- ------ ------ ------ Three months ended $ (3) $ (3) $ - Six months ended $ 34 $ 55 $ (21) ====== ====== ======
Three Months Ended Six Months Ended Reasons for the change: June 30, 2006 vs. 2005 June 30, 2006 vs. 2005 - ----------------------- ---------------------- ---------------------- Gas deliveries $ (5) $ (36) Gas wholesale and retail services, other gas revenues and other income 6 11 Operation and maintenance 1 (2) General taxes and depreciation (2) (5) Interest charges (3) (3) Income taxes 3 14 ------ ------ Total change $ - $ (21) ====== ======
GAS DELIVERIES: For the three months ended June 30, 2006, gas deliveries, including miscellaneous transportation to end-use customers, decreased 6 bcf or 12 percent. The decrease in gas deliveries is due to increased customer conservation efforts in response to higher gas prices and warmer than normal weather. For the six months ended June 30, 2006, gas deliveries, including miscellaneous transportation to end-use customers, decreased 28 bcf or 14.4 percent. The decrease in gas deliveries is primarily due to warmer weather in 2006 versus 2005 and increased customer conservation efforts in response to higher gas prices. Average temperatures during the six-month period in 2006 were 4.3 percent warmer than 2005. GAS WHOLESALE AND RETAIL SERVICES, OTHER GAS REVENUES AND OTHER INCOME: For the three and six months ended June 30, 2006, the increase is related primarily to increased gas wholesale and retail services revenue. OPERATION AND MAINTENANCE: For the three months ended June 30, 2006, operation and maintenance expenses decreased versus 2005 primarily due to a reduction in our injuries and damages expense, offset partially by higher pension and benefit expense and customer service expense. Pension and benefit expense reflects changes in actuarial assumptions and the latest collective bargaining agreement between the Utility Workers Union of America and Consumers. Customer service expense increased primarily due to higher uncollectible accounts expense. For the six months ended June 30, 2006, operation and maintenance expenses increased versus 2005 primarily due to higher pension and benefit expense and customer service expense. Pension and benefit expense reflects changes in actuarial assumptions and the latest collective bargaining agreement between the Utility Workers Union of America and Consumers. Customer service expense increased primarily due to higher uncollectible accounts expense. CE-9 Consumers Energy Company GENERAL TAXES AND DEPRECIATION: For the three and six months ended June 30, 2006, depreciation expense increased versus 2005 primarily due to higher plant in service. The increase in general taxes reflects higher MSBT expense, partially offset by lower property tax expense. INTEREST CHARGES: For the three and six months ended June 30, 2006, interest charges increased primarily due to adjustments made in connection with an IRS income tax audit. INCOME TAXES: For the three and six months ended June 30, 2006, income taxes decreased versus 2005 primarily due to lower earnings by the gas utility and the resolution of an IRS income tax audit, which resulted in a $3 million income tax benefit primarily for the utilization or restoration of income tax credits. OTHER RESULTS OF OPERATIONS
In Millions ------------------------------------ June 30 2006 2005 Change - ------- ------ ------ ------ Three months ended $ 1 $ (11) $ 12 Six months ended $ (55) $ 55 $ (110) ====== ====== ======
For the three months ended June 30, 2006, other operations net income was $1 million, an increase of $12 million versus 2005. The change is primarily due to a $5 million increase in earnings from our ownership interest in the MCV Partnership, primarily due to lower depreciation expense and higher dispatch revenue. Also contributing to the increase were lower interest charges and lower income tax expense at Consumers. The decrease in income tax expense is primarily due to the resolution of an IRS income tax audit, which resulted in a $7 million income tax benefit primarily for the utilization or restoration of income tax credits. For the six months ended June 30, 2006, other operations net loss was $55 million, a decrease of $110 million versus 2005. The change is primarily due to a $122 million decrease in earnings from our ownership interest in the MCV Partnership. The decrease in MCV Partnership earnings is due to the impact of gas prices on the market value of certain long-term gas contracts and financial hedges. In order to reflect the market value of these contracts and hedges, mark-to-market losses were recorded in 2006 to reduce partially gains recorded on these assets in 2005. The 2005 gains were primarily due to the marking-to-market of certain long-term gas contracts and financial hedges that, as a result of the implementation of the RCP, no longer qualified as normal purchases or cash flow hedges. CRITICAL ACCOUNTING POLICIES The following accounting policies are important to an understanding of our results of operations and financial condition and should be considered an integral part of our MD&A. USE OF ESTIMATES AND ASSUMPTIONS In preparing our financial statements, we use estimates and assumptions that may affect reported amounts and disclosures. We use accounting estimates 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. CE-10 Consumers Energy Company CONTINGENCIES: We are involved in various regulatory and legal proceedings that arise in the ordinary course of our business. We record a liability for contingencies based upon our assessment that a 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. Significant contingencies 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. For additional details on accounting for financial instruments, see Note 4, Financial and Derivative Instruments. DERIVATIVE INSTRUMENTS: We account for derivative instruments in accordance with SFAS No. 133. Except as noted within this section, there have been no material changes to the accounting for derivative instruments since the year ended December 31, 2005. For additional details on accounting for derivatives, see Note 4, Financial and Derivative Instruments. To determine the fair value of our derivatives, we use information from external sources (i.e., quoted market prices and third-party valuations), if available. For certain contracts, this information is not available and we use mathematical valuation models to value our derivatives. These models require various inputs and assumptions, including commodity market prices and volatilities, as well as interest rates and contract maturity dates. Changes in forward prices or volatilities could significantly change the calculated fair value of our derivative contracts. The cash returns we actually realize on these contracts may vary, either positively or negatively, from the results that we estimate using these models. As part of valuing our derivatives at market, we maintain reserves, if necessary, for credit risks arising from the financial condition of our counterparties. The following table summarizes the interest rate and volatility rate assumptions we used to value these contracts at June 30, 2006:
Interest Rates (%) Volatility Rates (%) ------------------ -------------------- Long-term gas contracts associated with the MCV Partnership 5.33 - 5.68 31 - 69
Establishment of the Midwest Energy Market: In 2005, the MISO began operating the Midwest Energy Market. As a result, the MISO now centrally dispatches electricity and transmission service throughout much of the Midwest and provides day-ahead and real-time energy market information. At this time, we believe that the establishment of this market does not represent the development of an active energy market in Michigan, as defined by SFAS No. 133. However, as the Midwest Energy Market matures, we will continue to monitor its activity level and evaluate whether or not an active energy market may exist in Michigan. If an active market develops in the future, some of our electric purchase and sale contracts may qualify as derivatives. However, we believe that we would be able to apply the normal purchases and sales exception of SFAS No. 133 to these contracts and, therefore, would not be required to mark these contracts to market. CE-11 Consumers Energy Company Implementation of the RCP: As a result of implementing the RCP in 2005, a significant portion of the MCV Partnership's long-term gas contracts no longer qualify as normal purchases because the gas will not be used to generate electricity or steam. Accordingly, these contracts are accounted for as derivatives, with changes in fair value recorded in earnings each quarter. Additionally, certain of the MCV Partnership's natural gas futures and swap contracts, which are used to hedge variable-priced long-term gas contracts, no longer qualify for cash flow hedge accounting and we record any changes in their fair value in earnings each quarter. As a result of recording the changes in fair value of these long-term gas contracts and the related futures, options, and swaps to earnings, the MCV Partnership has recognized the following losses in 2006:
In Millions ------------------------------------- 2006 ------------------------------------- First Second Year to Quarter Quarter Date ------- ------- ------- Long-term gas contracts $ (111) $ (34) $ (145) Related futures, options, and swaps (45) (8) (53) ------ ------ ------ Total $ (156) $ (42) $ (198) ====== ====== ======
These losses, shown before consideration of tax effects and minority interest, are included in the total Fuel costs mark-to-market at the MCV Partnership on our Consolidated Statements of Income. Because of the volatility of the natural gas market, the MCV Partnership expects future earnings volatility on both its long-term gas contracts and its futures, options, and swap contracts, since gains and losses will be recorded each quarter. We will continue to record these gains and losses in our consolidated financial statements until we close the sale of our interest in the MCV Partnership. We have recorded derivative assets totaling $58 million associated with the fair value of these contracts on our Consolidated Balance Sheets at June 30, 2006. The MCV Partnership expects almost all of these assets, which represent cumulative net mark-to-market gains, to reverse as losses through earnings during 2006 and 2007 as the gas is purchased and the futures, options, and swaps settle, with the remainder reversing between 2008 and 2011. Due to the impairment of the MCV Facility and subsequent losses, the value of the equity held by all of the owners of the MCV Partnership has decreased significantly and is now negative. Since we are one of the general partners of the MCV Partnership, we have recognized a portion of the limited partners' negative equity. As the MCV Partnership recognizes future losses from the reversal of these derivative assets, we will continue to assume a portion of the limited partners' share of those losses, in addition to our proportionate share, but only until we close the sale of our interest in the MCV Partnership. At the closing of this sale, these assets, which represent cumulative net mark-to-market gains, will be sold in conjunction with the sale of our ownership interest. As a result, we will no longer record the fair value of these long-term gas contracts or the related futures, options, and swaps on our Consolidated Balance Sheets and will not be required to recognize gains or losses related to changes in the fair value of these contracts on our Consolidated Statements of Income. Additionally, at June 30, 2006, we have recorded a cumulative net gain of $39 million, net of tax and minority interest, in Accumulated other comprehensive income representing our proportionate share of the cash flow hedges held by the MCV Partnership. At the closing of the sale of our interest, this amount, adjusted for any additional changes in fair value, will be reclassified and recognized in earnings. CE-12 Consumers Energy Company Any changes in the fair value of these contracts recognized before the closing will not affect the purchase price of our ownership interest in the MCV Partnership. For additional details on the sale of our interest in the MCV Partnership, see the "Other Electric Business Uncertainties - MCV Underrecoveries" section in this MD&A and Note 2, Contingencies, "Other Electric Contingencies - The Midland Cogeneration Venture." MARKET RISK INFORMATION: The following is an update of our risk sensitivities since December 31, 2005. These sensitivities indicate the potential loss in fair value, cash flows, or future earnings from our financial instruments, including our derivative contracts, assuming a hypothetical adverse change in market rates or prices of 10 percent. Changes in excess of the amounts shown in the sensitivity analyses could occur if changes in market rates or prices exceed the 10 percent shift used for the analyses. Interest Rate Risk Sensitivity Analysis (assuming an adverse change in market interest rates of 10 percent):
In Millions -------------------------------------- June 30, 2006 December 31, 2005 ------------- ----------------- Variable-rate financing - before tax annual earnings exposure $ 2 $ 3 Fixed-rate financing - potential REDUCTION in fair value (a) 148 149
(a) Fair value exposure could only be realized if we repurchased all of our fixed-rate financing. Commodity Price Risk Sensitivity Analysis (assuming an adverse change in market prices of 10 percent):
In Millions ----------------------------------------- June 30, 2006 December 31, 2005 ------------- ----------------- Potential REDUCTION in fair value: Gas supply option contracts $ - $ 1 Derivative contracts associated with the MCV Partnership: Long-term gas contracts 19 39 Gas futures, options, and swaps 34 48
Investment Securities Price Risk Sensitivity Analysis (assuming an adverse change in market prices of 10 percent):
In Millions ----------------------------------------- June 30, 2006 December 31, 2005 ------------- ----------------- Potential REDUCTION in fair value of available-for-sale equity securities (SERP investments and investments in CMS Energy common stock) $ 5 $ 6
We maintain trust funds, as required by the NRC, for the purpose of funding certain costs of nuclear plant decommissioning. At June 30, 2006 and December 31, 2005, these funds were invested primarily in equity securities, fixed-rate, fixed-income debt securities, and cash and cash equivalents, and are recorded at fair value on our Consolidated Balance Sheets. These 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 our consolidated earnings or cash flows. For additional details on market risk and derivative activities, see Note 4, Financial and Derivative Instruments. For additional details on nuclear plant decommissioning at Big Rock and Palisades, see the "Other Electric Business Uncertainties - Nuclear Matters" section included in this MD&A. CE-13 Consumers Energy Company OTHER Other accounting policies 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 pension and OPEB, - accounting for asset retirement obligations, - accounting for nuclear decommissioning costs, and - accounting for related party transactions. These accounting policies were disclosed in our 2005 Form 10-K and there have been no subsequent material changes. CAPITAL RESOURCES AND LIQUIDITY Factors affecting our liquidity and capital requirements are: - results of operations, - capital expenditures, - energy commodity costs, - contractual obligations, - regulatory decisions, - debt maturities, - credit ratings, - 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. Although our prudent natural gas purchases are recoverable from our customers, the amount paid for natural gas stored as inventory requires additional liquidity due to the timing of the cost recoveries. We have credit agreements with our commodity suppliers and those agreements contain terms that have resulted in margin calls. Additional margin calls or other credit support may be required if agency ratings are lowered or if market conditions remain unfavorable relative to our obligations to those parties. Our current financial plan includes controlling operating expenses and capital expenditures and evaluating market conditions for financing opportunities. Due to the adverse impact of the MCV Partnership asset impairment charge recorded in 2005 and the MCV Partnership fuel cost mark-to-market charges during 2006, our ability to issue FMB as primary obligations or as collateral for financing is expected to be limited to $298 million through December 31, 2006. After December 31, 2006, our ability to issue FMB in excess of $298 million is based on achieving a two-times FMB interest coverage ratio. CE-14 Consumers Energy Company We believe the following items will be sufficient to meet our liquidity needs: - our current level of cash and revolving credit facilities, - our ability to access junior secured and unsecured borrowing capacity in the capital markets, and - our anticipated cash flows from operating and investing activities. CASH POSITION, INVESTING, AND FINANCING Our operating, investing, and financing activities meet consolidated cash needs. At June 30, 2006, $511 million consolidated cash was on hand, which includes $55 million of restricted cash and $265 million from entities consolidated pursuant to FASB Interpretation No. 46(R). SUMMARY OF CONSOLIDATED STATEMENTS OF CASH FLOWS:
In Millions --------------------- Six Months Ended June 30 2006 2005 - ------------------------ ------ ------ Net cash provided by (used in): Operating activities $ 274 $ 564 Investing activities (214) (284) ------ ------ Net cash provided by operating and investing activities 60 280 Financing activities (20) 162 ------ ------ Net Increase in Cash and Cash Equivalents $ 40 $ 442 ====== ======
OPERATING ACTIVITIES: For the six months ended June 30, 2006, net cash provided by operating activities was $274 million, a decrease of $290 million versus 2005. This was a result of income tax payments to the parent and decreases in the MCV Partnership gas supplier funds on deposit, offset by a decrease in accounts receivable and an increase in accounts payable. The decrease in the MCV Partnership gas supplier funds on deposit was the result of refunds to suppliers from decreased exposure due to declining gas prices in 2006. The decrease in accounts receivable was primarily due to the expiration of emergency rules initiated by the MPSC, which delayed customer payments during the heating season. The increase in accounts payable was due to the timing of additional tax payments to the parent related to the IRS income tax audit offset by payments for higher priced gas that were accrued as of December 31, 2005. INVESTING ACTIVITIES: For the six months ended June 30, 2006, net cash used in investing activities was $214 million, a decrease of $70 million versus 2005. This decrease was due to the release of restricted cash in February 2006, which we used to extinguish long-term debt - related parties. FINANCING ACTIVITIES: For the six months ended June 30, 2006, net cash used in financing activities was $20 million, an increase of $182 million versus 2005. This increase was primarily due to lower stockholder's contributions from the parent, partially offset by a decrease in payments of common stock dividends of $127 million. For additional details on long-term debt activity, see Note 3, Financings and Capitalization. OBLIGATIONS AND COMMITMENTS DIVIDEND RESTRICTIONS: For details on dividend restrictions, see Note 3, Financings and Capitalization. CE-15 Consumers Energy Company OFF-BALANCE SHEET ARRANGEMENTS: We enter into various arrangements in the normal course of business to facilitate commercial transactions with third-parties. These arrangements include indemnifications, letters of credit and surety bonds. For details on guarantee arrangements, see Note 2, Contingencies, "Other Contingencies -FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." REVOLVING CREDIT FACILITIES: For details on revolving credit facilities, see Note 3, Financings and Capitalization. SALE OF ACCOUNTS RECEIVABLE: For details on the sale of accounts receivable, see Note 3, Financings and Capitalization. OUTLOOK ELECTRIC BUSINESS OUTLOOK GROWTH: Summer 2005 temperatures were higher than historical averages, leading to increased demand from electric customers. In 2006, we project electric deliveries will decline less than one percent from 2005 levels. This short-term outlook assumes a stabilizing economy and normal weather conditions throughout the remainder of the year. Over the next five years, we expect electric deliveries to grow at an average rate of about one and one-half percent per year. However, such growth is dependent on a modestly growing customer base and a stabilizing Michigan 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. ELECTRIC RESERVE MARGIN: We have a reserve margin of approximately 11 percent for summer 2006, or supply resources equal to 111 percent of projected firm summer peak load. The 2006 supply resources of 111 percent come from our electric generating plants, long-term power purchase contracts, and other contractual arrangements. We have purchased capacity and energy contracts covering the reserve margin requirements for 2006 and covering partially the estimated reserve margin requirements for 2007 through 2010. As a result, we recognized an asset of $75 million for unexpired capacity and energy contracts at June 30, 2006. Upon the completion of the sale of the Palisades plant, the power purchase agreement will offset for the term of the agreement, the reduction in the owned capacity represented by the Palisades plant. The MCV PPA is not affected by our agreement to sell our interest in the MCV Partnership. After September 15, 2007, we expect to exercise our claim for relief under the regulatory out provision in the MCV PPA. If we are successful in exercising our claim, the MCV Partnership has the right to terminate the MCV PPA, which could impact our reserve margin status. ELECTRIC TRANSMISSION EXPENSES: METC, which provides electric transmission service to us, increased substantially the transmission rates it charges us in 2006. The increased rates are subject to refund and to reduction based on the outcome of hearings at the FERC scheduled for December 2006. We are attempting to recover these costs through our 2006 PSCR plan case. The PSCR process allows recovery of all reasonable and prudent power supply costs. However, we cannot predict when recovery of these transmission costs will commence. To the extent that we incur and are unable to collect these increased costs in a timely manner, our cash flows from electric utility operations will be affected negatively. For additional details, see Note 2, Contingencies, "Electric Rate Matters - Power Supply Costs." CE-16 Consumers Energy Company In May 2006, ITC, a company that operates electric transmission facilities through a wholly owned subsidiary, including the transmission system within Detroit Edison's territory, filed an application with the FERC to acquire METC. The FERC subsequently delayed hearings concerning the METC transmission rates. We will continue to participate in the FERC proceeding concerning the METC transmission rates and the FERC proceeding concerning ITC's proposed acquisition of METC. We are unable to predict the nature and timing of any action by the FERC on transmission rates or if and when the ITC's purchase of METC will be completed. INDUSTRIAL REVENUE OUTLOOK: Our electric utility customer base includes a mix of residential, commercial, and diversified industrial customers. In November 2005, General Motors Corporation, a large industrial customer of Consumers, announced plans to reduce certain manufacturing operations in Michigan. However, since the targeted operations are outside of our service territory, we do not anticipate a significant impact on electric utility revenue. In March 2006, Delphi Corporation, also a large industrial customer of Consumers with six facilities in our service territory, announced plans to sell or close all but one of their manufacturing operations in Michigan as part of their bankruptcy restructuring. Our electric utility operations are not dependent upon a single customer, or even a few customers, and customers in the automotive sector constitute 4 percent of our total electric revenue. In addition, returning former ROA industrial customers will benefit our electric utility revenue. However, we cannot predict the impact of these restructuring plans or possible future actions by other industrial customers. THE ELECTRIC CAPACITY NEED FORUM: In January 2006, the MPSC Staff issued a report on future electric capacity in the state of Michigan. The report indicated that existing generation resources are adequate in the short term, but could be insufficient to maintain reliability standards by 2009. The report also indicated that new coal-fired baseload generation may be needed by 2011. The MPSC Staff recommended an approval and bid process for new power plants. To address revenue stability risks, the Staff also proposed a special reliability charge that a utility would assess on all electric distribution customers. In April 2006, the governor of Michigan issued an executive directive calling for the development of a comprehensive energy plan for the state of Michigan. The directive calls for the Chairman of the MPSC, working in cooperation with representatives from the public and private sectors, to make recommendations on Michigan's energy policy by the end of 2006. We will continue to participate as the MPSC addresses future electric capacity needs. BURIAL OF OVERHEAD POWER LINES: The City of Taylor, a municipality located in Wayne county, Michigan, passed an ordinance that required Detroit Edison to bury a section of overhead power lines at Detroit Edison's expense. In September 2004, the Michigan Court of Appeals upheld a lower court decision affirming the legality of the ordinance over Detroit Edison's objections. Other municipalities in our service territory adopted, or proposed the adoption of, similar ordinances. Detroit Edison appealed the Michigan Court of Appeals ruling to the Michigan Supreme Court. In May 2006, the Michigan Supreme Court ruled in favor of Detroit Edison. The Court found that the MPSC has primary jurisdiction over this issue and accordingly, the Taylor ordinance is subject to any applicable rules and regulations of the MPSC, including issues concerning who should bear the expense of underground facilities. If incurred, we would seek recovery of these costs from the municipality, or from our customers located in the municipality, subject to MPSC approval. CE-17 Consumers Energy Company 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 Act: 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 $819 million. As of June 2006, we have incurred $634 million in capital expenditures to comply with the federal Clean Air Act and resulting regulations and anticipate that the remaining $185 million of capital expenditures will be made in 2006 through 2011. In addition to modifying coal-fired electric generating plants, our compliance plan includes the use of nitrogen oxide emission allowances until all of the control equipment is operational in 2011. The nitrogen oxide emission allowance annual expense is projected to be $6 million per year, which we expect to recover from our customers through the PSCR process. Clean Air Interstate Rule: In March 2005, the EPA adopted the Clean Air Interstate Rule that requires additional coal-fired electric generating plant emission controls for nitrogen oxides and sulfur dioxide. We plan to meet this rule by year round operation of our selective catalytic reduction control technology units and installation of flue gas desulfurization scrubbers at an estimated total cost of $960 million, to be incurred by 2014. Clean Air Mercury Rule: Also in March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial reductions of mercury emissions from coal-fired electric generating plants by 2010 and further reductions by 2018. We anticipate our capital costs for mercury emissions reductions required by Phase I of the Clean Air Mercury Rule to be less than $50 million and implemented by 2010. Phase II requirements of the Clean Air Mercury Rule are not yet known and a cost estimate has not been determined. In April 2006, Michigan's governor announced a plan that would result in mercury emissions reductions of 90 percent by 2015. We are working with the MDEQ on the details of these rules. We will develop a cost estimate when the details of these rules are determined. Greenhouse gases: Several legislative proposals have been introduced in the United States Congress that would require reductions in emissions of greenhouse gases, including potentially carbon dioxide. We cannot predict whether any federal mandatory greenhouse gas emission reduction rules ultimately will be enacted, or the specific requirements of any of these rules and their effect on our operations and financial results. To the extent that greenhouse gas emission reduction rules come into effect, the 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 CE-18 Consumers Energy Company policies at this time. However, we stay abreast of 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 electric generating plant cooling water intake systems. The rules require significant reduction in fish killed by operating equipment. Fish kill reduction studies are required to be submitted to the EPA in 2007 and 2008. EPA compliance options in the rule are currently being challenged in court and we will finalize our cost estimates in 2008, when a decision on the final rule is anticipated. We expect to implement the EPA approved process from 2009 to 2011. 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. At June 30, 2006, alternative electric suppliers were providing 311 MW of generation service to ROA customers, which represents 4 percent of our total distribution load. It is difficult to predict future ROA customer trends. Section 10d(4) Regulatory Assets: In December 2005, the MPSC issued an order that authorized us to recover $333 million in Section 10d(4) costs. Instead of collecting these costs evenly over five years, the order instructed us to collect 10 percent of the regulatory asset total in the first year, 15 percent in the second year, and 25 percent in each of the third, fourth, and fifth years. In January 2006, we filed a petition for rehearing with the MPSC that disputed the aspect of the order dealing with the timing of our collection of these costs. In April 2006, the MPSC issued an order that denied our petition for rehearing. Stranded Costs: Prior MPSC orders adopted a mechanism pursuant to the Customer Choice Act to provide recovery of Stranded Costs that occur when customers leave our system to purchase electricity from alternative suppliers. In November 2005, we filed an application with the MPSC related to the determination of 2004 Stranded Costs. In March 2006, the ALJ in our 2004 PSCR reconciliation case issued a Proposal for Decision recommending that we use a greater portion of our net sales of excess power into the bulk electricity market to offset our 2004 PSCR costs, rather than 2004 Stranded Costs. In June 2006, the ALJ issued a Proposal for Decision in our 2004 Stranded Cost case recommending that the MPSC find that we had no Stranded Costs in 2004. If the MPSC adopts the ALJ recommendations, earnings would be impacted adversely by $10 million. We cannot predict the outcome of these proceedings. Through and Out Rates: From December 2004 to March 2006, we paid a transitional charge pursuant to a FERC order eliminating regional "through and out" rates. In May 2006, the FERC approved an agreement between the PJM RTO transmission owners and Consumers concerning these transitional charges. The agreement resolves all issues regarding transitional charges for Consumers and eliminates the potential for refunds or additional charges to Consumers. In May 2006, Baltimore Gas & Electric filed a notice of withdrawal from the settlement. Consumers, PJM, and others filed responses with the FERC on this matter. The FERC has not ruled on whether the notice of withdrawal is effective, but we do not believe this action will have any material impact on us. CE-19 Consumers Energy Company 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. Sale of our Interest in the MCV Partnership and the FMLP: In July 2006, we reached an agreement to sell 100 percent of the stock of CMS Midland, Inc. and CMS Midland Holdings Company to an affiliate of GSO Capital Partners and Rockland Capital Energy Investments for $60.5 million. These Consumers' subsidiaries hold our interests in the MCV Partnership and the FMLP. The sales agreement calls for the purchaser, an affiliate of GSO Capital Partners and Rockland Capital Energy Investments to pay $85 million, subject to certain conditions and reimbursement rights, if Dow terminates an agreement under which it is provided power and steam by the MCV Partnership. The purchaser will secure their reimbursement obligation with an irrevocable letter of credit of up to $85 million. The MCV PPA and the associated customer rates are not affected by the sale. We are targeting to close on the sale before the end of 2006. The sale is subject to various regulatory approvals, including the MPSC's approval and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The MPSC has established a contested case proceeding schedule, which will allow for a decision from the MPSC by the end of 2006. We cannot predict the timing or the outcome of the MPSC's decision. We further cannot predict with certainty whether or when this transaction will be completed. For additional details on the sale of our interests in the MCV Partnership and the FMLP, see Note 2, Contingencies, "Other Electric Contingencies -- The Midland Cogeneration Venture", and the Stock Purchase Agreement, which is attached as Exhibit 10c to this filing. Financial Condition of the MCV Partnership: 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. Historically high natural gas prices have caused the MCV Partnership to reevaluate the economics of operating the MCV Facility and to record an impairment charge in 2005. If natural gas prices remain at present levels or increase, the operations of the MCV Facility would be adversely affected and could result in the MCV Partnership failing to meet its obligations under the sale and leaseback transactions and other contracts. Underrecoveries related to the MCV PPA: Further, the cost that we incur under the MCV PPA exceeds the recovery amount allowed by the MPSC. As a result, we estimate cash underrecoveries of capacity and fixed energy payments of $55 million in 2006 and $39 million in 2007. However, Consumers' direct savings from the RCP, after allocating a portion to customers, are used to offset a portion of our capacity and fixed energy underrecoveries expense. 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 the MCV Partnership's financial performance, and CE-20 Consumers Energy Company - 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. If we are successful in exercising the regulatory out clause, the MCV Partnership has the right to terminate the MCV PPA. The MPSC's future actions on the capacity and fixed energy payments recoverable from customers subsequent to September 15, 2007 may affect negatively the financial performance of the MCV Partnership. If the MCV Partnership terminates the MCV PPA, we would be required to replace the lost capacity to maintain an adequate electric reserve margin. This could involve entering into a new PPA and (or) entering into electric capacity contracts on the open market. We cannot predict our ability to enter into such contracts at a reasonable price. We are also unable to predict regulatory approval of the terms and conditions of such contracts, or that the MPSC would allow full recovery of our incurred costs. For additional details on the MCV Partnership, see Note 2, Contingencies, "Other Electric Contingencies - The Midland Cogeneration Venture." NUCLEAR MATTERS: Sale of Nuclear Assets: In July 2006, we reached an agreement to sell Palisades and the Big Rock Independent Spent Fuel Storage Installation (ISFSI) for $380 million to Entergy. The sales price reflects a $35 million premium above the estimated Palisades asset values at the closing date after accounting for estimated sales-related costs. This premium is expected to benefit our customers. Entergy will assume responsibility for the future decommissioning of the plant and for storage and disposal of spent nuclear fuel. At the date of close, decommissioning trust assets are estimated to be $566 million. Consumers will retain $200 million of these funds at the time of close and will be entitled to receive a return of $116 million of decommissioning trust fund assets, pending either a favorable federal tax ruling regarding the release of the funds or, if the funds are available, after decommissioning of the Palisades site is complete. The disposition of the retained and receivable nuclear decommissioning funds is subject to regulatory approval. We expect that a portion of the proceeds will benefit our customers. We plan to use the cash that we retain from the sale to reduce debt. As part of the transaction, Entergy will sell us 100 percent of the plant's output up to its current capacity of 798 MW under a 15-year power purchase agreement. During the term of the PPA, Entergy is obligated to supply, and we are obligated to take, all capacity and energy from the Palisades plant, exclusive of uprates above the plant's presently specified capacity. When the plant is not operating or is derated, under certain circumstances, Entergy can elect to provide replacement power from another source at the rates set in the PPA. Otherwise, we would have to obtain replacement power from the market. However, we are only obligated to pay Entergy for capacity and energy actually delivered by Entergy either from the plant or from an allowable replacement source chosen by Entergy. If Entergy schedules a plant outage in June, July or August, Entergy is required to provide replacement power at PPA rates. There are significant penalties incurred by Entergy if the delivered energy fails to achieve a minimum capacity factor level during July and August. Over the term of the PPA, the pricing is structured such that Consumers' ratepayers will retain the benefits of the Palisades plant's low-cost nuclear generation. The sale is subject to various regulatory approvals, including the MPSC's approval of the power purchase agreement, the FERC's approval for Entergy to sell power to us under the PPA and other related matters, the NRC's approval of the transfer of the operating license to Entergy and other related matters, and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The final purchase price will be subject to various closing adjustments such as working capital and capital CE-21 Consumers Energy Company expenditure adjustments, adjustments for nuclear fuel usage and inventory, and the date of closing. We are targeting to complete the sale in the first quarter of 2007. However, the sale agreement can be terminated if the closing does not occur within 18 months of the execution of the agreement. The closing can be extended for up to six months to accommodate delays in receiving regulatory approval. We cannot predict with certainty whether or when the closing conditions will be satisfied or whether or when this transaction will be completed. For additional details on the sale of Palisades and the Big Rock ISFSI, see the Asset Sale Agreement and the Power Purchase Agreement, which are attached as Exhibits 10a and 10b to this filing. Big Rock: Decommissioning of the site is nearing completion. Demolition of the last remaining plant structure, the containment building, and removal of remaining underground utilities and temporary office structures is expected to be complete by the end of the third quarter of 2006. Final radiological surveys will then be completed to ensure that the site meets all requirements for free, unrestricted release in accordance with the NRC approved License Termination Plan (LTP) for the project. We anticipate NRC approval to return approximately 475 acres of the site, including the area formerly occupied by the nuclear plant, to a natural setting for unrestricted use by early 2007. An area of approximately 105 acres encompassing the Big Rock ISFSI, where eight casks loaded with spent fuel and other high-level radioactive material are stored, has been sold to Entergy. We will be required to pay Entergy $30 million for accepting responsibility for the storage and disposal of these materials. Palisades: 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 2006, we have loaded 29 dry casks with spent nuclear fuel. Palisades' current license from the NRC expires in 2011. In March 2005, the NMC, which operates the Palisades plant, applied for a 20-year license renewal for the plant on behalf of Consumers. We expect a decision from the NRC on the license renewal application in 2007. For additional details on nuclear plant decommissioning at Big Rock and Palisades, see Note 2, Contingencies, "Other Electric Contingencies - Nuclear Plant Decommissioning." GAS BUSINESS OUTLOOK GROWTH: In 2006, we project gas deliveries will decline by four percent, on a weather-adjusted basis, from 2005 levels due to increased conservation and overall economic conditions in the state of Michigan. Over the next five years, we expect gas deliveries to be relatively flat. Actual gas deliveries in future periods may be affected by: - fluctuations in weather patterns, - use by independent power producers, - competition in sales and delivery, - changes in gas commodity prices, - Michigan economic conditions, - the price of competing energy sources or fuels, and - gas consumption per customer. CE-22 Consumers Energy Company GAS BUSINESS UNCERTAINTIES Several gas business trends or uncertainties may affect our future financial results and financial condition. 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 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, policies, and practices for prudency in annual plan and reconciliation proceedings. For additional details on gas cost recovery, see Note 2, Contingencies, "Gas Rate Matters - Gas Cost Recovery." 2001 GAS DEPRECIATION 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, - required us to undertake a study to determine why our plant removal costs are in excess of other regulated Michigan natural gas utilities, and - required us to file a study report with the MPSC Staff on or before December 31, 2005. We filed the study report with the MPSC Staff on December 29, 2005. We are also required to file our next gas depreciation case within 90 days after the MPSC issuance of a final order in the pending case related to ARO accounting. We cannot predict when the MPSC will issue a final order in the ARO accounting case. If the depreciation case order is issued after the gas general rate case order, we proposed to incorporate its results into the gas general rates using a surcharge mechanism, a process used to incorporate specialty items into customer rates. 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. As part of this filing, we also requested interim rate relief of $75 million. The MPSC Staff and intervenors filed interim rate relief testimony on October 31, 2005. In its testimony, the MPSC Staff recommended granting interim rate relief of $38 million. In February 2006, the MPSC Staff recommended granting final rate relief of $62 million. The MPSC Staff proposed that $17 million of this amount be contributed to a low income and energy efficiency fund. The MPSC Staff also recommended reducing our allowed return on common equity to 11.15 percent, from our current 11.4 percent. In March 2006, the MPSC Staff revised its recommended final rate relief to $71 million, which includes $17 million to be contributed to a low income and energy efficiency fund. In April 2006, we revised our request for final rate relief downward to $118 million. CE-23 Consumers Energy Company In May 2006, the MPSC issued an order granting us interim gas rate relief of $18 million annually, which is under bond and subject to refund if final rate relief is granted in a lesser amount. The order also extended the temporary two-year surcharge of $58 million granted in October 2004 until the issuance of a final order in this proceeding. The MPSC has not set a date for issuance of an order granting final rate relief. In July 2006, the ALJ issued a Proposal for Decision recommending final rate relief of $74 million above current rate levels, which include interim and temporary rate relief. The $74 million includes $17 million to be contributed to a low income and energy efficiency fund. The Proposal for Decision also recommended reducing our return on common equity to 11 percent, from our current 11.4 percent. OTHER OUTLOOK MCV PARTNERSHIP NEGATIVE EQUITY: Due to the impairment of the MCV Facility and operating losses from mark-to-market adjustments on derivative instruments, the equity held by Consumers and by all of the owners of the MCV Partnership has decreased significantly and is now negative. Since Consumers is one of the general partners of the MCV Partnership, we have recognized a portion of the limited partners' negative equity. As the MCV Partnership recognizes future losses, we will continue to assume a portion of the limited partners' share of those losses, in addition to our proportionate share. 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. For additional details regarding this investigation and litigation, see Note 2, Contingencies. PENSION REFORM: Both branches of Congress passed legislation aimed at reforming pension plans in 2005. The U.S. Senate passed The Pension Security and Transparency Act in November 2005 and The House of Representatives passed the Pension Protection Act of 2005 in December 2005. Although the Senate and House bills were similar, they did contain a number of differences. The House and Senate have passed the Pension Protection Act of 2006, which primarily reflects a bipartisan House-Senate pension conference agreement. The bill reforms the funding rules for employer-provided pension plans, effective for plan years beginning after 2007, and was sent to the President in August 2006 for his signature. We are in the process of determining the impact of this potential legislation on our financial statements. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS SFAS NO. 123(R) AND SAB NO. 107, SHARE-BASED PAYMENT: SFAS No. 123(R) requires companies to use the fair value of employee stock options and similar awards at the grant date to value the awards. SFAS No. 123(R) was effective for us on January 1, 2006. We elected to adopt the modified prospective method recognition provisions of this Statement instead of retrospective restatement. We adopted the fair value method of accounting for share-based awards effective December 2002. Therefore, SFAS No. 123(R) did not have a significant impact on our results of operations when it became effective. We applied the additional guidance provided by SAB No. 107 upon implementation of SFAS No. 123(R). For additional details, see Note 7, Executive Incentive Compensation. CE-24 Consumers Energy Company NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE FIN 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES: In June 2006, the FASB issued FIN 48. This interpretation provides a two-step approach for the recognition and measurement of uncertain tax positions taken, or expected to be taken, by a company on its income tax returns. The first step is to evaluate the tax position to determine if, based on management's best judgment, it is greater than 50 percent likely that the taxing authority will sustain the tax position. The second step is to measure the appropriate amount of the benefit to recognize. This is done by estimating the potential outcomes and recognizing the greatest amount that has a cumulative probability of at least 50 percent. We are presently evaluating the impacts, if any, of FIN 48. Any impacts of implementing FIN 48 will result in a cumulative adjustment to retained earnings. This interpretation is effective for us beginning January 1, 2007. PROPOSED ACCOUNTING STANDARD On March 31, 2006, the FASB released an exposure draft of a proposed SFAS entitled "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans." The proposed SFAS would amend SFAS Nos. 87, 88, 106, and 132(R) and is expected to be effective for us on December 31, 2006. The most significant requirement stated in the proposed SFAS is the balance sheet recognition of the underfunded portion of our defined benefit postretirement plans at the date of adoption. We expect that we will be allowed to apply SFAS No. 71 and recognize the underfunded portion as a regulatory asset. If we determine that SFAS No. 71 does not apply, our other comprehensive income could be reduced significantly. We are in the process of determining the impact of this proposed SFAS on our financial statements. CE-25 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
In Millions --------------------------------------------------------------- Three Months Ended Six Months Ended ----------------------------- ----------------------------- June 30 2006 2005 2006 2005 - ------- ------------ ------------ ------------ ------------ OPERATING REVENUE $ 1,138 $ 1,016 $ 2,920 $ 2,648 EARNINGS FROM EQUITY METHOD INVESTEES 1 - 1 - OPERATING EXPENSES Fuel for electric generation 172 157 344 311 Fuel costs mark-to-market at the MCV Partnership 42 39 198 (170) Purchased and interchange power 134 63 244 127 Purchased power - related parties 19 14 37 31 Cost of gas sold 223 242 1,039 982 Other operating expenses 220 201 435 389 Maintenance 79 50 150 102 Depreciation, depletion, and amortization 116 111 268 256 General taxes 56 53 121 118 ------------ ------------ ------------ ------------ 1,061 930 2,836 2,146 ------------ ------------ ------------ ------------ OPERATING INCOME 78 86 85 502 OTHER INCOME (DEDUCTIONS) Accretion expense - (1) - (1) Interest and dividends 16 10 26 15 Regulatory return on capital expenditures 7 15 10 31 Other income 10 6 14 10 Other expense (1) (2) (4) (8) ------------ ------------ ------------ ------------ 32 28 46 47 ------------ ------------ ------------ ------------ INTEREST CHARGES Interest on long-term debt 74 75 146 147 Interest on long-term debt - related parties - 2 1 9 Other interest 5 2 8 4 Capitalized interest (3) (1) (5) (2) ------------ ------------ ------------ ------------ 76 78 150 158 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS 34 36 (19) 391 MINORITY INTERESTS (OBLIGATIONS), NET (3) (14) (75) 97 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 37 50 56 294 INCOME TAX EXPENSE 1 17 10 104 ------------ ------------ ------------ ------------ NET INCOME 36 33 46 190 PREFERRED STOCK DIVIDENDS 1 1 1 1 ------------ ------------ ------------ ------------ NET INCOME AVAILABLE TO COMMON STOCKHOLDER $ 35 $ 32 $ 45 $ 189 ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CE-26 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In Millions ----------------- Six Months Ended ----------------- June 30 2006 2005 - ------- ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 46 $ 190 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion, and amortization (includes nuclear decommissioning of $3 per year) 268 256 Deferred income taxes and investment tax credit (260) 78 Fuel costs mark-to-market at the MCV Partnership 198 (170) Minority interests (obligations), net (75) 97 Regulatory return on capital expenditures (10) (31) Capital lease and other amortization 18 17 Earnings from equity method investees (1) - Changes in assets and liabilities: Increase in accounts receivable and accrued revenue (6) (94) Decrease in inventories 91 107 Increase in accounts payable 147 35 Increase in accrued expenses 62 4 Decrease in accrued taxes (202) (30) Increase (decrease) in the MCV Partnership gas supplier funds on deposit (100) 4 Decrease in other current and non-current assets 53 125 Increase (decrease) in other current and non-current liabilities 45 (24) ------ ------ Net cash provided by operating activities 274 564 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (excludes assets placed under capital lease) (310) (270) Cost to retire property (31) (18) Restricted cash and restriced short-term investments 128 (33) Investments in nuclear decommissioning trust funds (18) (3) Proceeds from nuclear decommissioning trust funds 13 24 Proceeds from short-term investments - 145 Purchase of short-term investments - (141) Maturity of the MCV Partnership restricted investment securities held-to-maturity 118 222 Purchase of the MCV Partnership restricted investment securities held-to-maturity (118) (223) Cash proceeds from sale of assets - 1 Other investing 4 12 ------ ------ Net cash used in investing activities (214) (284) ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long term debt - 735 Retirement of long-term debt (144) (925) Payment of common stock dividends (40) (167) Payment of preferred stock dividends (1) (1) Payment of capital and finance lease obligations (5) (5) Stockholder's contribution, net 200 550 Decrease in notes payable (27) - Debt issuance and financing costs (3) (25) ------ ------ Net cash provided by (used in) financing activities (20) 162 ------ ------ Net Increase in Cash and Cash Equivalents 40 442 Cash and Cash Equivalents, Beginning of Period 416 171 ------ ------ Cash and Cash Equivalents, End of Period $ 456 $ 613 ====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CE-27 CONSUMERS ENERGY COMPANY CONSOLIDATED BALANCE SHEETS
In Millions ------------------------------ June 30 2006 December 31 (Unaudited) 2005 ------------- ------------- ASSETS PLANT AND PROPERTY (AT COST) Electric $ 8,396 $ 8,204 Gas 3,179 3,151 Other 229 227 ------------- ------------- 11,804 11,582 Less accumulated depreciation, depletion, and amortization 4,891 4,804 ------------- ------------- 6,913 6,778 Construction work-in-progress 559 509 ------------- ------------- 7,472 7,287 ------------- ------------- INVESTMENTS Stock of affiliates 28 33 Other 4 7 ------------- ------------- 32 40 ------------- ------------- CURRENT ASSETS Cash and cash equivalents at cost, which approximates market 456 416 Restricted cash and restricted short-term investments 55 183 Accounts receivable, notes receivable, and accrued revenue, less allowances of $14 in 2006 and $13 in 2005 649 653 Accounts receivable - related parties 9 9 Inventories at average cost Gas in underground storage 949 1,068 Materials and supplies 74 75 Generating plant fuel stock 109 80 Deferred property taxes 147 159 Regulatory assets - postretirement benefits 19 19 Derivative instruments 95 242 Prepayments and other 89 70 ------------- ------------- 2,651 2,974 ------------- ------------- NON-CURRENT ASSETS Regulatory assets Securitized costs 538 560 Additional minimum pension 399 399 Postretirement benefits 105 116 Customer Choice Act 206 222 Other 475 484 Nuclear decommissioning trust funds 563 555 Other 547 520 ------------- ------------- 2,833 2,856 ------------- ------------- TOTAL ASSETS $ 12,988 $ 13,157 ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CE-28 STOCKHOLDER'S INVESTMENT AND LIABILITIES
In Millions -------------------------- June 30 2006 December 31 (Unaudited) 2005 ----------- ----------- CAPITALIZATION Common stockholder's equity Common stock, authorized 125.0 shares; outstanding 84.1 shares for all periods $ 841 $ 841 Paid-in capital 1,832 1,632 Accumulated other comprehensive income 53 72 Retained earnings since December 31, 1992 238 233 ----------- ----------- 2,964 2,778 Preferred stock 44 44 Long-term debt 4,291 4,303 Non-current portion of capital leases and finance lease obligations 310 308 ----------- ----------- 7,609 7,433 ----------- ----------- MINORITY INTERESTS 269 259 ----------- ----------- CURRENT LIABILITIES Current portion of long-term debt, capital leases and finance leases 113 112 Current portion of long-term debt - related parties - 129 Notes payable - related parties - 27 Accounts payable 385 458 Accounts payable - related parties 260 40 Accrued interest 93 82 Accrued taxes 198 400 Deferred income taxes 72 55 MCV Partnership gas supplier funds on deposit 93 193 Other 180 150 ----------- ----------- 1,394 1,646 ----------- ----------- NON-CURRENT LIABILITIES Deferred income taxes 727 1,027 Regulatory liabilities Regulatory liabilities for cost of removal 1,166 1,120 Income taxes, net 468 455 Other regulatory liabilities 222 178 Postretirement benefits 347 308 Asset retirement obligations 493 494 Deferred investment tax credit 64 67 Other 229 170 ----------- ----------- 3,716 3,819 ----------- ----------- Commitments and Contingencies (Notes 2, 3, and 4) TOTAL STOCKHOLDER'S INVESTMENT AND LIABILITIES $ 12,988 $ 13,157 =========== ===========
CE-29 CONSUMERS ENERGY COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (UNAUDITED)
In Millions --------------------------------------------------- Three Months Ended Six Months Ended ----------------------- ----------------------- June 30 2006 2005 2006 2005 - ------- --------- --------- --------- --------- COMMON STOCK At beginning and end of period (a) $ 841 $ 841 $ 841 $ 841 --------- --------- --------- --------- OTHER PAID-IN CAPITAL At beginning of period 1,832 1,132 1,632 932 Stockholder's contribution - 350 200 550 --------- --------- --------- --------- At end of period 1,832 1,482 1,832 1,482 --------- --------- --------- --------- ACCUMULATED OTHER COMPREHENSIVE INCOME Minimum pension liability At beginning of period (2) (1) (2) (1) Minimum pension liability adjustment (b) - (1) - (1) --------- --------- --------- --------- At end of period (2) (2) (2) (2) --------- --------- --------- --------- Investments At beginning of period 16 15 18 12 Unrealized gain (loss) on investments (b) - 3 (2) 6 --------- --------- --------- --------- At end of period 16 18 16 18 --------- --------- --------- --------- Derivative instruments At beginning of period 44 26 56 20 Unrealized gain (loss) on derivative instruments (b) (4) 7 (14) 23 Reclassification adjustments included in net income (b) (1) (1) (3) (11) --------- --------- --------- --------- At end of period 39 32 39 32 --------- --------- --------- --------- Total Accumulated Other Comprehensive Income 53 48 53 48 --------- --------- --------- --------- RETAINED EARNINGS At beginning of period 203 647 233 608 Net income 36 33 46 190 Cash dividends declared - Common Stock - (49) (40) (167) Cash dividends declared - Preferred Stock (1) (1) (1) (1) --------- --------- --------- --------- At end of period 238 630 238 630 --------- --------- --------- --------- TOTAL COMMON STOCKHOLDER'S EQUITY $ 2,964 $ 3,001 $ 2,964 $ 3,001 ========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. CE-30 (a) Number of shares of common stock outstanding was 84,108,789 for all periods presented. (b) Disclosure of Other Comprehensive Income:
In Millions ------------------------------------------- Three Months Ended Six Months Ended ------------------- ------------------- June 30 2006 2005 2006 2005 - ------- ------- ------- ------- ------- Minimum Pension Liability Minimum pension liability adjustment, net of tax of $-, $-, $-, and $-, respectively $ - $ (1) $ - $ (1) Investments Unrealized gain (loss) on investments, net of tax (tax benefit) of $-, $1, $(1), and $3, respectively $ - $ 3 $ (2) $ 6 Derivative instruments Unrealized gain (loss) on derivative instruments, net of tax (tax benefit) of $(2), $3, $(7), and $12, respectively (4) 7 (14) 23 Reclassification adjustments included in net income, net of tax benefit of $-, $(1), $(1), and $(6), respectively (1) (1) (3) (11) Net income 36 33 46 190 ------- ------- ------- ------- Total Comprehensive Income $ 31 $ 41 $ 27 $ 207 ======= ======= ======= =======
CE-31 Consumers Energy Company (This page intentionally left blank) CE-32 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 consolidated 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 related Notes contained in the Consumers' Form 10-K for the year ended December 31, 2005. 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. We manage our business by the nature of services each provides and operate principally in two business segments: electric utility and gas utility. 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 FASB Interpretation No. 46(R). 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. REVENUE RECOGNITION POLICY: We recognize revenues from deliveries of electricity and natural gas, and the storage of natural gas when services are provided. Sales taxes are recorded as liabilities and are not included in revenues. CE-33 Consumers Energy Company ACCOUNTING FOR MISO TRANSACTIONS: We account for MISO transactions on a net basis for all of our generating units combined. We record billing adjustments when invoices are received and also record an expense accrual for future adjustments based on historical experience. LONG-LIVED ASSETS AND EQUITY METHOD INVESTMENTS: Our assessment of the recoverability of long-lived assets and equity method investments involves critical accounting estimates. We periodically perform tests of impairment 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 $12.988 billion at June 30, 2006, 58 percent represent long-lived assets and equity method investments that are subject to this type of analysis. DETERMINATION OF PENSION MRV OF PLAN ASSETS: We determine the MRV for pension plan assets, as defined in SFAS No. 87, as the fair value of plan assets on the measurement date, adjusted by the gains or losses that will not be admitted into MRV until future years. We reflect each year's assets gain or loss in MRV in equal amounts over a five-year period beginning on the date the original amount was determined. The MRV is used in the calculation of net pension cost. 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 2006 2005 2006 2005 - ------- ------ ------ ------ ------ Other income Electric restructuring return $ 1 $ 3 $ 2 $ 4 Return on stranded and security costs 2 2 3 3 Nitrogen oxide allowance sales 6 1 6 1 Gain on stock - - 1 1 All other 1 - 2 1 ------ ------ ------ ------ Total other income $ 10 $ 6 $ 14 $ 10 ====== ====== ====== ======
In Millions --------------------------------------------------- Three Months Ended Six Months Ended --------------------- --------------------- June 30 2006 2005 2006 2005 - ------- ------ ------ ------ ------ Other expense Loss on reacquired debt $ - $ (1) $ - $ (6) Civic and political expenditures - - (1) (1) Donations - - (1) - All other (1) (1) (2) (1) ------ ------ ------ ------ Total other expense $ (1) $ (2) $ (4) $ (8) ====== ====== ====== ======
RECLASSIFICATIONS: Certain prior year amounts have been reclassified for comparative purposes. These reclassifications did not affect consolidated net income for the periods presented. NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE: FIN 48, Accounting for Uncertainty in Income Taxes: In June 2006, the FASB issued FIN 48. This interpretation provides a two-step approach for the recognition and measurement of uncertain tax positions taken, or expected to be taken, by a company on its income tax returns. The first step is to evaluate the tax position to determine if, based on management's best judgment, it is greater than 50 percent likely that the taxing authority will sustain the tax position. The second step is to measure the appropriate amount of the benefit to recognize. This is done by estimating the potential outcomes and recognizing the greatest amount that has a cumulative probability of at least 50 percent. We are presently evaluating the impacts, if any, of FIN 48. Any impacts of implementing FIN 48 will result in a cumulative adjustment to retained earnings. This interpretation is effective for us beginning January 1, 2007. CE-34 Consumers Energy Company 2: CONTINGENCIES SEC AND OTHER INVESTIGATIONS: During the period of May 2000 through January 2002, CMS MST engaged in simultaneous, prearranged commodity trading transactions in which energy commodities were sold and repurchased at the same price. These so called round-trip trades had no impact on previously reported consolidated net income, earnings per share, or cash flows but had the effect of increasing operating revenues and operating expenses by equal amounts. 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. Those individuals filed a motion to dismiss the SEC action, which was denied. 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. The cases were consolidated into a single lawsuit, which 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, the court granted a motion to dismiss Consumers and three of the individual defendants, but denied the motions to dismiss CMS Energy and the 13 remaining individual defendants. The court issued an opinion and order dated March 24, 2006, granting in part and denying in part plaintiffs' amended motion for class certification. The court conditionally certified a class consisting of "all persons who purchased CMS Common Stock during the period of October 25, 2000 through and including May 17, 2002 and who were damaged thereby." The court excluded purchasers of CMS Energy's 8.75 percent Adjustable Convertible Trust Securities ("ACTS") from the class. Trial has been scheduled for March 2007. In response to the court's opinion and order excluding purchasers of ACTS from the shareholder class, a new class action lawsuit was filed on behalf of ACTS purchasers. The new lawsuit names the same defendants as the shareholder action and contains essentially the same allegations and class period. CMS Energy and the individual defendants will defend themselves vigorously in this litigation but cannot predict its outcome. ERISA LAWSUITS: CMS Energy was a named defendant, along with Consumers, CMS MST, and certain named and unnamed officers and directors, in two lawsuits, filed in July 2002 in United States District Court for the Eastern District of Michigan, brought as purported class actions on behalf of participants and beneficiaries of the CMS Employees' Savings Plan (the Plan). Plaintiffs alleged breaches of fiduciary duties under ERISA and sought 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, as well as other equitable relief and legal fees. On March 1, 2006, CMS Energy and Consumers reached an agreement, subject to court and independent fiduciary approval, to settle the lawsuits. The settlement agreement required a $28 million cash payment by CMS Energy's primary insurer to be used to pay Plan participants and beneficiaries for alleged losses, as well as any legal fees and expenses. In addition, CMS Energy agreed to certain other steps regarding administration of the Plan. The hearing on final approval of the CE-35 Consumers Energy Company settlement was held on June 15, 2006. On June 27, 2006, the judge entered the Order and Final Judgment, approving the proposed settlement with minor modifications. 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 Act: 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 $819 million through 2011. 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 - an AFUDC capitalization rate. Our current capital cost estimates include an escalation rate of 2.6 percent and an AFUDC capitalization rate of 8.4 percent. As of June 2006, we have incurred $634 million in capital expenditures to comply with the federal Clean Air Act and resulting regulations and anticipate that the remaining $185 million of capital expenditures will be made in 2006 through 2011. These expenditures include installing selective catalytic reduction control technology at four of our coal-fired electric generating plants. In addition to modifying coal-fired electric generating plants, our compliance plan includes the use of nitrogen oxide emission allowances until all of the control equipment is operational in 2011. The nitrogen oxide emission allowance annual expense is projected to be $6 million per year, which we expect to recover from our customers through the PSCR process. The projected annual expense is based on market price forecasts and forecasts of regulatory provisions, known as progressive flow control, that restrict the usage in any given year of allowances banked from previous years. The allowances and their cost are accounted for as inventory. The allowance inventory is expensed at the rolling average cost as the coal-fired electric generating plants emit nitrogen oxide. Clean Air Interstate Rule: In March 2005, the EPA adopted the Clean Air Interstate Rule that requires additional coal-fired electric generating plant emission controls for nitrogen oxides and sulfur dioxide. The rule involves a two-phase program to reduce emissions of nitrogen oxides by more than 60 percent and sulfur dioxide by more than 70 percent from 2003 levels by 2015. The final rule will require that we run our selective catalytic reduction control technology units year round beginning in 2009 and may require that we purchase additional nitrogen oxide allowances beginning in 2009. The additional nitrogen oxide allowances are estimated to cost $4 million per year for years 2009 through 2011, which we expect to recover from our customers through the PSCR process. In addition to the selective catalytic reduction control technology installed to meet the nitrogen oxide standards, 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 an estimated total cost of $960 million. Our capital cost estimates include an escalation rate of 2.6 percent and an AFUDC capitalization rate of 8.4 percent. We currently have a surplus of sulfur dioxide allowances, which were granted by the EPA and are accounted for as inventory. In January 2006, we CE-36 Consumers Energy Company sold some of our excess sulfur dioxide allowances for $61 million and recognized the proceeds as a regulatory liability. Clean Air Mercury Rule: Also in March 2005, the EPA issued the Clean Air Mercury Rule, which requires initial reductions of mercury emissions from coal-fired electric generating plants by 2010 and further reductions by 2018. The Clean Air Mercury Rule establishes a cap-and-trade system for mercury emissions that is similar to the system used in the Clean Air Interstate Rule. The industry has not reached a consensus on the technical methods for curtailing mercury emissions. However, we anticipate our capital costs for mercury emissions reductions required by Phase I of the Clean Air Mercury Rule to be less than $50 million and implemented by 2010. Phase II requirements of the Clean Air Mercury Rule are not yet known and a cost estimate has not been determined. In August 2005, the MDEQ filed a Motion to Intervene in a court challenge to certain aspects of EPA's Clean Air Mercury Rule, asserting that the rule is inadequate. We cannot predict the outcome of this proceeding. In April 2006, Michigan's governor announced a plan that would result in mercury emissions reductions of 90 percent by 2015. This plan would adopt the Clean Air Mercury Rule through its first phase. Beginning in year 2015, the mercury emissions reduction standards outlined in the governor's plan would become more stringent than those included in the Clean Air Mercury Rule. We are working with the MDEQ on the details of these rules. We will develop a cost estimate when the details of these rules are determined. The EPA has alleged that some utilities have incorrectly classified plant modifications as "routine maintenance" rather than seeking permits to modify the plant 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 generating 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 our experience, we estimate that our share of the total liability for the known Superfund sites will be between $1 million and $10 million. At June 30, 2006, 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 Ludington. 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. CE-37 Consumers Energy Company 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 duct burner and failing to maintain certain records in the required format. The MCV Partnership there after declared five of the six duct burners in the MCV Facility as unavailable for operational use (which reduced the generation capability of the MCV Facility by approximately 100 MW) and took other corrective action to address the MDEQ's assertions. Testing of the one available duct burner occurred in April 2005, and its emissions met permitted levels due to the configuration of that particular unit. In July 2004, the MCV Partnership filed a response to the Letter of Violation, opposing its findings. On December 13, 2004, the MDEQ informed the MCV Partnership that it was pursuing an escalated enforcement action against the MCV Partnership. 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). Following voluntary settlement discussions, the MDEQ issued the MCV Partnership a new PTI, which established higher carbon monoxide emissions limits on the five duct burners that had been declared unavailable. The MCV Partnership has returned those duct burners to service. The MDEQ and the MCV Partnership are pursuing a settlement of the emission violation, which will also satisfy state and federal requirements and remove the MCV Partnership from the HPVL. At this time, we cannot predict the financial impact or outcome of this issue. LITIGATION: In October 2003, a group of eight PURPA qualifying facilities (the plaintiffs), which sell power to us, filed a lawsuit in Ingham County Circuit Court. The lawsuit alleged 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. The Michigan Court of Appeals upheld this order on the primary jurisdiction question, but remanded the case back on another issue. 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 plaintiffs have appealed the MPSC order to the Michigan Court of Appeals. The plaintiffs also filed suit in the United States Court for the Western District of Michigan, which the judge subsequently dismissed. The plaintiffs have appealed the dismissal to the United States Court of Appeals. We cannot predict the outcome of these appeals. CE-38 Consumers Energy Company ELECTRIC RESTRUCTURING MATTERS ELECTRIC ROA: The Customer Choice Act allows all of our electric customers to buy electric generation service from us or from an alternative electric supplier. At June 30, 2006, alternative electric suppliers were providing 311 MW of generation service to ROA customers, which represents 4 percent of our total distribution load. This represents a decrease of 11 percent of ROA load compared to March 31, 2006 and a decrease of 62 percent of ROA load compared to June 30, 2005. It is difficult to predict future ROA customer trends. STRANDED COSTS: Prior MPSC orders adopted a mechanism pursuant to the Customer Choice Act to provide recovery of Stranded Costs that occur when customers leave our system to purchase electricity from alternative suppliers. In November 2005, we filed an application with the MPSC related to the determination of 2004 Stranded Costs. Applying the Stranded Cost methodology used in prior MPSC orders, we concluded that we experienced Stranded Costs in 2004; however, we also concluded that these costs were offset completely by our net sales of excess power into the bulk electricity market. In March 2006, the ALJ in our 2004 PSCR reconciliation case issued a Proposal for Decision recommending that we use a greater portion of our net sales of excess power into the bulk electricity market to offset our 2004 PSCR costs, rather than 2004 Stranded Costs. We believe, if accepted, that this recommendation would lead to a greater amount of 2004 Stranded Costs to recover from ROA customers. However, in June 2006, the ALJ issued a Proposal for Decision in our 2004 Stranded Cost case recommending that the MPSC find that we had no Stranded Costs in 2004 because the ALJ did not believe we demonstrated that the Stranded Costs were caused by ROA. If the MPSC adopts the ALJ recommendations earnings would be impacted adversely by $10 million. In June 2006, we filed exceptions to this Proposal for Decision in the Stranded Cost case. We cannot predict the outcome of these proceedings. ELECTRIC RATE MATTERS 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 reserve margin requirements for 2006 and covering partially the estimated reserve margin requirements for 2007 through 2010. As a result, we have recognized an asset of $75 million for unexpired capacity and energy contracts at June 30, 2006. At July 2006, we expect the total capacity cost of electric capacity and energy contracts for 2006 to be $19 million. PSCR: The PSCR process allows recovery of reasonable and prudent power supply costs. Revenues from the PSCR charges are subject to reconciliation after review of actual costs for reasonableness and prudence. In September 2005, we submitted our 2006 PSCR plan filing to the MPSC. In November 2005, we submitted an amended 2006 PSCR plan to the MPSC to include higher estimates for METC and coal supply costs. In December 2005, the MPSC issued an order that temporarily excluded these increased costs from our PSCR charge and further reduced the charge by one mill per kWh. We implemented the temporary order in January 2006. CE-39 Consumers Energy Company In April 2006, the MPSC Staff filed briefs in the 2006 PSCR plan case recommending inclusion of all filed costs in the 2006 PSCR charge, including those temporarily excluded in the December 2005 temporary order. In May 2006, the ALJ issued a Proposal for Decision with a recommendation similar to the MPSC Staff. However, the ALJ recommended that we continue to exclude those costs temporarily excluded until addressed in our 2006 PSCR reconciliation case, which we plan to file in March 2007. Depending on the action taken by the MPSC, our cash underrecoveries of power supply costs for 2006 could range from $39 million to $146 million. These underrecoveries are due to increased bundled sales, and other cost increases beyond those included in the September 2005 and November 2005 filings. We expect to recover fully all of our PSCR costs. When we incur and are unable to collect these costs in a timely manner, there is a negative impact on our cash flows from electric utility operations. In March 2006, we submitted our 2005 PSCR reconciliation filing to the MPSC. In July 2006, we submitted supplemental testimony in which we calculated an underrecovery of $37 million for commercial and industrial customers, which we expect to recover fully. We cannot predict the outcome of these PSCR proceedings. OTHER ELECTRIC CONTINGENCIES THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates the MCV Facility, contracted to sell electricity to Consumers for a 35-year period beginning in 1990. 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 FASB Interpretation No. 46(R). Sale of our Interest in the MCV Partnership and the FMLP: In July 2006, we reached an agreement to sell 100 percent of the stock of CMS Midland, Inc. and CMS Midland Holdings Company to an affiliate of GSO Capital Partners and Rockland Capital Energy Investments for $60.5 million. These Consumers' subsidiaries hold our interest in the MCV Partnership and the FMLP. The MCV PPA and the associated customer rates are not affected by the sale. We are targeting to close on the sale by the end of 2006. The sale is subject to various regulatory approvals, including the MPSC's approval and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. On July 27, 2006, the MPSC issued an order establishing a contested case proceeding and provided a schedule, which will allow for a decision from the MPSC by the end of 2006. We cannot predict the timing or the outcome of the MPSC's decision. We further cannot predict with certainty whether or when this transaction will be completed. Further, because of the PPA in place between Consumers and the MCV Partnership, the transaction is effectively a sale and leaseback for accounting purposes. SFAS No. 98 specifies the accounting required for a seller's sale and simultaneous leaseback transaction involving real estate, including real estate with equipment. In accordance with SFAS No. 98, the transaction will be required to be accounted for as a financing and not a sale. This is due to forms of continuing involvement we will have with the MCV Partnership. At closing, we will remove from our Consolidated Balance Sheets all of the assets, liabilities, and minority interest associated with both the MCV Partnership and the FMLP except for the real estate assets and equipment of the MCV Partnership. Those assets will remain at their carrying value. If the fair value is determined to be less than the present carrying value, an impairment charge would result. CE-40 Consumers Energy Company Further, as disclosed in Note 4, Financial and Derivative Instruments, "Derivative Contracts Associated with the MCV Partnership," we will reflect in earnings certain cumulative amounts of MCV Partnership-related derivative fair value changes that are accounted for in other comprehensive income. We will also reflect in earnings a liability for the fair value of a guarantee, and income related to certain MCV Partnership gas contracts which are being sold. The transaction will not result in the MCV Partnership or the FMLP assets being classified as held for sale on our Consolidated Balance Sheets. Financial Condition of the MCV Partnership: 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. Historically high natural gas prices have caused the MCV Partnership to reevaluate the economics of operating the MCV Facility and to record an impairment charge in 2005. If natural gas prices remain at present levels or increase, the operations of the MCV Facility would be adversely affected and could result in the MCV Partnership failing to meet its obligations under the sale and leaseback transactions and other contracts. Due to the impairment of the MCV Facility and subsequent losses, the value of the equity held by all of the owners of the MCV Partnership has decreased significantly and is now negative. Since we are one of the general partners of the MCV Partnership, we have recognized a portion of the limited partners' negative equity. At June 30, 2006, the negative minority interest for the other general partners' share, including their portion of the limited partners' negative equity, is $112 million and is included in Other Non-current Assets on our Consolidated Balance Sheets. Underrecoveries related to the MCV PPA: Further, 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 underrecoveries of $55 million in 2006 and $39 million in 2007. Of the 2006 estimate, we expensed $28 million during the six months ended June 30, 2006. However, Consumers' direct savings from the RCP, after allocating a portion to customers, are used to offset our capacity and fixed energy underrecoveries expense. 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 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. If we are successful in exercising the regulatory out clause, the MCV Partnership has the right to terminate the MCV PPA. The MPSC's future actions on the capacity and fixed energy payments recoverable from customers subsequent to September 15, 2007 may affect negatively the financial performance of the MCV Partnership. 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 benefits our interest in the MCV Partnership. In January 2005, we 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 approving the RCP. The Attorney General also filed an appeal with the Michigan Court of Appeals. We cannot predict the outcome of these matters. CE-41 Consumers Energy Company 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 City of Midland appealed the decision to the Michigan Court of Appeals, and the MCV Partnership 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 2006. The MCV Partnership estimates that the 1997 through 2005 tax year cases will result in a refund to the MCV Partnership of $87 million, inclusive of interest, if the decision of the Michigan Tax Tribunal is upheld. In February 2006, the Michigan Court of Appeals largely affirmed the Michigan Tax Tribunal decision, but remanded the case back to the Michigan Tax Tribunal to clarify certain aspects of the Tax Tribunal decision. In April 2006, the City of Midland filed an application for Leave to Appeal with the Michigan Supreme Court. The MCV Partnership filed a response in opposition to that application. The remanded proceedings may result in the determination of a greater refund to the MCV Partnership. In July 2006, the Michigan Supreme Court denied the City of Midland's application. The MCV Partnership cannot predict the outcome of these proceedings; therefore, this anticipated refund has not been recognized in earnings. NUCLEAR PLANT DECOMMISSIONING: The MPSC and the FERC regulate the recovery of costs to decommission, or remove from service, our Big Rock and Palisades nuclear plants. 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 in March 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, this estimated cost includes historical expenditures in nominal dollars and future costs in 2003 dollars, with all Palisades costs given in 2003 dollars. Updated cost projections for Big Rock indicate an anticipated decommissioning cost of $393 million as of June 2006. Big Rock: In December 2000, funding of the Big Rock trust fund stopped because the MPSC-authorized decommissioning surcharge collection period expired. In our March 2004 report to the MPSC, we indicated that we would manage the decommissioning trust fund to meet annual NRC financial assurance requirements by withdrawing NRC radiological decommissioning costs from the fund and initially funding non-NRC, greenfield costs out of corporate funds. In March 2006, we contributed $16 million to the trust fund from our corporate funds to support NRC radiological decommissioning costs. Excluding the additional nuclear fuel storage costs due to the DOE's failure to accept spent fuel on schedule, we are projecting that the level of funds provided by the trust will fall short of the amount needed to complete the decommissioning by $39 million, which is the amount projected for non-NRC, greenfield costs. We plan initially to fund the $39 million out of corporate funds. Therefore, at this time, we plan to provide a total of $55 million from corporate funds for costs associated with NRC radiological and non-NRC greenfield decommissioning work. We plan to seek recovery of such expenditures. We cannot predict the outcome of these efforts. Palisades: Excluding additional nuclear fuel storage costs due to the DOE's failure to accept spent fuel on schedule, we concluded, based on the cost estimates filed in March 2004, that the existing Palisades' surcharge of $6 million needed to be increased to $25 million annually, beginning January 2006. A settlement agreement was approved by the MPSC, providing for the continuation of the existing $6 million annual decommissioning surcharge through 2011, our current license expiration date, and for the next periodic review to be filed in March 2007. Amounts collected from electric retail customers and deposited in trusts, including trust earnings, are credited to a regulatory liability. CE-42 Consumers Energy Company In March 2005, the NMC, which operates the Palisades plant, applied for a 20-year license renewal for the plant on behalf of Consumers. We expect a decision from the NRC on the license renewal application in 2007. At this time, we cannot determine what impact this will have on decommissioning costs or the adequacy of funding. In July 2006, we reached an agreement to sell Palisades and the Big Rock ISFSI to Entergy. As part of the transaction, Entergy will sell us 100 percent of the plant's output up to its current capacity of 798 MW under a 15-year power purchase agreement. Because of the PPA that will be in place between Consumers and Entergy, the transaction is effectively a sale and leaseback for accounting purposes. SFAS No. 98 specifies the accounting required for a seller's sale and simultaneous leaseback transaction involving real estate, including real estate with equipment. In accordance with SFAS No. 98, the transaction will be accounted for as a financing and not a sale. This is due to forms of continuing involvement. As such, we will not classify the assets as held for sale on our Consolidated Balance Sheets. 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, 2006, our DOE liability is $148 million. This amount includes interest, which is payable upon the first delivery of spent nuclear fuel to the DOE. The amount of this liability, excluding a portion of interest, was recovered through electric rates. In conjunction with the sale of Palisades and the Big Rock ISFSI, we will retain this obligation and provide security to Entergy for this obligation in the form of either cash, a letter of credit, or other acceptable means. 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. 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 2002, the site at Yucca Mountain, Nevada was designated for the development of a repository for the disposal of high-level radioactive waste and spent nuclear fuel. We expect that the DOE, in due course, will submit a final license application to the NRC for 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 $28 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. CE-43 Consumers Energy Company 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. 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 $15 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 up to $544 million through nuclear insurance and NRC indemnity, and maintains 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 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 2005, we estimated our remaining costs to be between $29 million and $71 million, based on 2005 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 proceeds derived from a settlement with insurers and MPSC-approved rates. At June 30, 2006, we have a liability of $28 million, net of $54 million of expenditures incurred to date, and a regulatory asset of $59 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, policies, and practices for prudency in annual plan and reconciliation proceedings. CE-44 Consumers Energy Company The following table summarizes our GCR reconciliation filings with the MPSC:
Gas Cost Recovery Reconciliation - ------------------------------------------------------------------------------------------------------------------- Net Over- GCR Year Date Filed Order Date recovery Status - --------- ---------- ---------- ------------ ------------------------------------------- 2004-2005 June 2005 April 2006 $2 million The net overrecovery includes interest expense through March 2005 and refunds that we received from our suppliers that are required to be refunded to our customers. The net overrecovery includes $1 million 2005-2006 June 2006 Pending $3 million interest income through March 2006, which resulted from a net underrecovery position during the majority of the GCR period.
GCR plan for year 2005-2006: In November 2005, the MPSC issued an order for our 2005-2006 GCR Plan year, which resulted in approval of a settlement agreement and established a fixed price cap of $10.10 per mcf for the December 2005 through March 2006 billing period. We were able to maintain our billing GCR factor below the authorized level for that period. The order was appealed to the Michigan Court of Appeals by one intervenor. No action has been taken by the Court of Appeals on the merits of the appeal and we are unable to predict the outcome. GCR plan for year 2006-2007: In December 2005, we filed an application with the MPSC seeking approval of a GCR plan for the 12-month period of April 2006 through March 2007. Our request proposed using a GCR factor consisting of: - a base GCR ceiling factor of $11.10 per mcf, plus - a quarterly GCR ceiling price adjustment contingent upon future events. In July 2006, all parties signed a partial settlement agreement, which calls for a base GCR ceiling factor of $9.48 per mcf. The settlement agreement is also subject to a quarterly GCR ceiling price adjustment of up to $3.50 per MMbtu, contingent upon future events. The settlement agreement is subject to MPSC approval. Our GCR factor for the billing month of August 2006 is $8.37 per mcf. 2001 GAS DEPRECIATION 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, - required us to undertake a study to determine why our plant removal costs are in excess of other regulated Michigan natural gas utilities, and - required us to file a study report with the MPSC Staff on or before December 31, 2005. We filed the study report with the MPSC Staff on December 29, 2005. CE-45 Consumers Energy Company We are also required to file our next gas depreciation case within 90 days after the MPSC issuance of a final order in the pending case related to ARO accounting. We cannot predict when the MPSC will issue a final order in the ARO accounting case. If the depreciation case order is issued after the gas general rate case order, we proposed to incorporate its results into the gas general rates using a surcharge mechanism, a process used to incorporate specialty items into customer rates. 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. As part of this filing, we also requested interim rate relief of $75 million. The MPSC Staff and intervenors filed interim rate relief testimony on October 31, 2005. In its testimony, the MPSC Staff recommended granting interim rate relief of $38 million. In February 2006, the MPSC Staff recommended granting final rate relief of $62 million. The MPSC Staff proposed that $17 million of this amount be contributed to a low income and energy efficiency fund. The MPSC Staff also recommended reducing our allowed return on common equity to 11.15 percent, from our current 11.4 percent. In March 2006, the MPSC Staff revised its recommended final rate relief to $71 million, which includes $17 million to be contributed to a low income and energy efficiency fund. In April 2006, we revised our request for final rate relief downward to $118 million. In May 2006, the MPSC issued an order granting us interim gas rate relief of $18 million annually, which is under bond and subject to refund if final rate relief is granted in a lesser amount. The order also extended the temporary two-year surcharge of $58 million granted in October 2004 until the issuance of a final order in this proceeding. The MPSC has not set a date for issuance of an order granting final rate relief. In July 2006, the ALJ issued a Proposal for Decision recommending final rate relief of $74 million above current rate levels, which include interim and temporary rate relief. The $74 million includes $17 million to be contributed to a low income and energy efficiency fund. The Proposal for Decision also recommended reducing our return on common equity to 11 percent, from our current 11.4 percent. OTHER CONTINGENCIES IRS AUDIT RESOLUTION: In August 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 have been using this tax accounting method, generally allowed by the IRS under section 263A of the Internal Revenue Code, with respect to the allocation of certain indirect overhead costs to the tax basis of self-constructed utility assets. In June 2006, the IRS concluded its most recent audit of CMS Energy and its subsidiaries, and proposed changes to taxable income for the years ended December 31, 1987 through December 31, 2001. The proposed overall cumulative increase to taxable income related primarily to the disallowance of the simplified service cost method with respect to certain self-constructed utility assets. CMS Energy has accepted these proposed adjustments to taxable income, which has been allocated based upon Consumers' separate taxable income in accordance with CMS Energy's tax sharing agreement. We had CE-46 Consumers Energy Company tax related payables to CMS Energy with respect to its share of audit adjustments of $232 million, and a reduction of our June 2006 income tax provision of $14 million, net of interest expense, primarily for the utilization or restoration of previously written off income tax credits. OTHER: 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. 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 following table describes our guarantees at June 30, 2006:
In Millions ---------------------------------------------------------- Issue Expiration Maximum Carrying Guarantee Description Date Date Obligation Amount - --------------------- ------------ ---------- ---------- -------- Standby letters of credit Various Various $ 41 $ - Surety bonds Various Indefinite 1 - Guarantee (a) January 1987 March 2015 85 - Nuclear insurance retrospective premiums Various Indefinite 135 -
(a) We have reached an agreement to sell our interests in the MCV Partnership and the FMLP, subject to certain regulatory and other closing conditions. The sales agreement calls for the purchaser, an affiliate of GSO Capital Partners and Rockland Capital Energy Investments to pay $85 million, subject to certain reimbursement rights, if Dow terminates an agreement under which it is provided power and steam by the MCV Partnership. The purchaser will secure their reimbursement obligation with an irrevocable letter of credit of up to $85 million. CE-47 Consumers Energy Company The following table provides additional information regarding our guarantees:
Guarantee Description How Guarantee Arose Events That Would Require Performance - --------------------- ------------------- ------------------------------------- Standby letters of credit Normal operations of coal power plants Noncompliance with environmental regulations and inadequate response to demands for corrective action Natural gas transportation Nonperformance Self-insurance requirement Nonperformance Surety bonds Normal operating activity, permits and Nonperformance licenses Guarantee Agreement to provide power and steam to MCV Partnership's nonperformance or Dow non-payment under a related contract Nuclear insurance retrospective premiums Normal operations of nuclear plants Call by NEIL and Price-Anderson Act for nuclear incident
At June 30, 2006, none of our guarantees contained provisions allowing us to recover, from third-parties, any amount paid under the guarantees. We enter into various agreements containing indemnification provisions in connection with a variety of transactions. While we are unable to estimate the maximum potential obligation related to these indemnities, we consider the likelihood that we would be required to perform or incur significant losses related to these indemnities and the guarantees listed in the preceding tables to be remote. 3: FINANCINGS AND CAPITALIZATION Long-term debt is summarized as follows:
In Millions ------------------------------------------- June 30, 2006 December 31, 2005 ------------- ----------------- First mortgage bonds $ 3,174 $ 3,175 Senior notes and other 855 852 Securitization bonds 355 369 --------- --------- Principal amounts outstanding 4,384 4,396 Current amounts (86) (85) Net unamortized discount (7) (8) --------- --------- Total Long-term debt $ 4,291 $ 4,303 ========= =========
DEBT RETIREMENTS: The following is a summary of significant long-term debt retirements during the six months ended June 30, 2006:
Principal Interest Retirement (in millions) Rate (%) Date Maturity Date ------------- -------- ---------------- ------------- Long-term debt - related parties $ 129 9.00 February 2006 June 2031
CE-48 Consumers Energy Company REGULATORY AUTHORIZATION FOR FINANCINGS: In May 2006, the FERC issued an order authorizing us to issue up to $2.0 billion of secured and unsecured short-term securities for the following purposes: - up to $1.0 billion for general corporate purposes, and - up to $1.0 billion of FMB or other securities to be issued solely as collateral for other short-term securities. Also in May 2006, the FERC issued an order authorizing us to issue up to $5.0 billion of secured and unsecured long-term securities for the following purposes: - up to $1.5 billion for general corporate purposes, - up to $1.0 billion for purposes of refinancing or refunding existing long-term debt, and - up to $2.5 billion of FMB or other securities to be issued solely as collateral for other long-term securities. Any long-term issuances during the two-year authorization period are exempt from FERC's competitive bidding and negotiated placement requirements. The authorizations are for a two-year period beginning July 1, 2006 and ending June 30, 2008. REVOLVING CREDIT FACILITIES: The following secured revolving credit facilities with banks are available at June 30, 2006:
In Millions ----------- Outstanding Amount of Amount Letters-of- Amount Company Expiration Date Facility Borrowed Credit Available ------- --------------- --------- -------- ----------- ---------- Consumers March 30, 2007 $ 300 $ - $ - $ 300 Consumers May 18, 2010 500 - 42 458 MCV Partnership August 26, 2006 50 - 2 48
In March 2006, we entered into a short-term secured revolving credit agreement with banks. This facility provides $300 million of funds for working capital and other general corporate purposes. DIVIDEND RESTRICTIONS: Under the provisions of our articles of incorporation, at June 30, 2006, we had $184 million of unrestricted retained earnings available to pay common stock dividends. Covenants in our debt facilities cap common stock dividend payments at $300 million in a calendar year. For the six months ended June 30, 2006, we paid $40 million in common stock dividends to CMS Energy. Also, the provisions of the Federal Power Act and the Natural Gas Act effectively restrict dividends to the amount of our retained earnings. CAPITAL AND FINANCE LEASE OBLIGATIONS: Our capital leases are comprised mainly of leased service vehicles, power purchase agreements, and office furniture. At June 30, 2006, capital lease obligations totaled $56 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, 2006, finance lease obligations totaled $281 million, which represents the third-party portion of the MCV Partnership's finance lease obligation. CE-49 Consumers Energy Company SALE OF ACCOUNTS RECEIVABLE: Under a revolving accounts receivable sales program, we 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 at June 30, 2006 and $325 million of receivables at December 31, 2005. 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 neither recorded a gain or loss on the receivables sold nor 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 2006 2005 - ------------------------ ------ ------ Net cash flow as a result of accounts receivable financing $ (325) $ (304) Collections from customers $3,232 $2,787
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, 2006 December 31, 2005 ----------------------------------- ----------------------------------- Fair Unrealized Fair Unrealized Cost Value Gain (Loss) Cost Value Gain (Loss) ------ ------ ----------- ------ ------ ----------- Long-term debt, $4,377 $4,214 $ 163 $4,388 $4,393 $ (5) including current amounts Long-term debt - related parties, including current amounts - - - 129 131 (2) Available-for-sale securities: Common stock of CMS Energy 10 29 19 10 33 23 SERP: Equity securities 17 23 6 16 22 6 Debt securities 8 7 (1) 8 8 - Nuclear decommissioning investments: Equity securities 135 253 118 134 252 118 Debt securities 306 303 (3) 287 291 4
In July 2006, we reached an agreement to sell Palisades and the Big Rock ISFSI to Entergy. Entergy will assume responsibility for the future decommissioning of the plant and for storage and disposal of spent nuclear fuel. Accordingly, upon completion of the sale, we will transfer $366 million of nuclear decommissioning trust fund assets to Entergy and retain $200 million. We will also be entitled to receive a return of $116 million of decommissioning trust fund assets pending either a favorable federal CE-50 Consumers Energy Company tax ruling regarding the release of the funds, or, if the funds are available, after decommissioning of the Palisades site is complete. The disposition of the retained and receivable nuclear decommissioning funds is subject to regulatory proceedings. DERIVATIVE INSTRUMENTS: In order to limit our exposure to certain market risks, we may enter into various risk management contracts, such as swaps, options, futures, and forward contracts. These contracts, used primarily to manage our exposure to changes in interest rates and commodity prices, are entered into for purposes other than trading. We enter into these contracts 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. The contracts we use to manage market risks may qualify as derivative instruments that are subject to derivative and hedge accounting under SFAS No. 133. If a contract is a derivative, it is recorded on the balance sheet at its fair value. We then adjust the resulting asset or liability each quarter to reflect any change in the market value of the contract, a practice known as marking the contract to market. If a derivative qualifies for cash flow hedge accounting treatment, the changes in fair value (gains or losses) are reported in accumulated other comprehensive income; otherwise, the changes are reported in earnings. For a derivative instrument to qualify for hedge accounting: - the relationship between the derivative instrument and the item being hedged must be formally documented at inception, - the derivative instrument must be highly effective in offsetting the hedged item's cash flows or changes in fair value, and - if hedging a forecasted transaction, the forecasted transaction must be probable. If a derivative qualifies for cash flow hedge accounting treatment and gains or losses are recorded in accumulated other comprehensive income, those gains or losses will be reclassified into earnings in the same period or periods the hedged forecasted transaction affects earnings. If a cash flow hedge is terminated early because it is determined that the forecasted transaction will not occur, any gain or loss recorded in accumulated other comprehensive income at that date is recognized immediately in earnings. If a cash flow hedge is terminated early for other economic reasons, any gain or loss as of the termination date is deferred and then reclassified to earnings when the forecasted transaction affects earnings. The ineffective portion, if any, of all hedges is recognized in earnings. To determine the fair value of our derivatives, we use information from external sources (i.e., quoted market prices and third-party valuations), if available. For certain contracts, this information is not available and we use mathematical valuation models to value our derivatives. These models require various inputs and assumptions, including commodity market prices and volatilities, as well as interest rates and contract maturity dates. The cash returns we actually realize on these contracts may vary, either positively or negatively, from the results that we estimate using these models. As part of valuing our derivatives at market, we maintain reserves, if necessary, for credit risks arising from the financial condition of our counterparties. CE-51 Consumers Energy Company The majority of our commodity purchase and sale contracts are not subject to derivative accounting under SFAS No. 133 because: - they do not have a notional amount (that is, a number of units specified in a derivative instrument, such as MW of electricity or bcf of natural gas), - they qualify for the normal purchases and sales exception, or - there is not an active market for the commodity. Our coal purchase contracts are not derivatives because there is not an active market for the coal we purchase. Similarly, our electric capacity and energy contracts are not derivatives due to the lack of an active energy market in Michigan. If active markets for these commodities develop in the future, some of these contracts may qualify as derivatives. For our coal purchase contracts, the resulting mark-to-market impact on earnings could be material. For our electric capacity and energy contracts, we believe that we would be able to apply the normal purchases and sales exception, and, therefore, would not be required to mark these contracts to market. In 2005, the MISO began operating the Midwest Energy Market. As a result, the MISO now centrally dispatches electricity and transmission service throughout much of the Midwest and provides day-ahead and real-time energy market information. At this time, we believe that the establishment of this market does not represent the development of an active energy market in Michigan, as defined by SFAS No. 133. However, as the Midwest Energy Market matures, we will continue to monitor its activity level and evaluate whether or not an active energy market may exist in Michigan. Derivative accounting is required for certain contracts used to limit our exposure to commodity price risk. The following table summarizes our derivative instruments:
In Millions ----------------------------------------------------------------------- June 30, 2006 December 31, 2005 ------------------------------- ---------------------------------- Fair Unrealized Fair Unrealized Derivative Instruments Cost Value Gain Cost Value Gain (Loss) - ---------------------- ---- ----- ---------- ----- ----- ----------- Gas supply option contracts $- $ - $ - $ 1 $ (1) $ (2) FTRs - 1 1 - 1 1 Derivative contracts associated with the MCV Partnership: Long-term gas contracts (a) - 59 59 - 205 205 Gas futures, options, and swaps (a) - 121 121 - 223 223
(a) The fair value of the MCV Partnership's long-term gas contracts and gas futures, options, and swaps has decreased significantly from December 31, 2005 due to a decrease in natural gas prices since that time. The decrease is partly also the result of the normal reversal of such derivative assets. As gas has been purchased under the long-term gas contracts and the gas futures, options, and swap contracts have been settled, the fair value of the contracts has decreased. We record the fair value of our derivative contracts in Derivative instruments, Other assets, or Other liabilities on our Consolidated Balance Sheets. GAS SUPPLY OPTION 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 CE-52 Consumers Energy Company gas to our customers at a reasonable and prudent cost. As part of the GCR process, the mark-to-market gains and losses associated with these options are reported directly in earnings as part of Other income, and then immediately reversed out of earnings and recorded on the balance sheet as a regulatory asset or liability. FTRs: With the establishment of the Midwest Energy Market, FTRs were established. FTRs are financial instruments that manage price risk related to electricity transmission congestion. An FTR entitles its holder to receive compensation (or, conversely, to remit payment) for congestion-related transmission charges. FTRs are marked-to-market each quarter, with changes in fair value reported to earnings as part of Other income. DERIVATIVE CONTRACTS ASSOCIATED WITH THE MCV PARTNERSHIP: Long-term gas contracts: The MCV Partnership uses long-term gas contracts to purchase and manage the cost of the natural gas it needs to generate electricity and steam. The MCV Partnership believes that certain of these contracts qualify as normal purchases under SFAS No. 133. Accordingly, we have not recognized these contracts at fair value on our Consolidated Balance Sheets at June 30, 2006. The MCV Partnership also holds certain long-term gas contracts that do not qualify as normal purchases because these contracts contain volume optionality. In addition, as a result of implementing the RCP in 2005, a significant portion of long-term gas contracts no longer qualify as normal purchases, because the gas will not be used to generate electricity or steam. Accordingly, all of these contracts are accounted for as derivatives, with changes in fair value recorded in earnings each quarter. For further details on the RCP, see Note 2, Contingencies, "Other Electric Contingencies - The Midland Cogeneration Venture." For the six months ended June 30, 2006, we recorded a $145 million loss, before considering tax effects and minority interest, associated with the decrease in fair value of these long-term gas contracts. This loss is included in the total Fuel costs mark-to-market at the MCV Partnership on our Consolidated Statements of Income. Because of the volatility of the natural gas market, the MCV Partnership expects future earnings volatility on these contracts, since gains and losses will be recorded each quarter. We will continue to record these gains and losses in our consolidated financial statements until we close the sale of our interest in the MCV Partnership. We have recorded derivative assets totaling $59 million associated with the fair value of long-term gas contracts on our Consolidated Balance Sheets at June 30, 2006. The MCV Partnership expects almost all of these assets, which represent cumulative net mark-to-market gains, to reverse as losses through earnings during 2006 and 2007 as the gas is purchased, with the remainder reversing between 2008 and 2011. As the MCV Partnership recognizes future losses from the reversal of these derivative assets, we will continue to assume a portion of the limited partners' share of those losses, in addition to our proportionate share, but only until we close the sale of our interest in the MCV Partnership. At the closing of this sale, these assets, which represent cumulative net mark-to-market gains, will be sold in conjunction with the sale of our interest. Also at the closing, we will record any additional mark-to-market gains or losses associated with the long-term gas contracts and recognize the changes in fair value in earnings. Any such changes in the fair value of these contracts recognized before the closing will not affect the purchase price of our ownership interest in the MCV Partnership. After the closing of the sale, we will no longer record the fair value of these long-term gas contracts on our Consolidated Balance Sheets and will not be required to recognize gains or losses related to changes in the fair value of these contracts on our Consolidated Statements of Income. For further details on the sale of our interest in the MCV Partnership, see Note 2, Contingencies, "Other Electric Contingencies - The Midland Cogeneration Venture." CE-53 Consumers Energy Company Gas Futures, Options, and Swaps: The MCV Partnership enters into natural gas futures, options, and over-the-counter swap transactions in order to hedge against unfavorable changes in the market price of natural gas. The MCV Partnership uses these financial instruments to: - ensure an adequate supply of natural gas for the projected generation and sales of electricity and steam, and - manage price risk by fixing the price to be paid for natural gas on some of its long-term gas contracts. At June 30, 2006, the MCV Partnership held natural gas futures, options, and swaps. We have recorded a net derivative asset amount of $121 million on our Consolidated Balance Sheets at June 30, 2006 associated with the fair value of these contracts. Certain of the futures and swaps qualify for cash flow hedge accounting and we record our proportionate share of their mark-to-market gains and losses in Accumulated other comprehensive income. The remaining contracts are not cash flow hedges and their mark-to-market gains and losses are recorded to earnings. Those contracts that qualify as cash flow hedges represent assets of $122 million of the net $121 million derivative assets recorded on our Consolidated Balance Sheets. We have recorded a cumulative net gain of $39 million, net of tax and minority interest, in Accumulated other comprehensive income at June 30, 2006, representing our proportionate share of the cash flow hedges held by the MCV Partnership. If we have not closed the sale of our interest in the MCV Partnership within the next 12 months, we can expect to reclassify $17 million of this balance, net of tax and minority interest, as an increase to earnings as the contracts settle, offsetting the costs of gas purchases. There was no ineffectiveness associated with any of these cash flow hedges. The remaining futures, options, and swap contracts, representing derivative liabilities of $1 million, do not qualify as cash flow hedges. The futures and swap contracts were previously accounted for as cash flow hedges. Since the RCP was implemented in 2005, these instruments no longer qualify for cash flow hedge accounting and we record any changes in their fair value in earnings each quarter. The MCV Partnership expects almost all of these derivative liabilities to be realized during 2006 as the contracts settle, with the remainder to be realized during 2007. For further details on the RCP, see Note 2, Contingencies, "Other Electric Contingencies - The Midland Cogeneration Venture." For the six months ended June 30, 2006, we recorded a $53 million loss, before considering tax effects and minority interest, associated with the decrease in fair value of these instruments. This loss is included in the total Fuel costs mark-to-market at the MCV Partnership on our Consolidated Statements of Income. Because of the volatility of the natural gas market, the MCV Partnership expects future earnings volatility on these contracts, since gains and losses will be recorded each quarter. We will continue to record these gains and losses in our consolidated financial statements until we close the sale of our interest in the MCV Partnership. In conjunction with the sale of our interest in the MCV Partnership, all of the futures, options, and swaps will be sold. At the closing of this sale, we will record any additional mark-to-market gains or losses associated with these contracts and recognize the changes in fair value in Accumulated other comprehensive income or earnings, accordingly. Any such changes in the fair value of these contracts recognized before the closing will not affect the purchase price of our ownership interest in the MCV Partnership. Then, for those futures and swaps that qualify as cash flow hedges, the related balance of net cumulative gains recorded in Accumulated other comprehensive income will be reclassified and recognized in earnings. After the sale of these assets, we will no longer record the fair value of these contracts on our Consolidated Balance Sheets and will not be required to CE-54 Consumers Energy Company recognize gains or losses related to changes in the fair value of these contracts on our Consolidated Statements of Income. For additional details on the sale of our interest in the MCV Partnership, see Note 2, Contingencies, "Other Electric Contingencies -- The Midland Cogeneration Venture." CREDIT RISK: Our swaps and forward contracts contain credit risk, which is the risk that counterparties will fail to perform their contractual obligations. We reduce this risk through established credit policies. For each counterparty, we assess credit quality by using credit ratings, financial condition, and other available information. We then establish a credit limit for each counterparty based upon our evaluation of credit quality. We monitor the degree to which we are exposed to potential loss under each contract and take remedial action, if necessary. The MCV Partnership enters into contracts primarily with companies in the electric and gas industry. This industry concentration may have an impact on our exposure to credit risk, either positively or negatively, based on how these counterparties are affected by similar changes in economic conditions, the weather, or other conditions. The MCV Partnership typically uses industry-standard agreements that allow for netting positive and negative exposures associated with the same counterparty, thereby reducing exposure. These contracts also typically provide for the parties to demand adequate assurance of future performance when there are reasonable grounds for doing so. The following table illustrates our exposure to potential losses at June 30, 2006, if each counterparty within this industry concentration failed to perform its contractual obligations. This table includes contracts accounted for as financial instruments. It does not include trade accounts receivable, derivative contracts that qualify for the normal purchases and sales exception under SFAS No. 133, or other contracts that are not accounted for as derivatives.
In Millions --------------------------------------------------------------------------------------- Net Exposure Net Exposure Exposure from Investment from Investment Before Collateral Net Grade Grade Collateral (a) Held (b) Exposure Companies (c) Companies (%) -------------- ---------- -------- --------------- --------------- MCV Partnership $181 $96 $85 $82 96
(a) Exposure is reflected net of payables or derivative liabilities if netting arrangements exist. (b) Collateral held includes cash and letters of credit received from counterparties. (c) The remaining balance of our net exposure was from independent natural gas producers/suppliers that do not have published credit ratings. Based on our credit policies and our current exposures, we do not expect a material adverse effect on our financial position or future earnings as a result of counterparty nonperformance. CE-55 Consumers Energy Company 5: RETIREMENT BENEFITS We provide retirement benefits to our employees under a number of different plans, including: - a non-contributory, defined benefit Pension Plan, - a cash balance pension plan for certain employees hired between July 1, 2003 and August 31, 2005, - a DCCP for employees hired on or after September 1, 2005, - benefits to certain management employees under SERP, - a defined contribution 401(k) Savings Plan, - benefits to a select group of management under the EISP, and - health care and life insurance benefits under OPEB. Pension Plan: The Pension Plan includes funds for most of our current employees, our non-utility affiliates, and Panhandle, a former affiliate. The Pension Plan's assets are not distinguishable by company. Effective January 11, 2006, the MPSC electric rate order authorized us to include $33 million of electric pension expense in our electric rates. Due to the volatility of these particular costs, the order also established a pension equalization mechanism to track actual costs. If actual pension expenses are greater than the $33 million included in electric rates, the difference will be recognized as a regulatory asset for future recovery from customers. If actual pension expenses are less than the $33 million included in electric rates, the difference will be recognized as a regulatory liability, and refunded to our customers. The difference between pension expense allowed in our electric rates and pension expense under SFAS No. 87 resulted in a net reduction in pension expense of $2 million for the three months ended June 30, 2006 and $5 million for the six months ended June 30, 2006. We have established a corresponding regulatory asset of $5 million. OPEB: Effective January 11, 2006, the MPSC electric rate order authorized us to include $28 million of electric OPEB expense in our electric rates. Due to the volatility of these particular costs, the order also established an OPEB equalization mechanism to track actual costs. If actual OPEB expenses are greater than the $28 million included in electric rates, the difference will be recognized as a regulatory asset for future recovery from our customers. If actual OPEB expenses are less than the $28 million included in electric rates, the difference will be recognized as a regulatory liability, and refunded to our customers. The difference between OPEB expense allowed in our electric rates and OPEB expense under SFAS No. 106 resulted in a $1 million net reduction in OPEB expense for the three months and the six months ended June 30, 2006. We have established a corresponding regulatory asset of $1 million. CE-56 Consumers Energy Company Costs: The following table recaps the costs incurred in our retirement benefits plans:
In Millions --------------------------------------------- Pension --------------------------------------------- Three Months Ended Six Months Ended ------------------- ------------------- June 30 2006 2005 2006 2005 - --------------------------------------------- ------ ------ ------ ------ Service cost $ 11 $ 14 $ 23 $ 23 Interest expense 20 27 39 45 Expected return on plan assets (20) (35) (40) (58) Amortization of: Net loss 10 7 20 14 Prior service cost 2 2 4 3 ------ ------ ------ ------ Net periodic cost 23 15 46 27 Regulatory adjustment (2) - (5) - ------ ------ ------ ------ Net periodic cost after regulatory adjustment $ 21 $ 15 $ 41 $ 27 ====== ====== ====== ======
In Millions --------------------------------------------- OPEB --------------------------------------------- Three Months Ended Six Months Ended ------------------- ------------------- June 30 2006 2005 2006 2005 - ------- ------ ------ ------ ------ Service cost $ 6 $ 5 $ 12 $ 10 Interest expense 16 15 32 30 Expected return on plan assets (15) (13) (29) (26) Amortization of: Net loss 5 5 10 10 Prior service cost (2) (2) (5) (4) ------ ------ ------ ------ Net periodic cost 10 10 20 20 Regulatory adjustment (1) - (1) - ------ ------ ------ ------ Net periodic cost after regulatory adjustment $ 9 $ 10 $ 19 $ 20 ====== ====== ====== ======
SERP: On April 1, 2006, we implemented a Defined Contribution Supplemental Executive Retirement Plan (DC SERP) and froze further new participation in the defined benefit SERP. The DC SERP provides promoted and newly hired participants benefits ranging from 5 to 15 percent of total compensation. The DC SERP requires a minimum of five years of participation before vesting. Our contributions to the plan, if any, will be placed in a grantor trust. For the six months ended June 30, 2006, no contributions were made to the plan. MCV: 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 three months and six months ended June 30, 2006 and 2005 was less than $1 million. CE-57 Consumers Energy Company 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. 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 $25 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 or associated obligations related to potential future abandonment. 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 include use of decommissioning studies that largely utilize third-party cost estimates. FASB INTERPRETATION NO. 47, ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS: This Interpretation clarified 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. We determined that abatement of asbestos included in our plant investments qualifies as a conditional ARO, as defined by FASB Interpretation No. 47. The following tables describe our assets that have legal obligations to be removed at the end of their useful life:
June 30, 2006 In Millions - --------------------------------------------------------------------------------------------------------------------- In Service Trust ARO Description Date Long Lived Assets Fund - --------------- ---- ----------------- ---- Palisades - decommission plant site 1972 Palisades nuclear plant $551 Big Rock - decommission plant site 1962 Big Rock nuclear plant 12 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 - Asbestos abatement 1973 Electric and gas utility plant -
CE-58 Consumers Energy Company
In Millions ------------------------------------------------------------------------------ ARO ARO Liability Cash flow Liability ARO Description 12/31/05 Incurred Settled (a) Accretion Revisions 6/30/06 - --------------- -------- -------- ----------- --------- --------- ------- Palisades - decommission $375 $ - $- $12 $ - $387 Big Rock - decommission 27 - (15) 2 - 14 JHCampbell intake line - - - - - - Coal ash disposal areas 54 - (1) 2 - 55 Wells at gas storage fields 1 - - - - 1 Indoor gas services relocations 1 - - - - 1 Asbestos abatement 36 - (2) 1 - 35 ---- --- ---- --- --- ---- Total $494 $ - $(18) $17 $ - $493 ==== === ==== === === ====
(a) These cash payments are included in the Other current and non-current liabilities line in Net cash provided by operating activities on our Consolidated Statements of Cash Flows. Cash payments for the six months ended June 30, 2005 were $26 million. In October 2004, the MPSC initiated a generic proceeding to review SFAS No. 143, FERC Order No. 631, Accounting, Financial Reporting, and Rate Filing Requirements for Asset Retirement Obligations, and related accounting and ratemaking issues for MPSC-jurisdictional electric and gas utilities. In December 2005, the ALJ issued a Proposal for Decision recommending that the MPSC dismiss the proceeding. In March 2006, the MPSC remanded the case to the ALJ for findings and recommendations. We consider the proceeding a clarification of accounting and reporting issues that relate to all Michigan utilities. We cannot predict the outcome of the proceeding. 7: EXECUTIVE INCENTIVE COMPENSATION We provide a Performance Incentive Stock Plan (the Plan) to key employees and non-employee directors based on their contributions to the successful management of the company. The Plan has a five-year term, expiring in May 2009. All grants awarded under the Plan for the six months ended June 30, 2006 and in 2005 were in the form of restricted stock. Restricted stock awards are outstanding shares to which the recipient has full voting and dividend rights and vest 100 percent after three years of continued employment. Restricted stock awards granted to officers in 2005 and 2004 are also subject to the achievement of specified levels of total shareholder return, including a comparison to a peer group of companies. All restricted stock awards are subject to forfeiture if employment terminates before vesting. However, if certain minimum service requirements are met, restricted shares may continue to vest upon retirement or disability and vest fully if control of CMS Energy changes, as defined by the Plan. The Plan also allows for the following types of awards: - stock options, - stock appreciation rights, - phantom shares, and - performance units. For the six months ended June 30, 2006 and for the year ended 2005, we did not grant any of these types of awards. CE-59 Consumers Energy Company Select participants may elect to receive all or a portion of their incentive payments under the Officer's Incentive Compensation Plan in the form of cash, shares of restricted common stock, shares of restricted stock units, or any combination of these. These participants may also receive awards of additional restricted common stock or restricted stock units, provided the total value of these additional grants does not exceed $2.5 million for any fiscal year. Shares awarded or subject to stock options, phantom shares, and performance units may not exceed 6 million shares from June 2004 through May 2009, nor may such awards to any participant exceed 250,000 shares in any fiscal year. We may issue awards of up to 4,906,300 shares of common stock under the Plan at June 30, 2006. Shares for which payment or exercise is in cash, as well as shares or stock options that are forfeited, may be awarded or granted again under the Plan. SFAS NO. 123(R) AND SAB NO. 107, SHARE-BASED PAYMENT: SFAS No. 123(R) was effective for us on January 1, 2006. SFAS No. 123(R) 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 value over the required service period of the awards. As a result, future compensation costs for share-based awards with accelerated service provisions upon retirement will need to be fully expensed by the period in which the employee becomes eligible to retire. At January 1, 2006, unrecognized compensation cost for such share-based awards held by retirement-eligible employees was not material. We elected to adopt the modified prospective method recognition provisions of this Statement instead of retrospective restatement. The modified prospective method applies the recognition provisions to all awards granted or modified after the adoption date of this Statement. We adopted the fair value method of accounting for share-based awards effective December 2002. Therefore, SFAS No. 123(R) did not have a significant impact on our results of operations when it became effective. The SEC issued SAB No. 107 to express the views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations. Also, the SEC issued SAB No. 107 to provide the staff's views regarding the valuation of share-based payments, including assumptions such as expected volatility and expected term. We applied the additional guidance provided by SAB No. 107 upon implementation of SFAS No. 123(R) with no impact on our consolidated results of operations. The following table summarizes restricted stock activity under the Plan:
Weighted- Average Grant Restricted Stock Number of Shares Date Fair Value - ---------------- ---------------- --------------- Nonvested at December 31, 2005 1,141,316 $10.84 Granted 43,330 $12.98 Vested (10,000) $ 6.23 Forfeited - - --------- ------ Nonvested at June 30, 2006 1,174,646 $10.96 ========= ======
The total fair value of shares vested was less than $1 million for the six months ended June 30, 2006 and 2005. CE-60 Consumers Energy Company We calculate the fair value of restricted shares granted based on the price of our common stock on the grant date and expense the fair value over the required service period. Total compensation cost recognized in income related to restricted stock was $2 million for the six months ended June 30, 2006 and $1 million for the six months ended June 30, 2005. The total related income tax benefit recognized in income was $1 million for the six months ended June 30, 2006 and less than $1 million for the six months ended June 30, 2005. At June 30, 2006, there was $7 million of total unrecognized compensation cost related to restricted stock. We expect to recognize this cost over a weighted-average period of 2.0 years. The following table summarizes stock option activity under the Plan:
Weighted- Options Weighted- Average Aggregate Outstanding, Average Remaining Intrinsic Fully Vested, Exercise Contractual Value Stock Options and Exercisable Price Term (In Millions) - ------------- --------------- --------- ----------- ------------- Outstanding at December 31, 2005 1,714,787 $18.13 5.9 years $ (6) Granted - - Exercised (14,000) 6.35 Cancelled or Expired - - --------- ------ --------- ---- Outstanding at June 30, 2006 1,700,787 $18.22 5.4 years $ (9) ========= ====== ========= ====
Stock options give the holder the right to purchase common stock at a price equal to the fair value of our common stock on the grant date. Stock options are exercisable upon grant, and expire up to 10 years and one month from the grant date. We issue new shares when participants exercise stock options. The total intrinsic value of stock options exercised was less than $1 million for the six months ended June 30, 2006 and $1 million for the six months ended June 30, 2005. Cash received from exercise of these stock options was less than $1 million for the six months ended June 30, 2006 and $1 million for the six months ended June 30, 2005. Since we have utilized tax loss carryforwards, we were not able to realize the excess tax benefits upon exercise of stock options. Therefore, we did not recognize the related excess tax benefits in equity. CE-61 Consumers Energy Company 8: REPORTABLE SEGMENTS Our reportable segments are strategic business units organized and managed by the nature of the products and services each provides. We evaluate performance based upon the net income of each segment. We operate principally in two segments: electric utility and gas utility. The following table shows our financial information by reportable segment:
In Millions ------------------------------------------------ Three Months Ended Six Months Ended -------------------- --------------------- June 30 2006 2005 2006 2005 - ------- ---- ---- ---- ---- Operating revenue Electric $ 791 $ 649 $ 1,520 $ 1,277 Gas 334 355 1,375 1,347 Other 13 12 25 24 ------- ------- ------- ------- Total Operating Revenue $ 1,138 $ 1,016 $ 2,920 $ 2,648 ======= ======= ======= ======= Net income available to common stockholder Electric $ 37 $46 $ 66 $79 Gas (3) (3) 34 55 Other 1 (11) (55) 55 ------- ------- ------- ------- Total Net Income Available to Common Stockholder $ 35 $ 32 $ 45 $ 189 ======= ======= ======= =======
In Millions ----------------------------------------- June 30, 2006 December 31, 2005 ------------- ----------------- Assets Electric (a) $ 7,925 $7,743 Gas (a) 3,503 3,600 Other 1,560 1,814 -------- -------- Total Assets $ 12,988 $ 13,157 ======== ========
(a) Amounts include a portion of our other common assets attributable to both the electric and gas utility businesses. CE-62 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, due to the fact that the material weakness in CMS Energy's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in its 2005 Form 10-K, has not had adequate testing to confirm evidence of remediation, its disclosure controls and procedures were not effective at June 30, 2006. Management continues to validate the remedial actions it has taken to correct the income tax-related material weakness identified in CMS Energy's 2005 Form 10-K. Management believes it has implemented the necessary processes and procedures to overcome the material weakness relating to income taxes; however, these processes and procedures, and correlating controls, have not been in place for an adequate period of time to conclude that the material weakness has been remediated at June 30, 2006. Management will continue to monitor and test the continuous effectiveness of these controls and procedures and make appropriate modifications, as necessary. Management believes that the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, CMS Energy's financial condition, results of operations and cash flows for the periods presented. 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. CO-1 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 Form 10-K/A Amendment No. 1 and Consumers' Form 10-K for the year ended December 31, 2005 and Forms 10-Q for the quarter ended March 31, 2006. Reference is also made to the CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, in particular, Note 2, 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. CMS ENERGY SEC REQUEST On August 5, 2004, CMS Energy received a request from the SEC that CMS Energy voluntarily produce documents and data relating to the SEC's inquiry into payments made to the 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. The SEC subsequently issued a formal order of private investigation on this matter 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 is cooperating and has been and will continue to produce documents responsive to the subpoena. GAS INDEX PRICE REPORTING LITIGATION CMS MST and CMS Field Services (which was sold to Cantera Natural Gas, LLC and for which CMS Energy has indemnification obligations) were defendants in a consolidated class action lawsuit filed in the United States District Court for the Southern District of New York. Cornerstone Propane Partners, L.P. filed the original complaint in August 2003 as a putative class action and it was later consolidated with two similar complaints filed by other plaintiffs. The amended consolidated complaint, filed in January 2004, alleged that false natural gas price reporting by the defendants manipulated the prices of NYMEX natural gas futures and options. The complaint contained two counts under the Commodity Exchange Act, one for manipulation and one for aiding and abetting violations. On May 24, 2006, the judge entered a Final Judgment and Order of Dismissal approving settlements between plaintiffs and various defendants, including CMS MST and CMS Field Services. The settlement agreement required a $6.975 million cash payment that CMS MST was responsible to pay. The payment was made into a settlement fund that will be used to pay the class members as well as any legal fees awarded to plaintiffs' attorneys. CMS Energy had established a reserve for this amount in the fourth quarter of 2005. 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. The court issued an order granting the motion to dismiss on December 19, 2005 and entered judgment in favor of defendants on December 23, 2005. Plaintiffs have appealed the dismissal to the Ninth Circuit Court of Appeals. 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 CO-3 court complaints involving price reporting were coordinated as Natural Gas Antitrust Cases V. Plaintiffs 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 August 10, 2005, certain defendants, including CMS MST, filed a motion to dismiss and CMS Energy and CMS Field Services filed a motion to dismiss for lack of personal jurisdiction. Defendants attempted to remove the case to federal court, but it was remanded to state court by a federal judge. Plaintiffs have opposed the motions to dismiss and they remain pending. On November 20, 2005, CMS MST was served with a summons and complaint which named CMS Energy, CMS MST and CMS Field Services as defendants in a new putative class action filed in Kansas state court, Learjet, Inc., et al. v. Oneok, Inc., et al. Similar to the other actions that have been filed, the complaint alleges that during the putative class period, January 1, 2000 through October 31, 2002, defendants engaged in a scheme to violate the Kansas Restraint of Trade Act by knowingly reporting false or inaccurate information to the publications, thereby affecting the market price of natural gas. Plaintiffs, who allege they purchased natural gas from defendants and others for their facilities, are seeking statutory full consideration damages consisting of the full consideration paid by plaintiffs for natural gas. On December 7, 2005, the case was removed to the United States District Court for the District of Kansas and later that month a motion was filed to transfer the case to the MDL proceeding. On January 6, 2006, plaintiffs filed a motion to remand the case to Kansas state court. On January 23, 2006, a conditional transfer order transferring the case to the MDL proceeding was issued. On February 7, 2006, plaintiffs filed an opposition to the conditional transfer order. Breckenridge Brewery of Colorado, LLC and BBD Acquisition Co. v. Oneok, Inc., et al., a class action complaint brought on behalf of retail direct purchasers of natural gas in Colorado, was filed in Colorado state court in May 2006. Defendants, including CMS Energy, CMS Field Services, and CMS MST are alleged to have violated the Colorado Antitrust Act of 1992 in connection with their natural gas price reporting activities. Plaintiffs are seeking full refund damages. 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. The cases were consolidated into a single lawsuit, which 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 CO-4 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, the court granted a motion to dismiss Consumers and three of the individual defendants, but denied the motions to dismiss CMS Energy and the 13 remaining individual defendants. The court issued an opinion and order dated March 24, 2006, granting in part and denying in part plaintiffs' amended motion for class certification. The court conditionally certified a class consisting of "all persons who purchased CMS Common Stock during the period of October 25, 2000 through and including May 17, 2002 and who were damaged thereby." The court excluded purchasers of CMS Energy's 8.75 percent Adjustable Convertible Trust Securities ("ACTS") from the class. Trial has been scheduled for March 2007. In response to the court's opinion and order excluding purchasers of ACTS from the shareholder class, a new class action lawsuit was filed on behalf of ACTS purchasers. The new lawsuit names the same defendants as the shareholder action and contains essentially the same allegations and class period. CMS Energy and the individual defendants will defend themselves vigorously in this litigation but cannot predict its outcome. ERISA LAWSUITS CMS Energy was a named defendant, along with Consumers, CMS MST, and certain named and unnamed officers and directors, in two lawsuits, filed in July 2002 in United States District Court for the Eastern District of Michigan, brought as purported class actions on behalf of participants and beneficiaries of the CMS Employees' Savings Plan (the Plan). Plaintiffs alleged breaches of fiduciary duties under ERISA and sought 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, as well as other equitable relief and legal fees. On March 1, 2006, CMS Energy and Consumers reached an agreement, subject to court and independent fiduciary approval, to settle the lawsuits. The settlement agreement required a $28 million cash payment by CMS Energy's primary insurer to be used to pay Plan participants and beneficiaries for alleged losses, as well as any legal fees and expenses. In addition, CMS Energy agreed to certain other steps regarding administration of the Plan. The hearing on final approval of the settlement was held on June 15, 2006. On June 27, 2006, the judge entered the Order and Final Judgment, approving the proposed settlement with minor modifications. 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 1A. RISK FACTORS Other than discussed below, there have been no material changes to the Risk Factors as previously disclosed in CMS Energy's Form 10-K/A Amendment No. 1 and Consumers' Form 10-K for the year ended December 31, 2005 and CMS Energy's and Consumers' Forms 10-Q for the quarter ended March 31, 2006. CO-5 RISKS RELATED TO CMS ENERGY CMS ENERGY'S NATURAL GAS PIPELINE AND ELECTRIC GENERATION PROJECT LOCATED IN ARGENTINA AND CHILE MAY BE NEGATIVELY IMPACTED BY ARGENTINE GOVERNMENTAL RESTRICTIONS PLACED ON NATURAL GAS EXPORTS TO CHILE. On March 24, 2004, the Argentine government authorized the restriction of exports of natural gas to Chile, giving priority to domestic demand in Argentina. This restriction has had a detrimental effect on GasAtacama's earnings since GasAtacama's gas-fired electric generating plant is located in Chile and uses Argentine gas for fuel. From April through December 2004, Bolivia agreed to export 4 million cubic meters of gas per day to Argentina, which allowed Argentina to minimize its curtailments to Chile. Argentina and Bolivia extended the term of that agreement through December 31, 2006. With the Bolivian gas supply, Argentina relaxed its export restrictions to GasAtacama, allowing GasAtacama to receive approximately 50 percent of its contracted gas quantities at its electric generating plant. On May 1, 2006, the Bolivian government announced its intention to nationalize the natural gas industry and raise prices under its existing gas export contracts. Since May, gas flow from Bolivia has been restricted as Argentina and Bolivia have been renegotiating the price for gas. Simultaneously, gas supply to GasAtacama has been further curtailed. In July 2006, Argentina agreed to increase the price it pays for gas from Bolivia through the term of the existing contract, December 31, 2006. Concurrently, Argentina announced that it would recover all of this price increase by a special tax on its gas exports. The decision of Argentina to pass all of these increased costs to exports in addition to maintaining the current curtailment scheme, has increased the risk and cost of GasAtacama's fuel supply. CMS Energy is analyzing this situation to determine what effect these actions may have on the value of its investment in GasAtacama, but at this time cannot determine the effect. If an appropriate resolution of this issue is not reached, it could result in an impairment of our investment in GasAtacama. At June 30, 2006, the carrying value of CMS Energy's investment in GasAtacama was $361 million. RISKS RELATED TO CMS ENERGY AND CONSUMERS CMS ENERGY AND CONSUMERS MAY BE NEGATIVELY IMPACTED BY THE RESULTS OF AN EMPLOYEE BENEFIT LAWSUIT. CMS Energy was a named defendant, along with Consumers, CMS MST, and certain named and unnamed officers and directors, in two lawsuits, filed in July 2002 in United States District Court for the Eastern District of Michigan, brought as purported class actions on behalf of participants and beneficiaries of the CMS Employees' Savings Plan (the Plan). Plaintiffs alleged breaches of fiduciary duties under ERISA and sought 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, as well as other equitable relief and legal fees. On March 1, 2006, CMS Energy and Consumers reached an agreement, subject to court and independent fiduciary approval, to settle the lawsuits. The settlement agreement required a $28 million cash payment by CMS Energy's primary insurer to be used to pay Plan participants and beneficiaries for alleged losses, as well as any legal fees and expenses. In addition, CMS Energy agreed to certain other steps regarding administration of the Plan. The hearing on final approval of the settlement was held on June 15, 2006. On June 27, 2006, the judge entered the Order and Final Judgment, approving the proposed settlement with minor modifications. With the conclusion of this matter, there is no further risk to CMS Energy and Consumers. CONSUMERS' OWNERSHIP OF A NUCLEAR GENERATING FACILITY CREATES RISK RELATING TO NUCLEAR ENERGY. Consumers owns the Palisades nuclear power plant and is, therefore, subject to the risks of nuclear generation, including the risks associated with the operation of plant facilities and the storage and disposal CO-6 of spent fuel and other radioactive waste. The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of non-compliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. In addition, if a serious nuclear incident were to occur at Consumers' plant, it could harm Consumers' results of operations and financial condition. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit. In July 2006, Consumers reached an agreement to sell the Palisades nuclear plant to Entergy for $380 million. Consumers also signed a 15-year power purchase agreement for 100 percent of the plant's current electric output. We are targeting to close the sale in the first quarter of 2007. The sale will result in an immediate reduction in our nuclear operating and decommissioning risk. CONSUMERS CURRENTLY UNDERRECOVERS IN ITS RATES ITS PAYMENTS TO THE MCV PARTNERSHIP FOR CAPACITY AND ENERGY, AND IS ALSO EXPOSED TO FUTURE CHANGES IN THE MCV PARTNERSHIP'S FINANCIAL CONDITION THROUGH ITS EQUITY AND LESSOR INVESTMENTS. 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. 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. Historically high natural gas prices have caused the MCV Partnership to reevaluate the economics of operating the MCV Facility and to record an impairment charge in 2005. If natural gas prices remain at present levels or increase, the operations of the MCV Facility would be adversely affected and could result in the MCV Partnership failing to meet its obligations under the sale and leaseback transactions and other contracts. We are evaluating various alternatives in order to develop a new long-term strategy with respect to the MCV Facility. Further, the cost that we incur under the MCV PPA exceeds the recovery amount allowed by the MPSC. As a result, we estimate cash underrecoveries of capacity and fixed energy payments of $55 million in 2006 and $39 million in 2007. However, Consumers' direct savings from the RCP, after allocating a portion to customers, are used to offset a portion of our capacity and fixed energy underrecoveries expense. 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 the MCV Partnership's financial performance, 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. If we are successful in exercising the regulatory out clause, the MCV Partnership has the right to terminate the MCV PPA. The MPSC's future actions on the capacity and fixed energy payments recoverable from customers subsequent to September 15, 2007 may affect negatively the financial performance of the MCV Partnership. In January 2005, Consumers 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 CO-7 RCP case filed for rehearing of the MPSC order approving the RCP. The Attorney General also filed an appeal with the Michigan Court of Appeals. Consumers cannot predict the outcome of these matters. CMS Energy and Consumers cannot estimate, at this time, the impact of these issues on Consumers' future earnings or cash flow from its interest in the MCV Partnership. The ability to develop a new long-term strategy with respect to the MCV Facility, the future price of natural gas and an MPSC decision related to Consumers' recovery of capacity payments are the three most significant variables in the analysis of the MCV Partnership's future financial performance. It is not presently possible to predict the future price of natural gas, or the actions of the MPSC in 2007 or later. For these reasons, at this time CMS Energy and Consumers cannot predict the impact of these issues on Consumers' future earnings or cash flows or on the value of its equity interest in the MCV Partnership and CMS Energy's lessor interest in the FMLP. In July 2006, we reached an agreement to sell 100 percent of the stock of CMS Midland, Inc. and CMS Midland Holdings Company to an affiliate of GSO Capital Partners and Rockland Capital Energy Investments for $60.5 million. These Consumers' subsidiaries hold our interest in the MCV Partnership and the FMLP. We are targeting to close on the sale by the end of 2006. The sale will result in reduced exposure to sustained high natural gas prices. 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 19, 2006, the CMS Energy shareholders voted upon two proposals, as follows: o 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, 2006, with a vote of 185,968,036 shares in favor, 807,698 against and 1,369,527 abstentions; and o Election of eleven 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 183,831,106 4,316,601 188,147,707 Jon E. Barfield 182,673,024 5,474,683 188,147,707 Richard M. Gabrys 183,863,009 4,284,698 188,147,707 David W. Joos 182,597,983 5,549,724 188,147,707 Philip R. Lochner, Jr. 182,245,636 5,902,071 188,147,707 Michael T. Monahan 180,418,128 7,729,579 188,147,707 Joseph F. Paquette, Jr. 181,141,145 7,006,562 188,147,707 Percy A. Pierre 181,914,512 6,233,195 188,147,707 Kenneth L. Way 181,075,586 7,072,121 188,147,707 Kenneth Whipple 182,847,974 5,299,733 188,147,707 John B. Yasinsky 181,992,749 6,154,958 188,147,707
CO-8 CONSUMERS Consumers did not solicit proxies for the matters submitted to votes at the contemporaneous May 19, 2006 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 2007 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 15, 2006. In any event, if CMS Energy has not received written notice of any matter to be proposed at that meeting by February 28, 2007, 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 (10)(a) Asset Sale Agreement dated as of July 11, 2006 by and among Consumers Energy Company as Seller and Entergy Nuclear Palisades, LLC as Buyer (10)(b) Palisades Nuclear Power Plant Power Purchase Agreement dated as of July 11, 2006 between Entergy Nuclear Palisades, LLC and Consumers Energy Company (10)(c) Stock Purchase Agreement dated as of July 24, 2006 by and among Consumers Energy Company, CMS Midland, Inc., CMS Midland Holdings Company, and MCV Power Partners, Inc. (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 CO-9 (32)(b) Consumers Energy Company's certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 CO-10 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, 2006 By: /s/ Thomas J. Webb ------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer CONSUMERS ENERGY COMPANY (Registrant) Dated: August 4, 2006 By: /s/ Thomas J. Webb ------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer CO-11 CMS ENERGY AND CONSUMERS EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- (10)(a) Asset Sale Agreement dated as of July 11, 2006 by and among Consumers Energy Company as Seller and Entergy Nuclear Palisades, LLC as Buyer (10)(b) Palisades Nuclear Power Plant Power Purchase Agreement dated as of July 11, 2006 between Entergy Nuclear Palisades, LLC and Consumers Energy Company (10)(c) Stock Purchase Agreement dated as of July 24, 2006 by and among Consumers Energy Company, CMS Midland, Inc., CMS Midland Holdings Company, and MCV Power Partners, Inc. (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-10.(A) 2 k06781exv10wxay.txt ASSET SALE AGREEMENT EXHIBIT (10)(a) ASSET SALE AGREEMENT BY AND AMONG CONSUMERS ENERGY COMPANY, AS SELLER AND ENTERGY NUCLEAR PALISADES, LLC AS BUYER DATED AS OF JULY 11, 2006 TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS.................................................... 1 1.1. Definitions.................................................... 1 1.2. Certain Interpretive Matters................................... 21 ARTICLE 2 PURCHASE AND SALE.............................................. 22 2.1. Included Assets................................................ 22 2.2. Excluded Assets................................................ 25 2.3. Assumed Liabilities and Obligations............................ 27 2.4. Excluded Liabilities........................................... 29 2.5. Control of Litigation.......................................... 31 ARTICLE 3 THE CLOSING.................................................... 32 3.1. Closing........................................................ 32 3.2. Payment of Purchase Price...................................... 32 3.3. Adjustments to the Purchase Price.............................. 32 3.4. Allocation of Purchase Price................................... 35 3.5. Prorations..................................................... 35 3.6. Deliveries by Seller........................................... 37 3.7. Deliveries by Buyer............................................ 38 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER....................... 39 4.1. Organization................................................... 39 4.2. Authority Relative to this Agreement........................... 39 4.3. Consents and Approvals; No Violation........................... 40 4.4. Reports........................................................ 40 4.5. Title and Related Matters...................................... 41 4.6. Insurance...................................................... 41 4.7. Environmental Matters.......................................... 41 4.8. Labor Matters.................................................. 43 4.9. ERISA; Benefit Plans........................................... 44 4.10. Sufficiency of Assets.......................................... 46 4.11. Certain Contracts and Arrangements............................. 46 4.12. Legal Proceedings, etc......................................... 47 4.13. Permits........................................................ 47 4.14. NRC Licenses................................................... 47 4.15. Regulation as a Utility........................................ 48 4.16. Tax Matters.................................................... 48 4.17. Qualified Decommissioning Fund................................. 48 4.18. Intellectual Property.......................................... 50 4.19. Zoning Classification.......................................... 50 4.20. Emergency Warning Sirens....................................... 50 4.21. Disclaimer..................................................... 50
i ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER........................ 51 5.1. Organization; Qualification.................................... 51 5.2. Authority Relative to this Agreement........................... 51 5.3. Consents and Approvals; No Violation........................... 52 5.4. Availability of Funds.......................................... 52 5.5. Legal Proceedings.............................................. 52 5.6. WARN Act....................................................... 53 5.7. Transfer of Assets of Qualified Decommissioning Fund........... 53 5.8. Foreign Ownership or Control................................... 53 5.9. Permit and License Qualifications.............................. 53 ARTICLE 6 COVENANTS OF THE PARTIES....................................... 54 6.1. Conduct of Business Relating to the Included Assets............ 54 6.2. Access to Information.......................................... 58 6.3. Expenses....................................................... 61 6.4. Further Assurances; Cooperation................................ 61 6.5. Public Statements.............................................. 63 6.6. Consents and Approvals......................................... 64 6.7. Brokerage Fees and Commissions................................. 66 6.8. Tax Matters.................................................... 66 6.9. Advice of Changes; Supplements to Schedules.................... 68 6.10. Employees...................................................... 68 6.11. Risk of Loss................................................... 77 6.12. Qualified Decommissioning Fund................................. 78 6.13. Spent Nuclear Fuel Fees........................................ 79 6.14. Standard Spent Fuel Disposal Contract; Spent Nuclear Fuel Litigation..................................................... 79 6.15. Department of Energy Decontamination and Decommissioning Fees.. 81 6.16. Cooperation Relating to Insurance and Price-Anderson Act....... 81 6.17. Release of Seller.............................................. 82 6.18. Private Letter Ruling.......................................... 82 6.19. NRC Commitments................................................ 83 6.20. Decommissioning; Return of Excess Qualified Decommissioning Fund Assets.................................................... 83 6.21. Buyer's Parent Guaranty........................................ 86 6.22. Nuclear Insurance Policies..................................... 86 6.23. No Transport or Storage of Waste............................... 87 6.24. Title and Survey............................................... 87 6.25. Big Rock Amount................................................ 87 6.26. Removal of Trade Names, Trademarks, etc........................ 88 6.27. Financial Assurances to the NRC................................ 88 ARTICLE 7 CONDITIONS..................................................... 88 7.1. Conditions to Obligations of Buyer............................. 88 7.2. Conditions to Obligations of Seller............................ 92 ARTICLE 8 INDEMNIFICATION................................................ 93 8.1. Indemnification................................................ 93
ii 8.2. Limitations on Indemnification................................. 94 8.3. Defense of Claims.............................................. 95 ARTICLE 9 TERMINATION AND REMEDIES....................................... 97 9.1. Termination.................................................... 97 9.2. Procedure and Effect of No Default Termination................. 98 9.3. Remedies....................................................... 98 ARTICLE 10 MISCELLANEOUS PROVISIONS...................................... 99 10.1. Limitation of Liability; Waiver of Certain Damages............. 99 10.2. Amendment and Modification..................................... 99 10.3. Waiver of Compliance; Consents................................. 99 10.4. Survival of Representations, Warranties, Covenants and Obligations.................................................... 99 10.5. Notices........................................................ 100 10.6. Assignment..................................................... 101 10.7. No Third Party Beneficiaries................................... 102 10.8. Governing Law.................................................. 102 10.9. Counterparts................................................... 103 10.10. Schedules and Exhibits......................................... 103 10.11. Entire Agreement............................................... 103 10.12. Acknowledgment; Independent Due Diligence...................... 103 10.13. Bulk Sales Laws................................................ 104 10.14. No Joint Venture............................................... 104 10.15. Change in Law.................................................. 104 10.16. Severability................................................... 104
LIST OF EXHIBITS AND SCHEDULES EXHIBITS Exhibit A Form of Assignment and Assumption Agreement Exhibit B Form of Bill of Sale Exhibit C Form of Interconnection Agreement Exhibit D-1 Form of Palisades Deed Exhibit D-2 Form of Big Rock ISFSI Deed Exhibit E Form of Firing Range Lease Exhibit F Form of Power Purchase Agreement Exhibit G Form of Emergency Operations Facilities Lease Exhibit H Form of Buyer's Parent Guaranty Exhibit I Form of Seller's FIRPTA Certificate Exhibit J Form of Title Commitments Exhibit K Form of Consumers Guaranty iii SCHEDULES 1.1(26) Book Value 2.1(a) Description of Real Property 2.1(b) Description of Personal Property 2.1(i) Intellectual Property 2.1(l) ANI Insurance Policies Included in the Included Assets 2.1(m) Radio Licenses 2.1(n) Pending Causes of Action 2.1(q) Emergency Equipment Easements and List of Emergency Sirens 2.2(o) Excluded Contracts 3.3(a)(4) Capital Budget 3.3(a)(5) Decrease in Purchase Price 4.3(a) Seller's Third Party Consents 4.3(b) Seller's Required Regulatory Approvals 4.5(c)4.6 Insurance Exceptions 4.7 Environmental Matters 4.8 Labor Matters 4.9(a) Benefit Plans 4.9(d) Benefit Plan Exceptions 4.11(a)(i) Seller's Agreements (other than Fuel Contracts) 4.11(a)(ii) Fuel Contracts 4.11(b) Material Breaches 4.12 Legal Proceedings 4.13(b) Permits 4.14(b) NRC Licenses 4.16 Tax Matters 4.17 Tax and Financial Matters Relating to Qualified Decommissioning Fund 4.18 Exceptions to Ownership of Intellectual Property 4.19 Zoning Classification 5.3(a) Buyer's Third Party Consents 5.3(b) Buyer's Required Regulatory Approvals 6.10(a) Transferred Employees 6.10(g) Actuarial Assumptions iv ASSET SALE AGREEMENT ASSET SALE AGREEMENT, dated as of July 11, 2006, (the "Agreement") by and among Consumers Energy Company, a Michigan corporation ("Seller" or "Consumers"), and Entergy Nuclear Palisades, LLC, a Delaware limited liability company ("Buyer"). Seller and Buyer are referred to individually as a "Party," and collectively as the "Parties." WITNESSETH: WHEREAS, Seller owns the Palisades Nuclear Power Plant ("Palisades"), located near South Haven, Michigan, and certain facilities and other assets associated therewith and ancillary thereto, in accordance with NRC Operating License No. DPR- 20; WHEREAS, as agent for Consumers, Nuclear Management Company, LLC, a Wisconsin limited liability company ("NMC"), has operational responsibility with respect to Palisades pursuant to (i) a Nuclear Power Plant Operating Services Agreement, dated as of November 7, 2000, by and between NMC and Consumers (the "NPPOSA") and (ii) NRC Operating License No. DPR- 20; WHEREAS, Seller owns and operates the Big Rock Independent Spent Fuel Storage Installation (the "Big Rock ISFSI"), located in Charlevoix County, Michigan, in accordance with NRC Operating License No. DPR-6; WHEREAS, Buyer desires to purchase and assume, and Seller desires to sell and assign, all of the Included Assets (as defined below) and the Assumed Liabilities and Obligations, upon the terms and conditions hereinafter set forth in this Agreement; WHEREAS, the Parties desire that Buyer's Parent support certain of the obligations of Buyer hereunder. NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements hereinafter set forth, and intending to be legally bound hereby, the Parties agree as follows: ARTICLE 1 DEFINITIONS 1.1. Definitions. As used in this Agreement, the following terms have the meanings specified in this Section 1.1. (1) "Actual Amount" has the meaning set forth in Section 6.10(g)(6). (2) "Actual Retiree Medical and Life Insurance Amount" has the meaning set forth in Section 6.10(l)(3). (3) "Affiliate" has the meaning set forth in Rule 12b-2 of the General Rules and Regulations under the Exchange Act and, with respect to Seller, shall also include any ERISA Affiliate. (4) "Agreement" has the meaning set forth in the preamble. (5) "Allocation" has the meaning set forth in Section 3.4(b). (6) "Ancillary Agreements" means the Bill of Sale, Assignment and Assumption Agreement, the Deeds, the Interconnection Agreement, the Emergency Operations Facility Lease, the Firing Range Lease and the Power Purchase Agreement, as the same may be amended from time to time. (7) "ANI" means American Nuclear Insurers, or any successors thereto. (8) "APBO" has the meaning set forth in Section 6.10(l)(2). (9) "Approved Marked Up Title Commitments" has the meaning set forth in Section 7.1(s). (10) "Assignment and Assumption Agreement" means the Assignment and Assumption Agreement between Seller and Buyer in the form of Exhibit A hereto, by which Seller, subject to the terms and conditions hereof, shall assign Seller's interest in and rights under the Seller's Agreements, the Fuel Contracts, the Non-material Contracts, the Transferable Permits, licenses for emergency warning sirens, dosimeters and environmental sampling stations that are not located on the Sites, certain intangible assets and other Included Assets to Buyer and whereby Buyer shall assume the Assumed Liabilities and Obligations. (11) "Assumed Liabilities and Obligations" has the meaning set forth in Section 2.3. (12) "Atomic Energy Act" means the Atomic Energy Act of 1954, as amended, 42 U.S.C. Section 2011 et seq. (13) "Bargaining Unit Transferred Employees" means those Transferred Employees whose employment is covered by the Collective Bargaining Agreement. (14) "Benefit Plans" has the meaning set forth in Section 4.9(a). (15) "Big Rock Amount" has the meaning set forth in Section 6.25. (16) "Big Rock ISFSI" has the meaning set forth in the recitals hereto. (17) "Big Rock ISFSI Assets" means that part of the Included Assets related to the Big Rock ISFSI. (18) "Big Rock ISFSI Deed" means a deed conveying the Real Property comprising the Big Rock ISFSI Site to Buyer, in the form of Exhibit D-2 hereto. 2 (19) "Big Rock ISFSI Employees" means those employees of Consumers identified on Schedule 6.10(a) as employees principally performing services at the Big Rock ISFSI. (20) "Big Rock ISFSI Facilities" means the Facilities associated with the Big Rock ISFSI. (21) "Big Rock ISFSI Site" means the parcels of land included in the Real Property conveyed to Buyer pursuant to the Big Rock ISFSI Deed. (22) "Big Rock ISFSI Survey" has the meaning set forth in Section 6.24. (23) "Big Rock ISFSI Title Commitment" means the title commitment issued by Chicago Title Insurance Company, Revision No. 6, effective date May 10, 2006 at 8:00 a.m., File No. 150430683CML that is included in Exhibit J attached hereto. (24) "Big Rock Point Plant Operating Facility" means the nuclear power plant located in Charlevoix County, Michigan, owned by Seller pursuant to NRC License No. DPR-6 and currently undergoing Decommissioning. (25) "Bill of Sale" means the Bill of Sale, in the form of Exhibit B hereto, to be delivered at the Closing, with respect to the tangible personal property included in the Included Assets to be transferred to Buyer at the Closing. (26) "Book Value" means, as of the date a calculation is to be made of a specified asset (i) with respect to Seller's Facility Inventories, the value on the books of Seller, determined in accordance with GAAP consistent with Seller's past practices, and (ii) with respect to Seller's Nuclear Fuel Inventories, the value on the books of Seller, determined in accordance with GAAP consistent with Seller's past practices (with such adjustments and as more fully described in Schedule 1.1(26), which schedule also provides an illustration of the calculation of the Book Value of Seller's Nuclear Fuel Inventories as of May 31, 2006). With respect to Facility Inventories, Book Value shall not reflect inventory items which were not included in Book Value on January 1, 2006 unless such items were purchased by Seller or NMC from unrelated third parties after such date. (27) "Business Books and Records" has the meaning set forth in Section 2.1(f). (28) "Business Day" shall mean any day other than Saturday, Sunday and any day on which banking institutions in the State of Michigan are authorized by law or other governmental action to close. (29) "Buyer" has the meaning set forth in the preamble. (30) "Buyer Indemnitee" has the meaning set forth in Section 8.1(b). (31) "Buyer Material Adverse Effect" has the meaning set forth in Section 5.3(a). 3 (32) "Buyer's Parent" means Entergy Corporation, a Delaware corporation. (33) "Buyer's Parent Guaranty" shall mean a guaranty executed on the Effective Date by Buyer's Parent in the form of Exhibit H hereto. (34) "Buyer's Required Regulatory Approvals" has the meaning set forth in Section 5.3(b). (35) "Byproduct Material" means any radioactive material (except Special Nuclear Material) yielded in, or made radioactive by, exposure to the radiation incident to the process of producing or utilizing Special Nuclear Material. (36) "Capital Budget" means the budget established for capital projects as set forth in Schedule 3.3(a)(4), as such budget may be amended by agreement of the Parties. (37) "Capital Expenditures Shortfall" means the aggregate amount equal to (1) the sum of the monthly amounts set forth for each capital project in the Capital Budget for the period from January 1, 2006 through the Closing Date, less (2) the sum of the amounts actually spent on such projects during such period (not to exceed the applicable line item therefor by greater than ten percent (10%)), provided that the monthly amount with respect to the month during which the Closing occurs shall be prorated. (38) "CBA Termination Date" has the meaning set forth in Section 6.10(c). (39) "Closing" has the meaning set forth in Section 3.1. (40) "Closing Date" has the meaning set forth in Section 3.1. (41) "Closing Payment" has the meaning set forth in Section 3.3(b). (42) "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and the rules and regulations promulgated thereunder. (43) "Code" means the Internal Revenue Code of 1986, as amended. (44) "Collective Bargaining Agreement" means that certain Working Agreement between Consumers and the UWUA and its Michigan State Utility Workers Council, dated as of June 1, 2005, as amended from time to time. (45) "Commercially Reasonable Efforts" mean efforts which are designed to enable a Party, directly or indirectly, to expeditiously satisfy a condition to, or otherwise assist in the consummation of, the transactions contemplated by this Agreement and which do not require the performing Party to expend any funds or assume Liabilities other than expenditures and Liability assumptions which are customary and reasonable in nature and amount in the context of the transactions contemplated by this Agreement. (46) "Confidentiality Agreement" means the letter agreement, dated January 3, 2006, executed by Entergy Nuclear, Inc. 4 (47) "Consumers" has the meaning set forth in the preamble. (48) "Consumers Guaranty" has the meaning set forth in Section 6.14(g). (49) "Credited Service" has the meaning set forth in Section 6.10(e). (50) "Decommission" means, with respect to each Site, to completely retire and remove the Facilities on that Site from service and to restore the Site, as well as any planning and administrative activities incidental thereto, including: (i) the dismantlement and removal of the Facilities on such Site and any reduction or removal of radioactivity at such Site to a level that permits termination of the applicable NRC License and unrestricted use of the Site; (ii) all other activities necessary for the retirement, dismantlement, decontamination and/or storage of the Facilities at such Site to comply with all applicable Nuclear Laws and Environmental Laws, including the applicable requirements of the Atomic Energy Act and the NRC's rules, regulations, orders and pronouncements thereunder; and (iii) once the applicable Site is no longer utilized (A) in the case of Palisades, either for power generation of any kind or for any storage of Spent Nuclear Fuel or other Nuclear Material, and (B) in the case of the Big Rock ISFSI, for storage of Spent Nuclear Fuel or other Greater Than Class C Waste, the removal of structures, buried piping, rebar, below grade foundations, paved areas and rubble, and restoration of such Site to an appropriately graded, stabilized and vegetated condition. The Parties understand and agree that SAFSTOR is a permissible interim status for Palisades, provided that Decommissioning is completed in accordance with the applicable NRC regulations. (51) "Decommissioning Target" means an amount equal to Two Hundred Fifty Million Dollars ($250,000,000), which amount shall be increased by five and one-half percent (5.5%) per annum, compounded daily, from and after March 1, 2007 through and including the Closing Date. (52) "Deeds" means the Palisades Deed and the Big Rock ISFSI Deed, collectively. (53) "Department of Energy" means the United States Department of Energy and any successor agency thereto. (54) "Department of Energy Claim" means the action commenced by Seller on December 16, 2002, as amended from time to time, or any other action commenced by Seller for (i) pre-Closing damages resulting from the Department of Energy's failure to commence the removal, transportation, acceptance or any delay in accepting Spent Nuclear Fuel from Palisades and from the Big Rock Point Plant Operating Facility (now located at the Big Rock ISFSI) for disposal pursuant to the Standard Spent Fuel Disposal Contract and (ii) the recovery of any damages of the kind described in clause (i) and arising post-Closing in respect of the Big Rock ISFSI, up to an amount equal to the Big Rock Amount. The Department of Energy Claim shall not include, and Buyer shall have the right to pursue, damages against the Department of Energy arising after the Closing in respect of Palisades and, to the extent Buyer has not been compensated for such damages pursuant to Section 6.25, the Big Rock ISFSI. (55) "Department of Energy Decommissioning and Decontamination Fees" means all fees related to the Department of Energy's Special Assessment of utilities for the 5 Uranium Enrichment Decontamination and Decommissioning Funds pursuant to Sections 1801, 1802 and 1803 of the Atomic Energy Act and the Department of Energy's implementing regulations at 10 C.F.R. Part 766, applicable to separative work units consumed and/or purchased from the Department of Energy in order to decontaminate and decommission the Department of Energy's gaseous diffusion enrichment facilities. (56) "Department of Justice" means the United States Department of Justice and any successor agency thereto. (57) "Direct Claim" has the meaning set forth in Section 8.3(c). (58) "Downgrade Event" means, with respect to Buyer's Parent, any period of time when such party's unsecured, senior long-term debt obligations (not supported by third-party credit enhancements) are rated below Baa3 by Moody's Investment Services, Inc. (or its successor), and rated below BBB- by Standard & Poor's Rating Group (or its successor). (59) "Effective Date" means the date of this Agreement. (60) "Emergency Equipment Easements" means the easements listed on Schedule 2.1(q) with respect to thirteen (13) of the emergency warning sirens constituting part of the Palisades Assets and located off-Site. (61) "Emergency Operations Facilities" means (i) the facility owned by Consumers located in South Haven, Michigan and utilized as the emergency operations facility, (ii) the joint news center for Palisades located at the Lake Michigan College Mendel Center and (iii) the Allegan Service Center utilized as an alternative off-Site relocation and mustering or assembly facility. (62) "Emergency Operations Facilities Lease" means the lease in the form of Exhibit G to be entered into between Buyer and Consumers as of the Closing Date with respect to the facility located in South Haven, Michigan that is part of the Emergency Operations Facilities. (63) "Employee Pension Benefit Plan" has the meaning set forth in ERISA Section 3(2). (64) "Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section 3(1). (65) "Encumbrances" means any mortgages, pledges, liens, security interests, activity and use limitations, conservation easements, deed restrictions, rights of way, covenants, reservations, zoning limitations, easements, purchase rights, rights of first refusal and other encumbrances of any kind. (66) "Energy Reorganization Act" means the Energy Reorganization Act of 1974, as amended. 6 (67) "Environment" means all soil, real property, air, water (including surface waters, streams, ponds, drainage basins and wetlands), groundwater, water body sediments, drinking water supply, stream sediments or land, including land surface or subsurface strata, including all fish, plant, wildlife, and other biota and any other environmental medium or natural resource. (68) "Environmental Claim" means any and all written communications alleging potential Liability, administrative or judicial actions, suits, orders, liens, written notices alleging Liability, noncompliance or a violation, investigations which have been disclosed in writing to Seller or NMC, requests by Governmental Authorities for information relating to Releases or threatened Releases, complaints, proceedings, or other written communications, whether criminal or civil, pursuant to or relating to any applicable Environmental Law by any Person based upon, alleging, asserting, or claiming any actual or potential (a) violation of, or Liability under, any Environmental Law, (b) violation of, or Liability under, any Environmental Permit, or (c) Liability for investigatory costs, monitoring costs, cleanup costs, removal costs, remedial costs, response costs, natural resource damages, property damage, loss of life, injury or illness to persons, fines, or penalties arising out of, based on, resulting from, or related to the presence, Release, or threatened Release of any Hazardous Materials related to the Included Assets, including at any Off-Site Location to which Hazardous Materials, or materials containing Hazardous Materials, were sent. (69) "Environmental Cleanup Site" means any location that is listed or formally proposed for listing on the National Priorities List or on any similar state list of sites requiring investigation that has been disclosed in writing to Seller or NMC or cleanup, or that is the subject of any action, suit, proceeding or investigation for any alleged violation of any Environmental Law, or at which, to the Knowledge of Seller, there has been a Release of Hazardous Materials. (70) "Environmental Laws" means all Laws regarding pollution or protection of the Environment, including Laws regarding Releases or threatened Releases of Hazardous Materials (including Releases to ambient air, surface water, groundwater, land, surface and subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, transport, disposal or handling of Hazardous Materials. "Environmental Laws" include the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Sections 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. Sections 5101 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. Sections 1251 et seq.), the Clean Air Act (42 U.S.C. Sections 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. Sections 2601 et seq.), the Oil Pollution Act (33 U.S.C. Sections 2701 et seq.) and the Emergency Planning and Community Right-to-Know Act (42 U.S.C. Sections 11001 et seq.). Notwithstanding the foregoing, Environmental Laws do not include any of the foregoing to the extent that such Laws regulate Nuclear Fuel, Spent Nuclear Fuel or other Nuclear Materials, nor do Environmental Laws include any Nuclear Laws. (71) "Environmental Permit" means any federal, state or local permits, licenses, approvals, consents, registrations or authorizations required by any Governmental Authority under or in connection with any Environmental Law including any and all orders, 7 consent orders or binding agreements issued or entered into by a Governmental Authority under any applicable Environmental Law. (72) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the applicable rules and regulations promulgated thereunder. (73) "ERISA Affiliate" has the meaning set forth in Section 2.4(f). (74) "Estimated Adjustments" has the meaning set forth in Section 3.3(b). (75) "Estimated Allocation" has the meaning set forth in Section 3.4(a). (76) "Estimated Closing Statement" has the meaning set forth in Section 3.3(b). (77) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (78) "Excess PLR Decommissioning Amount" has the meaning set forth in Section 6.12(a). (79) "Excess Qualified Decommissioning Fund Assets" has the meaning set forth in Section 6.20(c). (80) "Excluded Assets" has the meaning set forth in Section 2.2. (81) "Excluded Contracts" has the meaning set forth in Section 2.2(o). (82) "Excluded Liabilities" has the meaning set forth in Section 2.4. (83) "Exempt Wholesale Generator" means an exempt wholesale generator as defined in the regulations of the FERC at 18 C.F.R. Section 366. (84) "Existing Savings Plans" has the meaning set forth in Section 6.10(f). (85) "Facilities" means the plant, facilities, equipment, supplies and improvements in which Seller has an ownership interest and which are included in the Included Assets. (86) "Facility Inventories" means materials, spare parts, consumable supplies, diesel and other fuel supplies (other than Nuclear Fuel) and chemical and gas inventories relating to the operation of the Facilities located at, or in transit to, the Facilities. (87) "Federal Power Act" means the Federal Power Act, as amended. (88) "Federal Trade Commission" means the United States Federal Trade Commission or any successor agency thereto. (89) "FERC" means the United States Federal Energy Regulatory Commission or any successor agency thereto. 8 (90) "Fiduciary" has the meaning set forth in ERISA Section 3(21). (91) "Final Determination" has the meaning set forth in section 1313(a) of the Code (or any similar provision of state or local Law). (92) "Firing Range" means that certain firearms facility that is the subject of the Firing Range Lease. (93) "Firing Range Lease" means the lease in the form of Exhibit E to be entered into between Buyer and Consumers as of the Closing Date with respect to the Firing Range. (94) "FIRPTA Certificate" means the certificate in the form of Exhibit I hereto satisfying the requirements of the Foreign Investment and Real Property Tax Act of 1980. (95) "Fuel Contracts" has the meaning set forth in Section 4.11(a). (96) "GAAP" means United States generally accepted accounting principles. (97) "Good Utility Practices" means any of the practices, methods and activities generally accepted in the electric utility industry in the United States of America during the relevant period as good practices applicable to nuclear generating facilities similar to the Facilities or any of the practices, methods or activities which, in the exercise of reasonable judgment by a prudent nuclear operator in light of the facts known at the time the decision was made (other than the fact that such operator is in the process of selling the facility), could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety, expedition, the requirements of any Governmental Authority having jurisdiction and applicable Laws including Nuclear Laws and Laws relating to the protection of public health and safety. Good Utility Practices are not intended to be limited to the optimal practices, methods or acts to the exclusion of all others, but rather to be practices, methods or acts generally accepted in the electric utility industry in the United States of America. For purposes of this Agreement, the determination of Good Utility Practices includes the assumption that the expected initial re-licensing of Palisades will occur. (98) "Governmental Authority" means any federal, state, local, provincial, foreign, international or other governmental, regulatory or administrative agency, taxing authority, commission, department, board, or other governmental subdivision, court, tribunal, arbitrating body or other governmental authority. (99) "Governmental Order" means any judgment, decision, consent decree, injunction, ruling, writ or order of any Governmental Authority. (100) "Greater Than Class C Waste" means radioactive waste that contains a radionuclide whose concentration exceeds the value in Table 1 or Table 2 of 10 C.F.R. 61.55, and therefore is currently not generally acceptable for disposal at existing (near surface) low level radioactive waste disposal facilities. 9 (101) "GUST" means: (a) the Uruguay Round Agreements Act, Pub. L. 103-465; (b) the Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. 103-353; (c) the Small Business Job Protection Act of 1996, Pub. L. 104-188; (d) the Taxpayer Relief Act of 1997, Pub. L. 105-34; (e) the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206; and (f) the Community Renewal Tax Relief Act of 2000, Pub. L. 106-554. (102) "Hazardous Materials" means (a) any petroleum, asbestos, asbestos-containing material, urea formaldehyde foam insulation, lead-based paint and polychlorinated biphenyls; (b) any chemicals, wastes, materials or substances defined as or included in the definition of, or regulated as, "hazardous substances," "hazardous wastes," "hazardous materials," "hazardous constituents," "restricted hazardous materials," "extremely hazardous substances," "toxic substances," "contaminants," "pollutants," "toxic pollutants," "hazardous air pollutants" or words of similar meaning and regulatory effect under any applicable Environmental Law; and (c) any other chemical, material or substance, the exposure to which is prohibited, limited or regulated by any applicable Environmental Law; excluding, however, any Nuclear Material. (103) "Head" has the meaning set forth in Section 7.1(z). (104) "Head Contract" has the meaning set forth in Section 7.1(z). (105) "High Level Waste Repository" means a facility which is designed, constructed and operated by or on behalf of the Department of Energy for the storage and disposal of Spent Nuclear Fuel in accordance with the requirements set forth in the Nuclear Waste Policy Act or subsequent legislation. (106) "HIPAA" means the Health Insurance Portability and Accountability Act of 1996 and accompanying regulations. (107) "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. (108) "Included Assets" has the meaning set forth in Section 2.1. (109) "Income Tax" means any Tax (a) based upon, measured by or calculated with respect to net income, profits or receipts (including capital gains Taxes and minimum Taxes), or (b) based upon, measured by or calculated with respect to multiple bases (including the Michigan Single Business Tax and any corporate franchise Tax) if one or more of the bases on which such Tax may be based, measured by or calculated with respect to, is described in clause (a), in each case together with any interest, penalties or additions to such Tax. (110) "Indemnifiable Loss" has the meaning set forth in Section 8.1(a). (111) "Indemnifying Party" means the Party required to provide indemnification under this Agreement. (112) "Indemnitee" means either a Seller Indemnitee or a Buyer Indemnitee. 10 (113) "Independent Accounting Firm" means such independent accounting firm of national reputation as is mutually appointed by Seller and Buyer. (114) "Independent Appraiser" means such independent engineering firm or appraiser of national reputation as is mutually appointed by Seller and Buyer. (115) "Indus Software" has the meaning set forth in Section 6.4(f). (116) "Initial Retiree Medical and Life Insurance Transfer" has the meaning set forth in Section 6.10(l)(2). (117) "Initial Transfer" has the meaning set forth in Section 6.10(g)(4). (118) "Intellectual Property" has the meaning set forth in Section 2.1(i). (119) "Interconnection Agreement" means the Interconnection Agreement, substantially in the form of Exhibit C hereto, among Buyer, transmission owner(s) and MISO, under which Palisades will be provided after the Closing with interconnection services consistent with FERC regulations and precedent and NRC requirements relating to offsite power availability and grid reliability. (120) "Interest Rate" means, for any date, the lesser of (i) the per annum rate of interest equal to the prime lending rate as may from time to time be published in The Wall Street Journal under "Money Rates" on such day (or if not published on such day on the most recent preceding day on which published) and (ii) the maximum rate permitted by applicable Law. (121) "IRS" means the United States Internal Revenue Service or any successor agency thereto. (122) "Knowledge" means (i) with respect to Buyer the actual knowledge (based upon reasonable inquiry of appropriate executive officers and managers of Buyer and Buyer's Parent) of the corporate officers of Buyer who are charged with responsibility for the particular function relating to the specific matter of the inquiry and (ii) with respect to Seller, the actual knowledge (based upon reasonable inquiry of appropriate executive officers and managers of Seller and NMC) of the corporate officers of Seller who are charged with responsibility for the particular function relating to the specific matter of inquiry. (123) "Law" or "Laws" means all laws, rules, regulations, codes, statutes, ordinances, treaties, and/or Governmental Orders, including the common law. (124) "Liability" or "Liabilities" means any liability, indebtedness, fine, penalty or obligation (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due) other than any liability for Taxes. Without limiting the generality of the foregoing, in the case of the NRC Licenses, "Liabilities" shall include the NRC Commitments. (125) "Loss" or "Losses" means any and all damages, fines, fees, penalties, deficiencies, losses and expenses (including all Remediation costs, fees of attorneys, accountants 11 and other experts, or other expenses of litigation or proceedings or of any claim, default or assessment). (126) "Low Level Waste" means radioactive material that: (a) is neither Spent Nuclear Fuel, Greater Than Class C Waste nor Byproduct Material; and (b) the NRC, consistent with existing Law and in accordance with clause (a), classifies as low-level radioactive waste. (127) "Material Adverse Effect" means the occurrence after the date hereof and prior to the Closing of: (i) any change to or effect on the Included Assets, including the operations or condition (financial or otherwise) thereof, taken as a whole, the result of which is Losses related to the Included Assets that are likely to require the expenditure by Buyer, within one (1) year following the Closing Date, of in excess of Two Million Five Hundred Thousand Dollars ($2,500,000) individually or Ten Million Dollars ($10,000,000) in the aggregate; (ii) a permanent shutdown of the Palisades Facilities; or (iii) a permanent diminution of the full licensed thermal power of the Palisades Facilities of in excess of twenty-five (25) Megawatts thermal (MWth). Notwithstanding the foregoing, a "Material Adverse Effect" shall not include: (i) any changes or effects (taken together) generally affecting (A) a substantial portion of the international, national or regional electric or nuclear power industries, (B) international, national or regional wholesale or retail markets for electric power or Nuclear Fuel or (C) international, national, regional or electric transmission systems or operations thereof; (ii) any change in any Law generally applicable to similarly situated Persons; (iii) any change in the application or enforcement of any Law by any Governmental Authority with respect to the Facilities or to similarly situated Persons, unless such change in application or enforcement prohibits consummation of the transactions contemplated by this Agreement; or (iv) any changes resulting from or associated with acts of war or terrorism or changes imposed by a Governmental Authority associated with additional security to address concerns of terrorism. Notwithstanding the foregoing, no changes or effects that are cured to the reasonable satisfaction of Buyer prior to the Closing at Seller's expense shall be considered a Material Adverse Effect. (128) "Michigan Land Division Act" has the meaning set forth in Section 4.5(f). (129) "MISO" means Midwest Independent Transmission System Operator, Inc. (130) "Mortgage Indenture" means the trust indenture dated as of September 1, 1945 between Consumers Power Company (now Consumers Energy Company) and City Bank Farmers Trust Company (now held by JPMorgan Chase Bank, N.A., successor trustee) and all supplemental indentures thereto, as may be further amended and/or supplemented from time to time. (131) "MPSC" means the Michigan Public Service Commission or any successor agency thereto. (132) "NEIL" means Nuclear Electric Insurance Limited, or any successor thereto. (133) "NMC" has the meaning set forth in the recitals. 12 (134) "Non-Bargaining Unit Transferred Employee" means any Transferred Employee whose employment is not covered by the Collective Bargaining Agreement. (135) "Non-material Contracts" means those contracts, agreements, personal property leases, software or other licenses, or other commitments, understandings or instruments relating to or associated with the operation, maintenance, repair, replacement, inspection, modification and/or procurement of the Included Assets, that have been entered into by Seller or NMC in the ordinary course of business prior to the Closing and which either (i) are terminable without penalty, termination payments, or other financial obligations associated with termination (except for wind-down costs) upon notice of ninety (90) days or less by Seller or, following the Closing, by Buyer or (ii) require the payment or delivery of goods or services with a value of less than (a) One Hundred Thousand Dollars ($100,000) per annum in the case of any individual contract or commitment or (b) Two Hundred Fifty Thousand Dollars ($250,000) per annum in the aggregate with respect to any single landlord, vendor or supplier. (136) "Notional Investment Amount" has the meaning set forth in Section 6.20(c). (137) "NPPOSA" has the meaning set forth in the recitals. (138) "NRC" means the United States Nuclear Regulatory Commission and any successor agency thereto. (139) "NRC Commitments" means all written regulatory commitments identified as such by Seller to the NRC. (140) "NRC Licenses" means those licenses listed on Schedule 4.14(b). (141) "Nuclear Fuel Book Value Baseline Amount" means (i) if the Closing shall occur prior to the commencement of the next refueling outage for Palisades, Fifty Five Million Seven Hundred Sixty Eight Thousand Nine Hundred Eighty Four Dollars ($55,768,984) and (ii) if the Closing shall occur after the completion of the next refueling outage for Palisades, Sixty Seven Million Five Hundred Thousand Dollars ($67,500,000). (142) "Nuclear Fuel" means: (i) all nuclear fuel assemblies in the Palisades reactor on the Closing Date; (ii) any previously irradiated fuel assemblies that have been temporarily removed from the Palisades reactor as of the Closing Date but which are capable of and intended for reinsertion into the Facilities reactor as of the Closing Date without modification or additional cost (for example, assemblies that are temporarily removed from the reactor during a refueling outage for the purpose of rearranging the locations of assemblies within the reactor core, or for purposes of repair prior to reinsertion), (iii) any unirradiated fuel assemblies located at Palisades awaiting their initial insertion into the Palisades reactor as of the Closing Date; and (iv) all nuclear fuel constituents (including uranium in any form and separative work units) in any stage of the fuel cycle that are in process of production, conversion, enrichment or fabrication for use in the Palisades reactor and which are owned by Seller, or in which Seller has any right, title or interest, on the Closing Date. 13 (143) "Nuclear Fuel Inventories" means Nuclear Fuel inventories relating to the operation of the Facilities located at, or in transit to, the Facilities. (144) "Nuclear Insurance Policies" means all nuclear insurance policies carried by or for the benefit of Seller with respect to the ownership, operation or maintenance of the Facilities, including all nuclear liability, property damage and business interruption policies in respect thereof. Without limiting the generality of the foregoing, the term "Nuclear Insurance Policies" includes all policies issued or administered by ANI or NEIL. (145) "Nuclear Laws" means all Laws relating to the regulation of nuclear power plants, Source Material, Byproduct Material and Special Nuclear Materials; Decommissioning; the regulation of Low Level Waste and Spent Nuclear Fuel; the transportation and storage of Nuclear Materials; the regulation of Safeguards Information; the regulation of Nuclear Fuel; the enrichment of uranium; the disposal and storage of Spent Nuclear Fuel; contracts for and payments into the Nuclear Waste Fund; and as applicable, the antitrust laws and the Federal Trade Commission Act to specified activities or proposed activities of certain licensees of commercial nuclear reactors, but shall not include Environmental Laws. "Nuclear Laws" include the Atomic Energy Act of 1954, as amended (42 U.S.C. Section 2011 et seq.), the Price-Anderson Act (Section 170 of the Atomic Energy Act of 1954, as amended); the Energy Reorganization Act of 1974 (42 U.S.C. Section 5801 et seq.); Convention on the Physical Protection of Nuclear Material Implementation Act of 1982 (Public Law 97 -351; 96 Stat. 1663); the prohibition against nuclear enrichment transfers found in the Foreign Assistance Act of 1961 (22 U.S.C. Section 2151, 2799 aa et seq.); the Nuclear Non-Proliferation Act of 1978 (22 U.S.C. Section 3201); the Low-Level Radioactive Waste Policy Act (42 U.S.C. Section 2021b et seq.); the Nuclear Waste Policy Act (42 U.S.C. Section 10101 et seq. as amended); the Low-Level Radioactive Waste Policy Amendments Act of 1985 (42 U.S.C. Section 2021b, 471); the Energy Policy Act of 1992 (4 U.S.C. Section 13201 et seq.); the provisions of 10 CFR Section 73.21. For sake of clarity, "Nuclear Laws" shall include the requirements of any Law to the extent excluded from the definition of "Environmental Laws" pursuant to the application of the last sentence thereof. (146) "Nuclear Material or Materials" means Source Material, Special Nuclear Material, Greater Than Class C Waste, Low Level Waste, Byproduct Material and Spent Nuclear Fuel. (147) "Nuclear Waste Fund" means the fund established by Section 302(c) of the Nuclear Waste Policy Act in which the Spent Nuclear Fuel Fees to be used for the design, construction and operation of a High Level Waste Repository and other activities related to the storage and disposal of Spent Nuclear Fuel is deposited. (148) "Nuclear Waste Policy Act" means the Nuclear Waste Policy Act of 1982, as amended. (149) "Observers" has the meaning set forth in Section 6.1(c). (150) "Off-Site Location" means any real property or other location, other than the real property comprising the Sites. 14 (151) "Palisades" has the meaning set forth in the recitals. (152) "Palisades Assets" means that part of the Included Assets related to Palisades. (153) "Palisades Deed" means a deed conveying the Real Property comprising the Palisades Site and the Emergency Equipment Easements to Buyer, in the form of Exhibit D-1 hereto. (154) "Palisades Defined Benefit Plan" has the meaning set forth in Section 6.10(g). (155) "Palisades Defined Contribution Plan" has the meaning set forth in Section 6.10(f). (156) "Palisades Employee" means an hourly-paid or salaried employee of (i) NMC or an Affiliate of NMC, or (ii) Consumers, who is subject to the Collective Bargaining Agreement with the UWUA, and in either case who receives an IRS Form W-2 from NMC or an Affiliate of NMC, or from Consumers and who is principally employed as of the Closing Date at Palisades (including employees absent from service due to illness, leave of absence or military service, or whose work responsibilities involve principally the operation of any of the Palisades Assets, which employees shall be set forth in Schedule 6.10(a) (which shall be updated as of the Closing Date as provided for herein). "Palisades Employee" does not mean or include any worker, working at or on the Facilities or the Palisades Assets, who is compensated directly by an entity other than NMC or an Affiliate of NMC or Consumers and/or for whom NMC or an Affiliate of NMC or Consumers issues an IRS Form 1099. (157) "Palisades Facilities" means the Facilities associated with Palisades. (158) "Palisades Retiree Coverages" has the meaning set forth in Section 6.10(k). (159) "Palisades Site" means the parcels of land included in the Real Property conveyed to Buyer pursuant to the Palisades Deed. (160) "Palisades Survey" has the meaning set forth in Section 6.24. (161) "Palisades Title Commitment" means the title commitment issued by Chicago Title Insurance Company, Revision No. 6, effective date April 10, 2006 at 8:00 a.m., File No. 800414496CML that is included in Exhibit J attached hereto. (162) "Party" (and the corresponding term "Parties") has the meaning set forth in the preamble. (163) "PBGC" means the Pension Benefit Guaranty Corporation established by ERISA. (164) "Permits" has the meaning set forth in Section 4.13(a). 15 (165) "Permitted Encumbrances" means: (i) without limiting Buyer's rights in regard to any applicable conditions to consummate the Closing, (A) with respect to the Palisades Site, (x) the exceptions to title listed in Items 6 through 28 of Schedule B, Part II, of the Palisades Title Commitment, (y) all matters shown on the Palisades Survey and (z) any rights of the public under the "public trust" doctrine in areas adjoining the Lake Michigan shore, and (B) with respect to the Big Rock ISFSI Site, the exceptions to title listed in Items 6 and 8 of Schedule B, Part II, of the Big Rock Point ISFSI Title Commitment and all matters shown on the Big Rock ISFSI Survey; (ii) Encumbrances created by the Mortgage Indenture that will be released prior to or at the Closing; (iii) statutory liens for Taxes or other governmental charges or assessments not yet due or delinquent or the validity of which are being contested in good faith by appropriate proceedings and which do not individually or in the aggregate exceed $500,000 (iv) mechanics', materialmen's, carriers', workers', repairers' and other similar liens arising or incurred in the ordinary course of business relating to obligations as to which there is no default on the part of Seller or the validity of which are being contested in good faith, and which do not, individually or in the aggregate, exceed Five Hundred Thousand Dollars ($500,000); (v) subject to Section 6.6(f), Seller's representations and warranties in this Agreement and without limiting any of Buyer's rights in regard to any applicable conditions to Buyer's obligations to consummate the Closing or under the terms of the Deeds, zoning, entitlement, environmental or conservation restrictions and other land use and environmental regulations imposed by Governmental Authorities which do not, individually or in the aggregate, interfere with the present use or operation of the Included Assets; (vi) the rights and easements to be reserved by Seller following the Closing pursuant to the Deeds and associated terms and conditions set forth in the Deeds; and (vii) such other imperfections in or failures of title, easements, leases, licenses, restrictions, building or use limitations, conservation easements, encumbrances and encroachments, as do not, individually or in the aggregate, materially detract from the value of the Included Assets as such assets are currently used by an amount in excess of One Hundred Thousand Dollars ($100,000) or materially interfere with the present use or operation of the Included Assets. (166) "Person" means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, association or Governmental Authority. (167) "Plans" has the meaning set forth in Section 2.4(f). (168) "PLR Decommissioning Amount" has the meaning set forth in Section 6.12(a). (169) "Post-Closing Adjustment" has the meaning set forth in Section 3.3(c). (170) "Post-Closing Decommissioning Trust Agreement" means the decommissioning trust agreement between Buyer and the Trustee pursuant to which any assets of the Qualified Decommissioning Fund to be transferred by Seller at Closing pursuant to Section 6.12 hereof will be held in trust. (171) "Post-Closing SNF Claim" has the meaning set forth in Section 6.14(a). (172) "Post-Closing Statement" has the meaning set forth in Section 3.3(c). 16 (173) "Power Purchase Agreement" means the Power Purchase Agreement between Seller and Buyer, dated as of the Effective Date and in the form of Exhibit F hereto. (174) "Pre-1983 Fee" means the one-time fee, including any interest, late fees and/or penalties accruing thereon from time to time, payable by Seller pursuant to Article VIII (B)(2) of the Standard Spent Fuel Disposal Contract. (175) "Price-Anderson Act" means Section 170 of the Atomic Energy Act and related provisions of Section 11 of the Atomic Energy Act. (176) "Proposed Post-Closing Adjustment" has the meaning set forth in Section 3.3(c). (177) "Proprietary Information" (i) with respect to information provided by Seller to Buyer, has the meaning as set forth in the Confidentiality Agreement, and (ii) with respect to information provided by Buyer to Seller, shall mean information relating to the financing or operation and maintenance, actual or proposed, of the Included Assets and any financial, operational or other information concerning Buyer or its Affiliates or their respective assets and properties furnished by Buyer or its Representatives to Seller or its Representatives, whether furnished before, on or after the Effective Date, whether oral or written, and regardless of the manner in which it is furnished; but does not include information which (a) is or becomes generally available to the public other than as a result of a disclosure by Seller or its Representatives, (b) was available to Seller or its Representatives on a non-confidential basis prior to its disclosure by Buyer or its Representatives or (c) becomes available on a non-confidential basis from a person other than Buyer or its Representatives who is not otherwise bound by a confidentiality agreement with Buyer or its Representatives, or is otherwise not under any obligation to Buyer or its Representatives not to transmit the information to Seller or its Representatives. (178) "Purchase Price" has the meaning set forth in Section 3.2. (179) "Qualified Decommissioning Fund" means, with respect to Seller, Seller's external trust fund for purposes of Decommissioning Palisades that meets the requirements of Code Section 468A and Treas. Reg. Section 1.468A-5, maintained by Seller with respect to the Facilities prior to Closing pursuant to Seller's Decommissioning Trust Agreement and, with respect to Buyer, Buyer's external trust fund for purposes of Decommissioning Palisades that meets the requirements of Code Section 468A and Treas. Reg. Section 1.468A-6(b)(2), maintained by Buyer after the Closing pursuant to the Post-Closing Decommissioning Trust Agreement to the extent assets are transferred to such fund by Seller pursuant to Section 6.12. (180) "Real Property" has the meaning set forth in Section 2.1(a). (181) "Release" shall have the meaning set forth in Environmental Laws, but shall include any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing of Hazardous Materials into the Environment; provided, however, that "Release" shall not include any release that is permissible under applicable Environmental Laws or Environmental Permits. 17 (182) "Remediation" means action of any kind required by any applicable Environmental Law or order of a Governmental Authority to address a Release, the threat of a Release or the presence of Hazardous Materials at a Site, the Included Assets or an Off-Site Location including any or all of the following activities to the extent they relate to or arise from the Release or presence of Hazardous Materials at that Site, the Included Assets or an Off-Site Location: (a) monitoring, investigation, assessment, treatment, cleanup, containment, removal, mitigation, response or restoration work; (b) obtaining any permits, consents, approvals or authorizations of any Governmental Authority necessary to conduct any such activity; (c) preparing and implementing any plans or studies for any such activity; (d) obtaining a written communication from a Governmental Authority with jurisdiction over the Site, the Included Assets or an Off-Site Location under Environmental Law that no material additional work is required by such Governmental Authority; (e) the use, implementation, application, installation, operation or maintenance of remedial action at the Site, the Included Assets or an Off-Site Location, remedial technologies applied to the surface or subsurface soils, excavation and off-Site treatment or disposal of soils, systems for long term treatment of surface water or ground water, engineering controls or institutional controls; and (f) any other activities reasonably determined to be required under Environmental Laws to address the presence or Release of Hazardous Materials at the Site, the Included Assets or an Off-Site Location. (183) "Replacement Benefit Plans" has the meaning set forth in Section 6.10(e). (184) "Replacement Defined Benefit Plans" has the meaning set forth in Section 6.10(g)(1). (185) "Replacement Retiree Coverages" has the meaning set forth in Section 6.10(k). (186) "Replacement Welfare Plans" has the meaning set forth in Section 6.10(d). (187) "Reportable Event" has the meaning set forth in ERISA Section 4043. (188) "Representatives" of a Party means the Party and its Affiliates and their directors, officers, employees, agents, partners, advisors (including accountants, counsel, environmental consultants, financial advisors and other authorized representatives) and parents and other controlling Persons. (189) "Requested Rulings" has the meaning set forth in Section 6.18. (190) "Safeguards Information" means information that is required to be protected under the terms of 10 C.F.R. Section 73.21. (191) "SAFSTOR" means a method of Decommissioning in which a nuclear facility is placed and maintained in such condition that such facility can be safely stored and subsequently decontaminated to levels that permit release for unrestricted use. (192) "SEC" means the United States Securities and Exchange Commission and any successor agency thereto. 18 (193) "Securities Act" means the Securities Act of 1933, as amended. (194) "Seller" has the meaning set forth in the preamble. (195) "Seller Indemnitee" has the meaning set forth in Section 8.1(a). (196) "Seller's Agent(s)" has the meaning set forth in Section 6.1(c). (197) "Seller's Agreements" means those contracts, agreements, licenses, leases and other legally binding commitments and arrangements primarily relating to the ownership, operation and maintenance of the Included Assets, including licenses and leases for computer hardware and software, described on Schedule 4.11(a)(i). (198) "Seller's Decommissioning Trust Agreement" means the Amended and Restated Trust Agreement, dated January 1, 2004, by and between Consumers and State Street Bank and Trust Company, regarding the Qualified Decommissioning Fund of Seller. (199) "Seller's Parent" means CMS Energy Corporation, a Michigan corporation. (200) "Seller's Required Regulatory Approvals" has the meaning set forth in Section 4.3(b). (201) "SFAS 106" has the meaning set forth in Section 6.10(l)(2). (202) "Sites" means, collectively, the Big Rock ISFSI Site and the Palisades Site. Any reference to the Sites or to any particular Site shall include, by definition, the surface and subsurface elements, including the soils and groundwater present at the relevant Site or Sites and any references to items "at the Site" or "at the Sites" shall include all items "at, in, on, upon, over, across, under, and within" the relevant Site(s). (203) "Source Material" means: (1) uranium or thorium; or any combination thereof, in any physical or chemical form, or (2) ores which contain by weight one-twentieth of one percent (0.05%) or more of (i) uranium, (ii) thorium, or (iii) any combination thereof. Source Material does not include Special Nuclear Material. (204) "Special Nuclear Material" means plutonium, uranium-233, uranium enriched in the isotope-233 or in the isotope-235, and any other material that the NRC determines to be "Special Nuclear Material," but does not include Source Material. Special Nuclear Material also refers to any material artificially enriched by any of the above-listed materials or isotopes, but does not include Source Material. (205) "Spent Nuclear Fuel" means fuel that has been permanently withdrawn from a nuclear reactor following irradiation, and has not been chemically separated into its constituent elements by reprocessing. Spent Nuclear Fuel includes the Special Nuclear Material, Byproduct Material, Source Material, Greater Than Class C Waste, and other radioactive materials associated with Nuclear Fuel assemblies. 19 (206) "Spent Nuclear Fuel Fees" means those fees assessed pursuant to the Standard Spent Fuel Disposal Contract, as provided in Section 302 of the Nuclear Waste Policy Act and 10 C.F.R. Part 961, as the same may be amended from time to time, on electricity generated at Palisades and the Big Rock Point Plant Operating Facility. (207) "Standard Spent Fuel Disposal Contract" means the Contract for Disposal of Spent Nuclear Fuel and/or High Level Radioactive Waste, No. DE-CR01-83NE44374, dated June 3, 1983 and entered into between Consumers and the United States of America, represented by the Department of Energy, as amended, which shall be deemed a Seller's Agreement under this Agreement. (208) "Survey(s)" has the meaning set forth in Section 6.24(b). (209) "Tangible Personal Property" has the meaning set forth in Section 2.1(b). (210) "Tax" or "Taxes" means, all taxes, charges, fees, levies, penalties or other assessments, including Income Taxes, imposed by any federal, state, local, provincial or foreign taxing authority, including gross receipts, single business, excise, ad valorem, real or personal property, sales, transfer, customs, duties, franchise, payroll, withholding, social security, receipts, license, stamp, occupation, employment, or other taxes, including any interest, penalties or additions attributable thereto, and any payments to any state, local, provincial or foreign taxing authorities in lieu of any such taxes, charges, fees, levies or assessments. (211) "Tax Rate" has the meaning set forth in Section 6.20(c). (212) "Tax Return" means any return, report, information return, declaration, claim for refund or other document (including any schedule or related or supporting information) required to be supplied to any Governmental Authority with respect to Taxes including amendments thereto. (213) "Termination Date" has the meaning set forth in Section 9.1(b). (214) "Third Party Claim" has the meaning set forth in Section 8.3(a). (215) "Threshold Amount" has the meaning set forth in Section 8.2(a). (216) "Total Compensation" has the meaning set forth in Section 6.10(c). (217) "Transferable Permits" means those Permits and Environmental Permits which are transferable to Buyer without consent or approval of any Governmental Authority. (218) "Transferred Employee Records" means all reasonably available records related to Transferred Employees (including those employed by NMC) for the entire term of their employment with Seller, NMC or any of their Affiliates, including the following information: (i) skill and development training, (ii) seniority histories, (iii) salary and benefit information, (iv) Occupational, Safety and Health Administration reports, (v) medical records and active medical restriction forms, (vi) fitness for duty, (vii) disciplinary actions, (viii) job performance appraisals and/or evaluations, (ix) employment applications, (x) bonuses, (xi) job 20 history, (xii) access authorization records, (xiii) radiation exposure records, (xiv) direct deposit financial institution data, (xv) wages paid, recurring payroll deductions, Taxes withheld and/or paid and liens, (xvi) payroll advance data, (xvii) accrued and unused sick or vacation leave and (xviii) service credited for purposes of vesting and eligibility to participate under any Benefit Plan, in each case for the year in which the Closing occurs. (219) "Transferred Employees" has the meaning set forth in Section 6.10(b). (220) "Transfer Taxes" means any real property transfer, sales, use, value added, stamp, documentary, recording, registration, conveyance, stock transfer, intangible property transfer, personal property transfer, gross receipts, registration, duty, securities transactions or similar fees or Taxes or governmental charges (together with any interest or penalty, addition to Tax or additional amount imposed) as levied by any Governmental Authority in connection with the transactions contemplated by this Agreement, including any payments made in lieu of any such Taxes or governmental charges which become payable in connection with the transactions contemplated by this Agreement. (221) "Transition Committee" has the meaning set forth in Section 6.1(b). (222) "Trustee" means with respect to Seller prior to the Closing the trustee of the Qualified Decommissioning Fund appointed by Seller pursuant to Seller's Decommissioning Trust Agreement and after the Closing to the extent any assets of the Qualified Decommissioning Fund are transferred by Seller pursuant to Section 6.12 hereof, the trustees appointed pursuant to the Post-Closing Decommissioning Trust Agreement. (223) "USERRA" means the Uniformed Services Employment and Reemployment Rights Act of 1994, as amended, and the accompanying regulations. (224) "UWUA" means the Utility Workers Union of America, an affiliate of the AFL-CIO. (225) "WARN Act" means the Worker Adjustment and Retraining Notification Act of 1988, as amended. (226) "WARN Certificate" has the meaning set forth in Section 6.10(h). 1.2. Certain Interpretive Matters. (a) Unless otherwise required by the context in which any term appears: (1) Capitalized terms used in this Agreement shall have the meanings specified in this Article. (2) The singular shall include the plural, the plural shall include the singular, and the masculine shall include the feminine and neuter. (3) References to "Articles," "Sections," "Schedules" or "Exhibits" shall be to articles, sections, schedules or exhibits of or to this Agreement, and references 21 to "paragraphs" or "clauses" shall be to separate paragraphs or clauses of the section or subsection in which the reference occurs. (4) The words "herein," "hereof" and "hereunder" shall refer to this Agreement as a whole and not to any particular section or subsection of this Agreement; and the words "include," "includes" or "including" shall mean "including, but not limited to." (5) The term "day" shall mean a calendar day, commencing at 12:00 a.m. (local time). The term "week" shall mean any seven consecutive day period commencing on a Sunday, and the term "month" shall mean a calendar month; provided that when a period measured in months commences on a date other than the first day of a month, the period shall run from the date on which it starts to the corresponding date in the next month and, as appropriate, to succeeding months thereafter. Whenever an event is to be performed or a payment is to be made by a particular date and the date in question falls on a day which is not a Business Day, the event shall be performed, or the payment shall be made, on the next succeeding Business Day; provided, however, that all calculations shall be made regardless of whether any given day is a Business Day and whether or not any given period ends on a Business Day. (6) All references to a particular entity shall include such entity's permitted successors and permitted assigns unless otherwise specifically provided herein. (7) All references herein to any Law or to any contract or other agreement shall be to such Law, contract or other agreement as amended, supplemented or modified from time to time unless otherwise specifically provided herein. (b) The titles of the articles, sections and schedules herein have been inserted as a matter of convenience of reference only, and shall not control or affect the meaning or construction of any of the terms or provisions hereof. (c) This Agreement was negotiated and prepared by both Parties with advice of counsel to the extent deemed necessary by each Party; the Parties have agreed to the wording of this Agreement; and none of the provisions hereof shall be construed against one Party on the ground that such Party is the author of this Agreement or any part hereof. (d) The Exhibits hereto are incorporated in and are intended to be a part of this Agreement; provided, however, that in the event of a conflict between the terms of any Exhibit and the terms of the remainder of this Agreement, the terms of the remainder of this Agreement shall take precedence. ARTICLE 2 PURCHASE AND SALE 2.1. Included Assets. Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, at the Closing, Seller will sell, assign, convey, transfer and deliver, or cause to be 22 sold, assigned, conveyed, transferred and delivered, to Buyer, and Buyer will purchase, assume and acquire from Seller free and clear of all Encumbrances (except for Permitted Encumbrances), all of Seller's right, title and interest in and to the properties and assets constituting, or primarily used in the ownership, maintenance or operation of, Palisades and the Big Rock ISFSI at or prior to the Closing (other than the Excluded Assets) (collectively, the "Included Assets"), including the following: (a) The land described on Schedule 2.1(a) (which land comprises the Sites) together with all buildings, facilities, fixtures and other improvements thereon including the Facilities (but excluding any personal property of Seller thereon) and all rights arising out of the ownership thereof or appurtenances thereto, including all related easements, all related rights of ingress and egress, the water intake and discharge structures to the extent such may be deemed real property (collectively, the "Real Property"); (b) All machinery, mobile or otherwise, equipment (including computer hardware and communications equipment), vehicles, tools, spare parts, materials, works in progress, furniture and furnishings and other items of personal property used primarily in connection with the ownership, maintenance or operation of Palisades and the Big Rock ISFSI, including that listed on Schedule 2.1(b) (collectively, "Tangible Personal Property"); (c) All Nuclear Fuel Inventories and Facility Inventories wherever located, and all Nuclear Materials located at the Sites at Closing which Nuclear Materials were used at or in connection with Palisades or Big Rock Point Plant Operating Facility and resulted from the operation or maintenance of Palisades or Big Rock Point Plant Operating Facility; (d) Subject to the provisions of Section 6.4(d), all rights of Seller under the Fuel Contracts, the Non-material Contracts and the Seller's Agreements; (e) All Transferable Permits; (f) To the extent permitted by Law, except for the books and records that are Excluded Assets, all books, operating records, licensing records, quality assurance records, purchasing records, and equipment repair, maintenance, safety or service records, operating, safety and maintenance manuals, inspection reports, environmental assessments, environmental reports made to Governmental Authorities and records maintained in accordance with Environmental Laws, engineering design plans, documents, blueprints and as built plans, specifications, procedures, studies or reports and other similar items of Seller primarily relating to the design, construction, licensing, regulation, operation or Decommissioning of Palisades, the Big Rock ISFSI and the Included Assets (including all of Seller's rights to use such documents owned by other Persons and licensed to or held for use by or for Seller or its agents) wherever located and whether existing in hard copy or magnetic or electronic form (subject to the right of Seller to retain copies of same for its use and subject to the obligation of Buyer to preserve such records and make such records available to Seller as reasonably necessary for Seller's reasonable and lawful purposes following the Closing Date as provided in Section 6.2(c)) (collectively, the "Business Books and Records"), provided, that Buyer agrees that Seller, at its option, may transfer to Buyer either originals or copies of the Business Books and Records, and, with respect to the Business Books and Records related to the Big Rock ISFSI, Seller may transfer to Buyer 23 originals or copies of Seller's books and records relating to the Big Rock Point Plant Operating Facility, which books and records include the Business Books and Records related to the Big Rock ISFSI; (g) All unexpired, transferable warranties and guarantees from third parties with respect to any item constituting part of the Included Assets; (h) The name "Palisades Nuclear Plant," "Palisades" and "Big Rock ISFSI" as used as a designation attached to or associated with the Facilities and any derivative tradenames, trademarks, servicemarks or logos; (i) All patents and patent rights, trademarks and trademark rights, service marks and service mark rights, inventions, proprietary processes, trade names, copyrights and copyright rights, trade secrets, computer programs and other software, know-how, domain names, websites, source and object codes and all other intellectual property and intellectual property rights primarily used in, the operation or maintenance of, the Included Assets, and all pending applications for registrations of patents, trademarks, service marks and copyrights, including those items described on Schedule 2.1(i) (the "Intellectual Property"), provided, however, that Seller hereby reserves, and Buyer hereby grants to Seller and its Affiliates, to the extent transferable or subject to reservation, as applicable, an irrevocable, fully-paid, royalty-free, license to use such Intellectual Property (except that such license or reservation, as applicable, shall not apply with respect to any trademarks and trademark rights, service marks and service mark rights, trade names, domain names and websites included within the Intellectual Property); (j) All equipment located within the boundaries of the Palisades Site substation owned by Seller, other than the meters referred to in Section 2.2(a); (k) Subject to Section 6.20(c), those assets comprising the Qualified Decommissioning Fund relating to the Palisades Facilities being transferred to Buyer pursuant to Section 6.12(a), including all profits, dividends, income, interest and earnings accrued thereon, together with all related Tax, accounting and other records for such assets, including all Decommissioning studies, analyses and cost estimates and all records related to the determination of the Tax basis of such assets; (l) Subject to Section 2.2(e), those Nuclear Insurance Policies with ANI and, to the extent transferable, those certain Indemnity Agreements of the Atomic Energy Commission, in either case to the extent relating to the Facilities and listed on Schedule 2.2(l); (m) The radio licenses set forth on Schedule 2.1(m); (n) Except for the Department of Energy Claim, the rights of Seller in and to any causes of action asserted and unasserted (other than any causes of action filed and pending as of the Closing Date, as set forth on Schedule 2.1(n) (as updated on or prior to the Closing Date) to the extent relating to the period prior to the Closing Date) claims (including rights under insurance policies to proceeds, refunds or distributions thereunder paid after the Closing Date with respect to the Assumed Liabilities and Obligations or with respect to pre-Closing damages to the Included Assets that have not been remedied by Seller) and defenses against third parties 24 (including indemnification and contribution) to the extent relating to any Assumed Liabilities and Obligations, including (subject to Section 6.14) the right to prosecute any and all claims for damages arising post-Closing under the Standard Spent Fuel Disposal Contract (except to the extent included within the Department of Energy Claim); (o) The Transferred Employee Records, subject to the right of Seller to retain copies of such records for its use and subject to the obligation of Buyer to preserve such records and make such records available to Seller as necessary for Seller's purposes following the Closing Date as provided in Section 6.2(c); (p) All assignable right, title and interest to the NRC Licenses; and (q) All rights of Seller in property, assets, leases and agreements primarily used in providing emergency warning or primarily associated with emergency preparedness, including (i) the Emergency Equipment Easements set forth on Schedule 2.1(q) and (ii) except as set forth in Schedule 4.13(b), the emergency warning sirens and environmental sampling and dosimeter stations listed on Schedule 2.1(q). 2.2. Excluded Assets. Notwithstanding anything to the contrary in this Agreement, nothing in this Agreement shall be construed as conferring on Buyer, and Buyer is not acquiring, any right, title or interest in or to the following specific assets which are associated with the Included Assets, but which are hereby specifically excluded from the sale and the definition of Included Assets herein (the "Excluded Assets"): (a) Any meters owned or to be owned by Seller located within the boundaries of the Palisades Site substation and to be used in connection with providing station power service to Palisades; (b) The radio communications system antenna and related equipment located on the "Meteorological Tower Site" as further described in the Palisades Deed; (c) Except to the extent contemplated by the Firing Range Lease and the Emergency Operations Facilities Lease, Seller's interest in (i) the Firing Range and (ii) the facility in South Haven, Michigan included in the Emergency Operations Facilities; (d) Certificates of deposit, shares of stock, securities, bonds, debentures, evidences of indebtedness, and interests in joint ventures, partnerships, limited liability companies and other entities relating to the Facilities or the Sites, except such assets comprising the Qualified Decommissioning Fund or assets transferred pursuant to Section 6.10; (e) All rights to premium refunds and distributions made on or after the Closing Date with respect to periods prior to the Closing Date under Nuclear Insurance Policies of Seller with ANI, including any rights to receive premium refunds, distributions and continuity credits with respect to periods prior to the Closing Date pursuant to the ANI nuclear industry credit rating plan; 25 (f) Seller's policyholder interest under its NEIL policies, including rights to any premium refunds or other distributions made on or after the Closing Date; (g) Seller's interest in all cash, cash equivalents, bank deposits, accounts and notes receivable (trade or otherwise), and any income, sales, payroll or other receivables relating to Taxes, in each case relating to the Included Assets, except to the extent such assets are included in the Qualified Decommissioning Fund or are assets transferred pursuant to Section 6.10; (h) The rights of Seller and its Affiliates to the names "Consumers Energy" or "Consumers" or any related or similar trade names, trademarks, service marks, corporate names or logos, or any part, derivative or combination thereof (for the avoidance of doubt, Buyer shall not acquire any right to or interest in the name "CMS Energy" or any related or similar trade names, trademarks, service marks, corporate names or logos, or any part, derivative or combination thereof); (i) All tariffs, agreements and arrangements to which Seller is a party or has an interest for the purchase or sale of electric capacity and/or energy or for the purchase or sale of transmission or ancillary services; (j) Other than those contemplated by Section 2.1(n), the rights of Seller in and to any causes of action, claims and defenses against third parties (including indemnification and contribution) arising out of or relating to (i) any Real Property or personal property, Permits, Taxes, Emergency Equipment Easements, the Seller's Agreements, Fuel Contracts or the Non-material Contracts, if any, including any claims for refunds (including refunds of previously paid Department of Energy Decommissioning and Decontamination Fees), prepayments, offsets, recoupment, insurance proceeds, condemnation awards, judgments and the like, whether received as payment or credit against future liabilities, relating specifically to the Included Assets (including the Facilities and the Sites), to the extent relating to any period prior to the Closing Date, (ii) the Excluded Assets or (iii) the Excluded Liabilities; (k) The Department of Energy Claim; (l) All personnel records of Seller, NMC and their Affiliates relating to the Facilities or the Sites, except the Transferred Employee Records; (m) Unless included as a Seller Agreement, any and all of Seller's rights in any contract representing an intercompany transaction between Seller and an Affiliate of Seller, whether or not such transaction relates to the provision of goods and services, payment arrangements, intercompany charges or balances, or the like; (n) To the extent not otherwise provided for in this Section 2.2 and unless prorated as provided in Section 3.5, any refund or credit (i) related to Taxes paid by Seller with respect to periods (or portions thereof) that end on or prior to the Closing Date in respect of the Included Assets, whether such refund is received as a payment or as a credit against future Taxes, or (ii) arising under any agreement which is part of the Included Assets and relating to a period (or portion thereof) ending on or prior to the Closing Date; 26 (o) All rights of Seller under those contracts, agreements, purchase orders and personal property leases set forth in Schedule 2.2(o) (the "Excluded Contracts"); (p) All books, operating records, licensing records, quality assurance records, purchasing records, and equipment repair, maintenance or service records relating exclusively to the design, construction, licensing or operation of the Facilities, operating, safety and maintenance manuals, inspection reports, environmental assessments, engineering design plans, documents, blueprints and as built plans, specifications, procedures and other similar items of Seller, wherever located, relating to the Excluded Assets or the Excluded Liabilities, whether existing in hard copy or magnetic or electronic form; (q) All of the assets of Seller comprising any fund relating to Decommissioning, other than the Seller's Qualified Decommissioning Fund; (r) The right to the Excess PLR Decommissioning Amount, if any, upon the occurrence of any event specified in Section 6.20(c) or the receipt of the Requested Rulings prior to the Closing; and (s) All other assets of Seller and its Affiliates not constituting an interest in the Included Assets (it being acknowledged and agreed that no spare transformer for the Facilities has been included in the Included Assets). 2.3. Assumed Liabilities and Obligations. At the Closing, Buyer shall deliver to Seller the Assignment and Assumption Agreement pursuant to which Buyer shall assume and agree to discharge when due, the following specific Liabilities and certain liabilities for Taxes of Seller that relate to the Included Assets or are otherwise specified below (collectively, "Assumed Liabilities and Obligations"): (a) All Liabilities arising after the Closing with respect to the ownership, operation, use or maintenance after the Closing of the Included Assets, and all Liabilities arising after the Closing under the Seller's Agreements (including the Standard Spent Fuel Disposal Contract), Fuel Contracts, the Emergency Equipment Easements, the Non-material Contracts and the Transferable Permits in accordance with the terms thereof, including all Liabilities arising after the Closing relating to the contracts, licenses, agreements and personal property leases entered into with respect to the Included Assets after the Effective Date consistent with Section 6.9, except in each case to the extent such Liabilities, but for a breach or default by Seller or a related waiver or extension, would have been paid, performed or otherwise discharged at or prior to the Closing or to the extent the same arise out of any such breach or default or related waiver or out of any event which after the giving of notice or the passage of time would constitute a default by Seller; (b) All Liabilities with respect to the Transferred Employees relating to loss of life, injury, illness, discrimination, wrongful discharge, unfair labor practice, or constructive termination of any individual, or similar claim or cause of action that are attributable to any actions or inactions of Buyer or its Affiliates at or after the Closing; 27 (c) All Liabilities with respect to Transferred Employees for which Buyer is responsible pursuant to Section 6.10; (d) Except as contemplated by Section 2.4(d), 2.4(i) and 2.4(j), all Liabilities of Seller under or related to Environmental Laws with respect to the ownership, use, operation or maintenance of the Included Assets (i) arising pre- or post-Closing, with respect to any such Liabilities caused (or allegedly caused) by the presence or Release of Hazardous Materials at, on, in, under or migrating from the Palisades Site (but excluding any such Liability arising pre-Closing with respect to an Off-site Location, except to the extent that the Hazardous Materials giving rise to such Liability are present on the Palisades Site and such Off-Site Location as a result of the same Release occurring prior to the Closing) and (ii) arising after the Closing with respect to all other such Liabilities, including any such Liabilities caused (or allegedly caused) by the presence or Release of Hazardous Materials at, on, in, under or migrating from the Big Rock ISFSI Site; (e) Liabilities for any claims by third parties resulting from or in connection with loss of life, injury or illness to persons or damages to property or the Environment and caused (or allegedly caused) by the presence or Release after the Closing of Hazardous Materials at, on, in, under or migrating from the Palisades Site or the Big Rock ISFSI Site; (f) All Liabilities associated with or arising from the Included Assets in respect of Taxes for which Buyer is liable pursuant to Section 3.5 or 6.8; (g) With respect to the Included Assets, all Liabilities for any Taxes that may be imposed by any Governmental Authority on the ownership, sale, maintenance, operation or use of the Included Assets or that relate to or arise from the Included Assets, in either case with respect to taxable periods (or portions thereof) beginning at or after the Closing (except for any Taxes imposed upon Seller arising from the sale of the Included Assets pursuant to this Agreement, any Income Taxes attributed to income actually received and retained by Seller, any Taxes imposed upon Seller under Section 6.8); (h) All Liabilities to Decommission the Facilities and the Sites; (i) Without limiting the Liabilities retained by Seller pursuant to Sections 6.13, 6.14 or 6.15, all Liabilities (other than Liabilities relating to claims by third parties, which are addressed in Section 2.3(j)), (A) whether arising pre- or post-Closing with respect to the Palisades Assets (but not, with respect to any such pre-Closing Liabilities, at any Off-Site Location) and (B) arising after the Closing with respect to the Big Rock ISFSI Assets, (x) under or relating to Nuclear Laws and arising out of the ownership, use, operation or maintenance at the applicable Site of the Included Assets or (y) associated with, or related to any claim in respect of, Nuclear Fuel, Spent Nuclear Fuel or other Nuclear Materials located at the applicable Site, including any and all such Liabilities arising out of or resulting from an "extraordinary nuclear occurrence," a "nuclear incident" or a "precautionary evacuation" (as such terms are defined in the Atomic Energy Act) at the Sites or any other licensed nuclear reactor site in the United States, or such an extraordinary nuclear occurrence, nuclear incident or precautionary evacuation in the course of the transportation of radioactive materials to or from the Sites or any other site, including Liability for any deferred premiums assessed in connection 28 with such an extraordinary nuclear occurrence, a nuclear incident or precautionary evacuation under any applicable NRC or industry retrospective rating plan or insurance policy, including any mutual insurance pools established in compliance with the requirements imposed under Section 170 of the Atomic Energy Act, 10 C.F.R. Part 140, and 10 C.F.R. Section 50.54(w); provided, however, that Buyer does not assume, and Seller shall retain as Excluded Liabilities hereunder, all Liabilities of Seller arising pre-Closing and associated with the off-Site processing, disposal, fabrication, storage, handling or transportation of Nuclear Fuel, Spent Nuclear Fuel or other Nuclear Materials (including, for purposes of this Section 2.3(i), Hazardous Materials mixed with Nuclear Materials) owned by Seller or NMC or otherwise associated in any manner with the Included Assets; and provided further, that, for sake of clarity, Buyer does not assume any such Liabilities associated with the construction, operation or Decommissioning of the Big Rock Point Plant Operating Facility, except all Liabilities attributable to periods following the Closing related to the Big Rock ISFSI; (j) Liabilities for any claims by third parties (including employees, whether such Liability is work-related or not) for loss of life, injury or illness to persons, damages to property or tort or similar causes of action based on acts or omissions arising or occurring after the Closing (i) under or relating to Nuclear Laws and arising out of the ownership, use, operation or maintenance of the Included Assets or (ii) associated with, or related to any claim in respect of, Nuclear Fuel, Spent Nuclear Fuel or other Nuclear Materials located at the Palisades Site or the Big Rock ISFSI Site; and (k) All other Liabilities expressly allocated to or assumed by Buyer in this Agreement. 2.4. Excluded Liabilities. Notwithstanding anything to the contrary in this Agreement, nothing in this Agreement shall be construed to impose on Buyer, and Buyer shall not assume or be obligated to pay, perform or otherwise discharge, any Liabilities not expressly identified as Assumed Liabilities and Obligations in Section 2.3 above (collectively, the "Excluded Liabilities"), including the following Liabilities and liabilities for Taxes, with all of such Excluded Liabilities remaining as obligations of Seller: (a) Any Liabilities in respect of (i) any Excluded Assets or other assets of Seller which are not Included Assets and (ii) any Excluded Contracts; (b) Any Liabilities for Taxes attributable to the ownership, sale, operation, maintenance or use of the Included Assets (including any withholding Taxes imposed on Seller with respect to the Transferred Employees) for taxable periods, or portions thereof, ending at or prior to the Closing, except for Taxes for which Buyer is liable pursuant to Section 3.5 or 6.8 hereof; (c) Any Liabilities arising under the NPPOSA prior to, at or after the Closing or any of the Seller's Agreements, Fuel Contracts, the Emergency Equipment Easements, Transferable Permits or Non-material Contracts at or prior to the Closing; 29 (d) Any Liabilities for any monetary fines or penalties imposed by a Governmental Authority with respect to the Included Assets or the employment of the Palisades Employees or Big Rock ISFSI Employees, in either case to the extent attributable to acts or omissions of Seller prior to the Closing, together with the reasonable out-of-pocket expenses of Buyer incurred in the course of responding to any investigation relating thereto commenced by a Governmental Authority; (e) Subject to Section 3.5, any payment obligations of Seller for goods delivered, and services rendered, at or prior to the Closing, including rental or lease payments due and owing at or prior to the Closing pursuant to any leases relating to Tangible Personal Property; (f) Subject to Section 6.10, any Liabilities relating to any Benefit Plan, any employee benefit plan as defined in Section 3(3) of ERISA, or any other plan, program, arrangement or policy established or maintained in whole or in part by Seller or NMC or by any trade or business (whether or not incorporated) which is or ever has been under common control, or which is or ever has been treated as a single employer, with Seller or NMC under Section 414(b), (c), (m), (o) or (t) of the Code ("ERISA Affiliate") or to which Seller, NMC or any ERISA Affiliate contributes or contributed, including any multiemployer plan, multiple employer plan or multiple employer welfare arrangement contributed to by Seller, NMC or any ERISA Affiliate or to which Seller, NMC or any ERISA Affiliate is or was obligated to contribute (the "Plans"), including any such Liability (i) for the termination or discontinuance of, or the Seller's, NMC's or an ERISA Affiliate's withdrawal from, any such Plan, (ii) relating to benefits payable under any such Plan or the denial of benefits alleged to be payable under any such Plan, (iii) relating to the PBGC under Title IV of ERISA, (iv) relating to a multiemployer plan, multiple employer plan or multiple employer welfare arrangement, (v) with respect to noncompliance with the notice requirements of COBRA, (vi) with respect to any noncompliance with ERISA or any other applicable Laws, and (vii) with respect to any suit, proceeding or claim which is asserted against Seller, NMC or any of their respective Affiliates, or against any Plan or any fiduciary or former fiduciary of, any of the Plans; (g) Any Liabilities relating to the failure to hire, the employment or services or termination of employment or services of any individual, including wages, compensation, benefits, affirmative action, personal injury (of any kind), discrimination, harassment, retaliation, constructive termination, wrongful discharge, unfair labor practices, or constructive termination by Seller or NMC of any individual, or any similar or related claim or cause of action attributable to any actions or inactions by such Person at or prior to the Closing with respect to the Included Assets, the Palisades Employees, the Big Rock ISFSI Employees, independent contractors, applicants, and any other individuals who are determined by a court or by a Governmental Authority to have been applicants or employees of Seller, NMC or any of their respective Affiliates, provided that neither Seller nor NMC will have any Liability for similar actions or inactions by Buyer or any successor thereto on or after the Closing Date. Notwithstanding the foregoing, Buyer shall not assume any Liabilities for any employees of Seller, NMC or their Affiliates who are terminated or retire prior to the Closing and are not considered a Transferred Employee hereunder; 30 (h) All Spent Nuclear Fuel Fees, the Pre-1983 Fee and any other fees associated with electricity generated at Palisades and the Big Rock Point Plant Operating Facility and sold on or prior to the Closing Date; (i) Any Liability arising out of or related to Releases from the former sulfuric acid above-ground storage tanks described in the amendment dated May 19, 2006 to the Phase I Environmental Site Assessment relating to the Palisades Site; (j) Any Liability arising out of or related to the presence or Release of Hazardous Materials at the Big Rock ISFSI Site as a result of the Release of Hazardous Materials at, on, in, under or migrating from the Big Rock Point Plant Operating Facility site; (k) Any Liability arising out of or related to the release, prior to the Closing, of tritium, strontium 90 or cesium 137 at the Sites that requires Buyer to undertake remediation at any Site or any Off-Site Location prior to the commencement of Decommissioning of the applicable Site. (l) Except as provided in Section 6.8(c), any Taxes incurred by Seller's Qualified Decommissioning Fund for taxable periods, or portions thereof, ending on or prior to the Closing Date (including any Tax incurred as a result of the ownership or disposition of an interest in a common trust fund subject to Code Section 584); (m) Except as otherwise expressly provided herein, Liabilities of Seller to the extent arising from the execution, delivery or performance of this Agreement and the transactions contemplated hereby; and (n) Any other Liabilities expressly allocated to or retained by Seller in this Agreement; 2.5. Control of Litigation. (a) The Parties agree and acknowledge that, following the Closing and subject to the provisions of Article 8, Seller shall pay for and be entitled exclusively to control, defend and settle any litigation, administrative or regulatory proceeding, and any investigation or other activities arising out of or related to any Excluded Assets or Excluded Liabilities and Buyer agrees to reasonably cooperate, at Seller's expense, with Seller in connection therewith. Subject to the foregoing, Buyer shall have the right, at its option and expense, but not the obligation, to retain counsel to represent its interests in connection with any such litigation, investigation, proceedings or activities. (b) The Parties agree and acknowledge that, subject to the provisions of Article 8, Buyer shall pay for and be entitled exclusively to control, defend and settle any litigation, administrative or regulatory proceeding, and any investigation or other activities for which Buyer has responsibility under this Agreement, and Seller agrees to reasonably cooperate, at Buyer's expense, with Buyer in connection therewith. 31 ARTICLE 3 THE CLOSING 3.1. Closing. (a) Upon the terms and subject to the satisfaction of the conditions contained in Article 7 of this Agreement, the sale, assignment, conveyance, transfer and delivery of the Included Assets to Buyer, the payment of the Purchase Price to Seller, and the consummation of the other respective obligations of the Parties contemplated by this Agreement shall take place at a closing (the "Closing"), to be held at the offices of Consumers at One Energy Plaza, Jackson, Michigan at 10:00 a.m. local time, or another mutually acceptable time and location, on the date that is twenty (20) Business Days following the date on which the last of the conditions precedent to Closing set forth in Article 7 of this Agreement has been either satisfied or waived by the Party for whose benefit such condition precedent exists (except with respect to those conditions which by their terms are to be satisfied at or immediately prior to Closing), but in any event not after the Termination Date, unless the Parties mutually agree on another date. The date of Closing is hereinafter called the "Closing Date." The Closing shall be effective for all purposes as of 00:00:01 Eastern Standard Time on the Closing Date. (b) The Parties agree that, notwithstanding anything to contrary contained herein, the Parties shall not be required to effect the Closing during the period commencing on July 15, 2007 and ending upon the completion of the next refueling outage for Palisades, which is currently scheduled to begin during the third quarter of 2007. In the event that the Closing shall occur after such refueling outage has been completed, the Purchase Price shall be reset as described in Schedule 3.3(a)(5). 3.2. Payment of Purchase Price. Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, in consideration of the aforesaid sale, assignment, conveyance, transfer and delivery of the Included Assets, Buyer will pay or cause to be paid to Seller at the Closing in consideration of the Included Assets the sum of Three Hundred Eighty Million Dollars ($380,000,000) (the "Purchase Price") plus or minus any adjustments to such Purchase Price pursuant to the provisions of Section 3.3 below, by wire transfer of immediately available funds denominated in U.S. dollars in accordance with written instructions of Seller given to Buyer at least two (2) Business Days prior to the Closing Date or by such other means as are agreed upon by Seller and Buyer. 3.3. Adjustments to the Purchase Price. (a) Subject to Sections 3.3(b) and 3.3(c), as of the Closing the Purchase Price shall be adjusted, on a dollar-for-dollar basis and without duplication, to account for the items set forth in this Section 3.3(a): (1) The Purchase Price shall be adjusted to account for the items prorated as of the Closing pursuant to Section 3.5. 32 (2) The Purchase Price shall be (A) increased if and to the extent that the Book Value of the Nuclear Fuel owned by Seller as of the Closing is greater than the applicable Nuclear Fuel Book Value Baseline Amount, and (B) decreased if and to the extent that Book Value of the Nuclear Fuel owned by Seller as of the Closing is less than the applicable Nuclear Fuel Book Value Baseline Amount. (3) The Purchase Price shall be (A) increased if and to the extent that the Book Value of the Facility Inventories as of the Closing is greater than Twenty Five Million Two Hundred Thousand Dollars ($25,200,000), and (B) decreased if and to the extent that the Book Value of the Facility Inventories as of the Closing is less than Twenty Five Million Two Hundred Thousand Dollars ($25,200,000). (4) The Purchase Price shall be (i) decreased by the Capital Expenditures Shortfall and (ii) increased by the amount of any and all expenditures (including an allocation for corporate overhead, warehousing and general and administrative expenses) for capital additions to or replacements of property, plant and equipment and other expenditures or repairs on property, plant and equipment relating to the Facilities or the Sites that are capitalized by Seller in accordance with its normal accounting policies ("Capital Expenditures") that are made in respect of work performed after the date hereof and have been specifically requested or approved by Buyer in writing. For purposes of this Section 3.3(a)(4), any work described on the Capital Budget or set forth in Schedule 3.3(a)(5) shall not be deemed to have been requested or approved by Buyer unless otherwise set forth in writing and specifically requesting or authorizing the same. Nothing in this paragraph should be construed to limit Seller's rights and obligations to make all Capital Expenditures necessary to comply with the NRC License, the NRC Commitments and other Permits. (5) The Purchase Price shall be adjusted each day that the Closing Date occurs after March 1, 2007 by the cumulative applicable dollar amount for all such days as set forth in Schedule 3.3(a)(5). (6) If the projected cost to dispose of the Low Level Waste at the Palisades Facilities as of the Closing Date is greater than Five Hundred Thousand Dollars ($500,000), the Purchase Price shall be adjusted downward to the extent that the cost of such Low Level Waste disposal is greater than Five Hundred Thousand Dollars ($500,000). Conversely, if the projected cost to dispose of the Low Level Waste at the Palisades Facilities as of the Closing Date is less than Five Hundred Thousand Dollars ($500,000), the Purchase Price shall be adjusted upward to the extent that the cost of such Low Level Waste disposal is less than Five Hundred Thousand Dollars ($500,000). The calculation of the projected cost to dispose of the Low Level Waste at the Palisades Facilities as of the Closing Date shall be made in accordance with the methodology set forth on Schedule 3.3(a)(5). (7) The Purchase Price shall be adjusted as provided in Section 6.10(g). (8) The Purchase Price shall be adjusted as provided in Section 6.10(l). 33 (9) The Purchase Price shall be adjusted for the Big Rock Amount as provided in Section 6.25. (b) No less than ten (10) Business Days prior to the Closing Date, Seller shall prepare in good faith and deliver to Buyer an estimated closing statement (the "Estimated Closing Statement") that shall set forth Seller's best estimate of all adjustments to the Purchase Price required by Section 3.3(a) (the "Estimated Adjustments"). Seller shall cooperate with Buyer and provide Buyer and its representatives access to all information used to calculate the Estimated Adjustments. Within five (5) Business Days after the delivery of the Estimated Closing Statement by Seller to Buyer, Buyer may object in good faith to any Estimated Adjustment in writing. If Buyer objects to an Estimated Adjustment, the Parties shall attempt to resolve their differences by negotiation. If and to the extent the Parties are able to do so prior to the Closing Date (or if Buyer does not object to any of the Estimated Adjustments), the Purchase Price shall be adjusted (the "Closing Adjustment") for the Closing by the amount of the Estimated Adjustments not in dispute. The Purchase Price, as so adjusted at Closing by the undisputed Estimated Adjustments, is referred to herein as the "Closing Payment." The Closing Payment shall be paid by Buyer to Seller at the Closing. The disputed Estimated Adjustments shall be resolved in accordance with the provisions of Section 3.3(c) and paid as part of any Post-Closing Adjustment to the extent required by Section 3.3(c). (c) Within sixty (60) Business Days after the Closing Date, Seller shall prepare and deliver to Buyer a final closing statement (the "Post-Closing Statement") that shall set forth all adjustments to the Purchase Price required by Section 3.3(a) and any disputed Estimated Adjustments pursuant to Section 3.3(b) (the "Proposed Post-Closing Adjustment") and all work papers detailing such adjustments. Within thirty (30) Business Days after the delivery of the Post-Closing Statement by Seller to Buyer, Buyer may object to the Proposed Post-Closing Adjustment in writing. Seller and Buyer agree to cooperate with one another to provide one another with the information used to prepare the Post-Closing Statement and information relating thereto. If Buyer objects to the Proposed Post-Closing Adjustment, the Parties shall attempt to resolve such dispute by negotiation. If the Parties are unable to resolve such dispute within thirty (30) days after any objection by Buyer, the Parties shall appoint the Independent Accounting Firm, which shall, at Seller's and Buyer's joint expense, review the Proposed Post-Closing Adjustment and determine the appropriate adjustment to the Purchase Price, if any, within thirty (30) days after such appointment. The Parties agree to cooperate with the Independent Accounting Firm and provide it with such information as it reasonably requests to enable it to make such determination. The Independent Accounting Firm shall act as an expert and not as an arbitrator and shall make findings only with respect to the remaining disputes so submitted to it (and not by independent review). The finding of such Independent Accounting Firm shall be binding on the Parties hereto. Upon determination of the appropriate adjustment (the "Post-Closing Adjustment") by agreement of the Parties or by binding determination of the Independent Accounting Firm, the Party owing the difference shall deliver such amount to the other Party (together with interest accrued thereon at the Interest Rate from and including the Closing Date to but excluding the date of payment) no later than two (2) Business Days after such determination, in immediately available funds or in any other manner as reasonably requested by the payee. 34 3.4. Allocation of Purchase Price. (a) Buyer and Seller shall use their reasonable good faith efforts to jointly agree at least forty-five (45) days prior to the Closing Date to an estimated allocation among the Included Assets of the sum of the Purchase Price and the Assumed Liabilities and Obligations that is consistent with the allocation methodology provided by Section 1060 of the Code and the regulations promulgated thereunder and the private letter rulings issued by the IRS under Code Section 468A relating to the transfer of Qualified Decommissioning Fund assets (the "Estimated Allocation"). The Estimated Allocation, to the extent agreed to, will be used for transfer and sales tax filings and for all other Closing document purposes. (b) Buyer and Seller shall use their reasonable good faith efforts to jointly agree, within ninety (90) days after the Closing Date, to an allocation among the Included Assets of the sum of the Purchase Price (including any subsequent adjustments thereto) and the Assumed Liabilities and Obligations (together with any other relevant items) that is consistent with the allocation methodology provided by Section 1060 of the Code and the regulations promulgated thereunder (the "Allocation"). (c) Except to the extent required to comply with a Final Determination, Buyer and Seller (to the extent Seller is required to make any such reports) shall report the transactions contemplated by this Agreement for all Tax purposes in a manner consistent with the Allocation. Buyer and Seller shall not take any position in any Tax Return, Tax proceeding or audit that is inconsistent with the Allocation without the consent of the other Party. To the extent such filings are required, Buyer and Seller agree to file Internal Revenue Service Form 8594 (Asset Acquisition Statement under Section 1060), and all federal, state, local and foreign Tax Returns, in accordance with the Allocation. Subsequent to the preparation of the Estimated Allocation and the Allocation as provided in Sections 3.4(a) and 3.4(b), Buyer and Seller agree to provide the other with any information required to complete Form 8594 within ten (10) days of the request for such information. Buyer and Seller shall notify and provide the other with reasonable assistance in the event of an examination, audit or other proceeding relating to Taxes regarding the allocation of the Purchase Price pursuant to this Section 3.4. Notwithstanding the foregoing, in the event Buyer and Seller cannot agree as to the Allocation, each Party shall be entitled to take its own position in any Tax Return, Tax proceeding or audit, provided that Seller and Buyer shall take all actions required to comply with a Final Determination. Buyer and Seller shall treat the transaction contemplated by this Agreement as the acquisition by Buyer of a trade or business for United States federal income Tax purposes and agree that no portion of the consideration shall be treated in whole or in part as the payment for services or future services. 3.5. Prorations. (a) Buyer and Seller agree that all of the items normally prorated, including those listed below (but not including Income Taxes and Transfer Taxes), relating to the business and operation of the Included Assets shall be prorated as of the Closing, with Seller liable to the extent such items relate to any time period ending at or prior to the Closing, and Buyer liable to the extent such items relate to periods commencing after the Closing (measured in the same units used to compute the item in question, otherwise measured by calendar days or fraction thereof): 35 (1) Taxes, assessments and other charges, if any, relating to the ownership, operation, maintenance, use or business of the Included Assets (subject to Sections 3.5(b) and 3.5(c) below); (2) Any prepaid expenses (including security deposits) relating to the Included Assets; (3) Rent, Taxes and all other items (including goods not included in Facility Inventory) under any of Seller's Agreements or the Non-material Contracts; (4) Any permit, license, registration, compliance assurance fees or other fees with respect to any Transferable Permit; (5) Sewer rents and charges for water, telephone, electricity and other utilities; (6) Spent Nuclear Fuel Fees for the quarter in which the Closing occurs, provided that Seller agrees to pay all Spent Nuclear Fuel Fees for the quarter which ended prior to the quarter in which Closing occurs; (7) Fees or charges (other than Taxes) imposed by any Governmental Authority; and (8) Insurance premiums with respect to the Nuclear Insurance Policies with ANI transferred to Buyer pursuant to Section 2.1(l). (b) Ad valorem real estate Taxes on the Real Property that first become due and payable prior to the Closing will be paid in full by Seller and ad valorem real estate Taxes on the Real Property that first become due and payable after the Closing will be paid in full by Buyer without proration. Seller shall fully pay and be responsible for all special assessments which have become a lien on the Real Property prior to or as of the Closing. Buyer shall be responsible for all special assessments which first become a lien on the Real Property after the Closing. (c) All personal property Taxes on the property included in the Included Assets that, under applicable Law, is taxed as personal property that first become due and payable prior to the Closing will be paid in full by Seller and all personal property Taxes on the property included in the Included Assets that, under applicable Law, is taxed as personal property, that first become due and payable after the Closing will be paid in full by Buyer without proration. (d) Notwithstanding any other provision of this Agreement, a Tax in the form of interest or penalties shall be allocated (i) to Seller (whether such Taxes accrue or are imposed or assessed on, before or after the Closing Date) to the extent they result from a failure by the Seller to pay a Tax or failure by the Seller to file a Tax Return, in each case, that was due on or before the Closing Date and (ii) to Buyer (whether such Taxes accrue or are imposed or assessed on, before or after the Closing Date) to the extent they result from a failure by Buyer to pay a Tax or failure by Buyer to file a Tax Return, in each case that was due after the Closing Date. 36 (e) In connection with the prorations referred to in (a) above, in the event that actual figures are not available at the Closing, the proration shall be based upon the actual accrued through the Closing or paid for the most recent year (or other appropriate period) for which actual amounts paid are available. Such prorated amounts shall be re-prorated and paid to the appropriate Party within sixty (60) days of the date that the previously unavailable actual figures become available. Prorations measured by calendar days shall be based on the number of days (and fractions thereof) in a year or other appropriate period (i) before the Closing and (ii) after the Closing. Seller and Buyer agree to promptly furnish each other with such documents and other records as may be reasonably requested in order to confirm all adjustment and proration calculations made pursuant to this Section 3.5. (f) To the extent that the proration of a Tax under this Section 3.5 allocates such Tax to a period (or portion thereof) ending at or prior to the Closing, such Tax shall constitute an Excluded Liability. To the extent that the proration of a Tax under this Section 3.5 allocates such Tax to a period (or portion thereof) ending after the Closing, such Tax shall constitute an Assumed Liability and Obligation. 3.6. Deliveries by Seller. At the Closing (or, in the case of those items contemplated by paragraph (f) below, at the Facilities on or before the Closing Date), Seller will deliver, or cause to be delivered, the following to Buyer: (a) All Ancillary Agreements, duly executed by Seller, as applicable, except for the Power Purchase Agreement which shall be executed prior thereto; (b) Copies of Seller's Required Regulatory Approvals and any and all consents, waivers or approvals set forth on Schedule 4.3(a) and obtained by Seller with respect to the transfer of the Included Assets, or the consummation of the transactions contemplated by this Agreement together with notice to, and if required by the terms thereof, consents by other Persons that are parties to (or have issued, in the case of the Transferable Permits) the Seller's Agreements, the Fuel Contracts and, to the extent reasonably necessary to operate the Facilities, the Transferable Permits; (c) Copies, certified by the Secretary or any Assistant Secretary of Seller, of corporate resolutions authorizing the execution and delivery of this Agreement and the Ancillary Agreements and all of the other agreements and instruments to be executed and delivered by Seller in connection herewith and therewith, and the consummation of the transactions contemplated hereby and thereby; (d) A certificate of the Secretary or any Assistant Secretary of Seller identifying the name and title and bearing the signatures of the officers of Seller authorized to execute and deliver this Agreement and the Ancillary Agreements and the other agreements and instruments contemplated hereby and thereby; (e) A certificate of good standing with respect to Seller, issued by the Secretary of State of the State of Michigan; 37 (f) To the extent reasonably available, originals or otherwise true and correct copies as certified by an officer of Seller of the Seller's Agreements, Fuel Contracts, Non-material Contracts, Emergency Equipment Easements, Transferred Employee Records and Transferable Permits and, if not reasonably available, true and correct copies thereof; (g) The assets of the Qualified Decommissioning Fund to be transferred pursuant to Section 6.12, provided that such assets shall be delivered to the Trustee of the Post-Closing Decommissioning Trust Agreement; (h) All such other instruments of assignment, transfer or conveyance as shall, in the reasonable opinion of Buyer and its counsel, be necessary or desirable to transfer to Buyer the Included Assets, in accordance with this Agreement and where necessary or desirable in recordable form; (i) Such other agreements, consents, documents, instruments and writings as are required to be delivered by Seller at or prior to the Closing pursuant to this Agreement or the Ancillary Agreements or otherwise reasonably required in connection herewith or therewith; (j) Seller's FIRPTA Certificate; (k) The WARN Certificate; (l) The Palisades Title Commitment and the Big Rock Title Commitment, down-dated/marked up to the Closing Date, each together with any owner's affidavits or similar documents required thereby. (m) Evidence of the release of the Included Assets from the lien of the Mortgage Indenture; and (n) The security required to be furnished by Seller pursuant to Section 7.3 of the Power Purchase Agreement. 3.7. Deliveries by Buyer. At the Closing, Buyer will deliver, or cause to be delivered, the following to Seller: (a) The Closing Payment, payable pursuant to Section 3.2, as adjusted pursuant to Section 3.3; (b) All Ancillary Agreements, duly executed by Buyer, as applicable, except for the Power Purchase Agreement and Interconnection Agreement, which shall be executed prior thereto; (c) Copies of Buyer's Required Regulatory Approvals and any and all consents, waivers or approvals set forth on Schedule 5.3(a) and obtained by Buyer with respect to the transfer of the Included Assets, or the consummation of the transactions contemplated by this Agreement; 38 (d) Copies, certified by the Secretary or any Assistant Secretary of Buyer of resolutions authorizing the execution and delivery of this Agreement and the Ancillary Agreements and all of the other agreements and instruments to be executed and delivered by Buyer and Buyer's Parent in connection herewith and therewith, and the consummation of the transactions contemplated hereby and thereby; (e) A certificate of the Secretary or any Assistant Secretary of Buyer identifying the name and title and bearing the signatures of the officers of Buyer and Buyer's Parent authorized to execute and deliver this Agreement and the Ancillary Agreements and the other agreements contemplated hereby and thereby; (f) A certificate of good standing with respect to Buyer, issued by the Secretary of State of the State of Delaware; (g) A certificate of authority of Buyer (or its assignee of this Agreement) to do business in Michigan, issued by the Secretary of State of the State of Michigan; (h) All such other instruments of assumption as shall, in the reasonable opinion of Seller and its counsel, be necessary for Buyer to assume the Assumed Liabilities and Obligations in accordance with this Agreement; (i) A copy of the Post-Closing Decommissioning Trust Agreement; (j) Such other agreements, documents, instruments and writings as are required to be delivered by Buyer at or prior to the Closing pursuant to this Agreement, or otherwise reasonably required in connection herewith; (k) The security required to be furnished by Buyer pursuant to Section 7.2 of the Power Purchase Agreement. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer as follows: 4.1. Organization. Seller is a corporation duly organized, validly existing and in good standing under the Laws of the State of Michigan and has all requisite corporate power and authority to own, lease, and operate its properties and to carry on its business as is now being conducted. Complete and correct copies of the Articles of Incorporation and By-laws of Seller, each as amended to date, have heretofore been made available to Buyer. 4.2. Authority Relative to this Agreement. Seller has full corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary 39 Agreements and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action required on the part of Seller and no other corporate proceedings on the part of Seller are necessary to authorize this Agreement or the Ancillary Agreements or to consummate the transactions contemplated hereby and thereby. This Agreement and the Ancillary Agreements to which it is a party have been duly and validly executed and delivered by Seller, or, if applicable, will be duly and validly executed and delivered by Seller at the Closing, and assuming that this Agreement and the applicable Ancillary Agreements constitute valid and binding agreements of Buyer, and subject to the receipt of Seller's Required Regulatory Approvals and Buyer's Required Regulatory Approvals, this Agreement and the Ancillary Agreements constitute legal, valid and binding agreements of Seller, enforceable against Seller in accordance with their respective terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, and other similar Laws affecting creditors' rights generally and to general principles of equity (whether considered in a proceeding at law or in equity). 4.3. Consents and Approvals; No Violation. (a) Subject to the receipt of the third-party consents set forth in Schedule 4.3(a), the Seller's Required Regulatory Approvals and the Buyer's Required Regulatory Approvals, neither the execution and delivery of this Agreement or the Ancillary Agreements by Seller nor the consummation of the transactions contemplated hereby or thereby will (i) conflict with or result in the breach or violation of any provision of the Articles of Incorporation or By-laws of Seller; (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which Seller is a party or by which Seller, or any of the Included Assets, may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which do not, individually or in the aggregate, create a Material Adverse Effect; (iii) constitute violations of any Law applicable to Seller, NMC, any of the Included Assets or any of the Palisades Employees or the Big Rock ISFSI Employees, except for such violations as do not, individually or in the aggregate, create a Material Adverse Effect; or (iv) result in the creation, continuation or imposition of an Encumbrance on any of the Included Assets other than a Permitted Encumbrance. (b) Except as set forth in Schedule 4.3(b) (the filings and approvals referred to in Schedule 4.3(b) are collectively referred to as the "Seller's Required Regulatory Approvals"), no declaration, filing or registration with, or notice to, or permit of, or authorization, consent or approval of any Governmental Authority is necessary for the execution and delivery of this Agreement or any Ancillary Agreement or the consummation by Seller of the transactions contemplated hereby or thereby. 4.4. Reports. Since January 1, 2003, each of Seller and its Affiliates and, to Seller's Knowledge, NMC, has filed or caused to be filed with the SEC, the applicable state or local utility commissions or regulatory bodies, the NRC, the Department of Energy, the FERC, the Federal Communications Commission and the Federal Aviation Administration, as the case may 40 be, all material forms, statements, reports and documents (including all exhibits, amendments and supplements thereto) required to be filed by it with respect to the Included Assets or the ownership or operation thereof under each of the Securities Act, the Exchange Act, the applicable state public utility laws, the Federal Power Act, the Public Utility Holding Company Act of 1935, the Public Utility Holding Company Act of 2005, the Atomic Energy Act, the Energy Reorganization Act, the Price Anderson Act, the Communications Act of 1934 and the Federal Aviation Act and the respective rules and regulations under each of the foregoing. All such filings complied in all material respects with all applicable requirements of the appropriate act and the rules and regulations thereunder in effect on the date each such report was filed. 4.5. Title and Related Matters. (a) Seller has marketable title, insurable by a nationally recognized title insurance company, to all of the Real Property, free and clear of all Encumbrances other than the Permitted Encumbrances. (b) Seller has good and valid title to the Included Assets not constituting Real Property free and clear of all Encumbrances, except Permitted Encumbrances. (c) All improvements constituting part of the Real Property are in compliance in all material respects with all applicable Laws and Permits. (d) Neither the whole nor any part of the Real Property is subject to any pending suit for condemnation or other taking by any Governmental Authority, and to Seller's Knowledge, no such condemnation or other taking has been threatened. 4.6. Insurance. Except as set forth in Schedule 4.6, all policies of property damage, fire, liability, Nuclear Insurance Policies, workers' compensation and forms of insurance relating to the Included Assets are in full force and effect, all premiums with respect thereto covering all periods up to and including the date as of which this representation is being made have been paid (other than retroactive premiums which may be payable with respect to NEIL policies), and no written notice of cancellation, non-renewal or termination has been received with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation. Except as described in Schedule 4.6, as of the date of this Agreement, to the Knowledge of Seller, no insurance with respect to the Included Assets has been refused nor has its coverage been limited by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance during the past three (3) years, and all required notices have been sent to insurers to preserve all material claims under the aforementioned insurance policies. 4.7. Environmental Matters. With respect to the Included Assets and the ownership or operation thereof, except as disclosed in Schedule 4.7 and Schedule 4.12: 41 (a) Seller alone or together with NMC has obtained and holds all Environmental Permits used in or necessary for the ownership and the current use of the Included Assets, all of which Environmental Permits are in full force and effect, and Seller and NMC are and have been in compliance in all material respects with all such Environmental Permits, and Seller has no Knowledge of any conditions, or circumstances that represent any material impediment to the prompt renewal or extension of any such Environmental Permits with an associated cost not in excess of standard renewal or extension fees. Seller has no planned changes to the Included Assets that requires modification of any Environmental Permit which has not yet been obtained. Schedule 4.13(b) sets forth all material Environmental Permits applicable to the Included Assets, as well as the status of any pending applications for renewal, modification or extension of any such Environmental Permits. (b) The Included Assets are presently and at all times in the last two (2) years have been in compliance in all material respects with all Environmental Laws. In connection with the ownership or operation of the Included Assets, none of Seller, its Affiliates, nor, to Seller's Knowledge, NMC, has received within the past two (2) years any written notice from any Governmental Authority that it is not or has not been in material compliance with all Environmental Laws and all Environmental Permits. There are no facts, circumstances or conditions that are reasonably likely to be expected to materially restrict, encumber or result in the imposition of any material lien, restriction or limitation, or to result in the imposition of material special conditions, under any Environmental Law with respect to the ownership, occupancy, or use of the Included Assets. (c) There are no material Environmental Claims pending or, to Seller's Knowledge, threatened with respect to the Included Assets and to Seller's Knowledge there are no facts or circumstances that are reasonably likely to form the basis for any material Environmental Claim with respect to the Included Assets. (d) In connection with the operation of the Included Assets by or on behalf of Seller, to Seller's Knowledge, no Releases of Hazardous Materials have occurred, and no Hazardous Materials are present on or migrating from the Sites, that are reasonably likely to give rise to a material Environmental Claim or require any material Remediation, it being understood that Hazardous Materials properly used, stored or maintained at the Sites in compliance with applicable Environmental Law shall not be considered to present a reasonable likelihood of a material Environmental Claim or of a material Remediation requirement. (e) Neither the Sites nor any portion of the Sites is an Environmental Cleanup Site, and, to Seller's Knowledge, neither Seller nor NMC has transported or arranged for treatment, storage, handling, disposal or transportation of any Hazardous Materials from the Sites to any location which is an Environmental Cleanup Site. (f) Except for tanks and equipment that are in conformance with all applicable Environmental Law, there are no above ground or underground storage tanks, active or abandoned, at the Sites nor, to Seller's Knowledge any polychlorinated biphenyl-containing equipment located at the Sites. 42 (g) In the three (3) years prior to the date hereof (i) none of Seller or its Affiliates, nor, to Seller's Knowledge, NMC, has previously sought or obtained, nor has there been or is there currently, to Seller's Knowledge, environmental liability insurance coverage for the Included Assets, and (ii) there have been no claims by Seller or NMC against primary general liability or excess liability insurance policies for any Loss resulting from, relating to or arising from Environmental Claims with respect to the Included Assets. The representations and warranties made by Seller in this Section 4.7 are the exclusive representations and warranties made to Buyer relating to environmental matters. 4.8. Labor Matters. (a) Schedule 4.8 sets forth all collective bargaining agreements and all written and to Seller's Knowledge oral employment agreements, including without limitation severance and change-in-control agreements, that relate to the Palisades Employees and Big Rock ISFSI Employees currently in effect. Complete and correct copies of all collective bargaining agreements and other written employment agreements in respect of the Palisades Employees and Big Rock ISFSI Employees, including all amendments thereto, have been made available to Buyer. To the Knowledge of Seller, each Palisades Employee and Big Rock ISFSI Employee and each other individual that provides services at the Facilities or otherwise in support of the Included Assets is performing, and is qualified, licensed, certified or trained, in accordance with applicable requirements or standards of Governmental Authorities to perform the duties and responsibilities of their current job assignment, and each has the appropriate nuclear power plant access authorizations, where required. (b) With respect to the Palisades Employees and the Big Rock ISFSI Employees, (i) each employer of such employees is in material compliance with all applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours, including all recordkeeping requirements thereunder; (ii) there is no material suit, action, investigation, charge, claim or proceeding pending, or to Seller's Knowledge, threatened (whether internal to Seller, its Affiliates or NMC or before any Governmental Authority), or any order binding upon or applicable to Seller, its Affiliates or NMC, in any case relating to employment, employment and hiring practices, terms and conditions of employment, wages and hours, employment discrimination and equal employment opportunity, employee benefits, occupational safety or health, collective bargaining, immigration, workers' compensation, the payment of Social Security Taxes and other Taxes or plant closings; (iii) there has been no notice of any unfair labor practice charge or complaint pending, or, to Seller's Knowledge, threatened, before the National Labor Relations Board; (iv) there is no strike, slowdown or work stoppage actually pending or, to Seller's Knowledge, threatened; (v) no representation petition has been filed with the National Labor Relations Board, and to Seller's Knowledge, no union organizing campaign is underway; and (vi) no arbitration proceeding arising out of or under the Collective Bargaining Agreement is pending, or to Seller's Knowledge, threatened with respect to any material grievance thereunder. 43 4.9. ERISA; Benefit Plans. (a) Schedule 4.9(a) lists each employee benefit plan, including each employee benefit plan as defined in Section 3(3) of ERISA, each multiemployer plan as defined in Section 3(37) of ERISA, each multiple employer plan within the meaning of Code Section 413(c), each multiple employer welfare arrangement as defined in Section 3(40) of ERISA, and each other plan, contract, agreement, arrangement or policy, whether written or oral, qualified or non-qualified, providing for (i) compensation, severance benefits, bonuses, profit-sharing or other forms of incentive compensation; (ii) vacation, holiday, sickness or other time-off; (iii) health, medical, dental, disability, life, accidental death and dismemberment, employee assistance, educational assistance, relocation or fringe benefits or perquisites, including post-employment benefits; and (iv) deferred compensation, defined benefit or defined contribution, retirement or pension benefits, or equity grants that covers any Palisades Employee, or that is maintained, administered or with respect to which contributions are made by any of NMC, Seller or ERISA Affiliates in respect of Palisades Employees or their beneficiaries ("Benefit Plans"). True, correct, and complete copies of (i) all such Benefit Plans, including all amendments thereto and other information regarding benefit changes that have been previously communicated, (ii) all related trust agreements, insurance contracts and funding arrangements that implement each such Benefit Plan, (iii) all related summary plan descriptions and summaries of material modifications of such Benefit Plans, (iv) all determination letters received from the IRS pertaining to any such Benefit Plan, (v) all annual reports (IRS Forms 5500) for the three (3) most recent plan years for each such Benefit Plan, (vi) all compliance testing data and results for the three (3) most recent plan years for each such Benefit Plan and (vii) all communications with any Governmental Authority with respect to each Benefit Plan have been made available to Buyer. Except as set forth on Schedule 4.9(a), no such information with respect to the Big Rock ISFSI Employee(s) has been provided. (b) Each Benefit Plan and related trust which is intended to be qualified within the meaning of Code Section 401(a) or tax-exempt under Code Section 501(c)(9) is so qualified or exempt from taxation and has received a favorable determination letter as to its qualification or tax-exempt status under all applicable Laws (or if no favorable determination letter has yet been issued, a request for such determination letter with respect to such Benefit Plan was timely submitted) and has never lost its qualified or tax-exempt status and, to Seller's Knowledge, there are no facts or circumstances that would adversely affect IRS qualification or tax-exempt status. The most recent IRS determination letters and any outstanding request for a determination letter have been furnished by Seller to Buyer. (c) With respect to each Benefit Plan: (i) such Benefit Plan (and each related trust, insurance contract or fund) has been maintained, funded and administered in accordance with the terms of such Benefit Plan and the terms of the Collective Bargaining Agreement, if applicable, and complies in all material respects with all applicable Laws, including ERISA, COBRA, HIPAA, USERRA and the Code, the Securities Act and the Exchange Act; (ii) all required reports and descriptions (including annual reports (IRS Form 5500), summary annual reports, summary plan descriptions and summaries of material modifications) have been filed on a timely basis and/or distributed in accordance with the applicable requirements of ERISA and the Code; (iii) no such Benefit Plan that is an Employee Pension Benefit Plan has been completely or partially terminated, and no proceeding by the PBGC to terminate any such 44 Employee Pension Benefit Plan has been instituted or to Seller's Knowledge threatened; (iv) to Seller's Knowledge no Fiduciary has incurred any Liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of such Benefit Plan, (v) subject to the Collective Bargaining Agreement, such Benefit Plan may be amended, terminated, or otherwise modified by the sponsoring employer (including elimination of future accruals under any such Benefit Plan), and no communication concerning such Benefit Plan or provision in any document governing such Benefit Plan (whether express or implied or written has failed to reserve effectively the right of the sponsoring employer (including, after any assumption of such Benefit Plan, Buyer) to terminate, or make any amendment or modification to such Benefit Plan in whole or in part; (vi) subject to the Collective Bargaining Agreement or as otherwise permitted by Section 6.1(a)(10), neither NMC nor Seller has made any commitment to establish any new Benefit Plan, to modify any Benefit Plan (except as required under applicable Laws), nor has any intention to do so been communicated in writing to any Palisades Employees or Big Rock ISFSI Employees; (vii) no actions, suits, proceedings, hearings, investigations or claims with respect to the administration or the investment of the assets of such Benefit Plan (other than routine claims for benefits in the ordinary course) are pending or threatened, and Seller has no Knowledge of any basis for any such action, suit, proceeding, hearing, investigation or claim; (viii) no administrative investigation, audit or other administrative proceeding by the Department of Labor, the PBGC, the IRS or other Governmental Authority is pending, in progress or threatened; and (ix) as of the date hereof, none of Seller, NMC or any ERISA Affiliate has an application pending to the IRS under the Employee Plans Compliance Resolution System or has had such an application pursuant to the Employee Plans Compliance Resolution System or its predecessor denied, and if NMC or Seller has previously made such application and a compliance statement has been issued, Seller, NMC or such ERISA Affiliate, as applicable, has signed such statement and made the applicable correction or will make the applicable correction within the requisite time period. (d) All contributions, premiums or other payments (including all employer contributions and employee salary reduction and other contributions) that are due have been made within the time periods prescribed by ERISA, the Code or the applicable plan document to each Employee Pension Benefit Plan. All contributions for any period ending at or before the Closing which are not yet due have been made to each Employee Pension Benefit Plan or have been properly accrued in accordance with the past custom and practice of Seller. (e) Neither NMC, Seller nor any ERISA Affiliate has incurred any material Liability, nor, to Seller's Knowledge, are there any facts or circumstances that, would reasonably be expected to subject Seller, NMC or any ERISA Affiliate to any Liability (i) to the PBGC in connection with any Benefit Plan or otherwise under Title IV of ERISA, (ii) under the Code with respect to any such Benefit Plan, or (iii) under COBRA, HIPAA, USERRA or the Code with respect to any such Benefit Plan. Except as set forth in Schedule 4.9(e), no Benefit Plan is or has been the subject of a Reportable Event, and no non-exempt "prohibited transaction" (as described in Section 406 of ERISA and Section 4975 of the Code) has occurred with respect to any Benefit Plan. None of Seller, NMC or their ERISA Affiliates contributes to, has any obligation to contribute to, or has any Liability (including any withdrawal liability under Section 4201 et. seq. of ERISA) under or with respect to any "multiemployer plan" within the meaning of Section 3(37) of ERISA or with respect to any multiple employer welfare arrangement within the meaning of Section 3(40) of ERISA. 45 (f) To the Knowledge of Seller, neither NMC nor Seller nor any ERISA Affiliate or successor corporation, within the meaning of Section 4069(b) of ERISA, has engaged in any transaction that may be disregarded under Section 4069 or Section 4212(c) of ERISA. 4.10. Sufficiency of Assets. The Included Assets, in the aggregate, constitute all of the assets, tangible and intangible, of any nature whatsoever (including, without limitation, all of the contracts, agreements, licenses, leases, commitments and other legally binding arrangements, whether for services, goods or otherwise), and the Palisades Employees and the Big Rock ISFSI Employees constitute all of the personnel, reasonably necessary for the ownership, operation and maintenance of Palisades and the Big Rock ISFSI in the manner presently operated and maintained or used in the operation and maintenance thereof during the twelve (12) months prior to the Effective Date and the Closing Date. Palisades is currently operable at a level sufficient to meet the accredited capacity obligations in the Power Purchase Agreement and Seller has no Knowledge of any condition that would prevent the operation of Palisades at this level consistent with past performance. 4.11. Certain Contracts and Arrangements. (a) Except for Seller's interests in and rights under (i) those purchase orders, contracts, agreements, licenses and leases relating to the ownership, operation and maintenance of the Included Assets, which are listed in Schedule 4.9(a) and Schedule 4.11(a)(i), (ii) those contracts, agreements, commitments and understandings relating to the procurement or fabrication of Nuclear Fuel, a list of which is included on Schedule 4.11(a)(ii) ("Fuel Contracts"), (iii) contracts, agreements, personal property leases, licenses, commitments, understandings or instruments which will expire or terminate, or in which the obligations of Seller will be fully performed, prior to the Closing Date, (iv) Non-material Contracts, (v) the Ancillary Agreements and (vi) the Excluded Contracts, Seller is not, as of the date of this Agreement, a party to any written contract, agreement, personal property lease, commitment, understanding or instrument which relates to the ownership or operation of the Included Assets or provides for the sale of capacity, energy or ancillary services from Palisades. (b) Except as set forth on Schedule 4.11(b), there is not, under any Seller's Agreement, Fuel Contract or Non-material Contract, any breach on the part of Seller, or to the Knowledge of Seller, on the part of any of the parties thereto, except such material breaches as to which requisite waivers or consents have been obtained or which do not, individually or in the aggregate, create a Material Adverse Effect. (c) Each Seller's Agreement, Fuel Contract and Non-material Contract (i) is legal, valid and enforceable as to Seller in accordance with its terms and is in full force and effect, and (ii) except as disclosed in Schedule 4.3(a), may be transferred or assigned to Buyer at the Closing without consent or approval of the other parties thereto and 46 (d) True and complete copies of each Seller's Agreement and Fuel Contract, including any amendments, supplements and modifications thereto, have been provided or made available to Buyer. 4.12. Legal Proceedings, etc. Except as described in Schedule 4.12, there are no claims, actions or proceedings pending or, to the Knowledge of Seller, threatened against Seller or NMC before any court, arbitrator or Governmental Authority (i) with respect to the Included Assets, the Palisades Employees or the Big Rock ISFSI Employees, or (ii) which prohibit or restrain the performance of this Agreement or any of the Ancillary Agreements. None of Seller or its Affiliates, nor, to Seller's Knowledge, NMC, is subject to any outstanding Governmental Order specifically relating to the Included Assets, the Palisades Employees or the Big Rock ISFSI Employees. 4.13. Permits. (a) Seller (together with NMC) has all permits, licenses, registrations, certificates, franchises and other governmental authorizations, consents and approvals, other than with respect to permits under Environmental Laws referred to in Section 4.7 hereof or licenses issued by the NRC referred to in Section 4.14 hereof (collectively, "Permits"), used in, or necessary for the ownership and operation of, the Included Assets as presently conducted or as required by Law. All Permits are in full force and effect, and neither Seller nor NMC has received any written notification which remains unresolved that it is in violation of any of such Permits, or any Law or Governmental Order applicable to the Included Assets except for notifications of violations that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Seller has no Knowledge of any conditions, circumstances or issues that represent any material impediment to prompt issuance, renewal, continuation or extension of the Permits without substantial increased cost or that represent any material impediment to the current use of Palisades, the Included Assets or the Sites under its existing emergency plan. Palisades and the Big Rock ISFSI are in compliance with all Permits, Laws and Governmental Orders applicable to the Included Assets except for violations which, individually or in the aggregate, do not create a Material Adverse Effect. (b) Schedule 4.13(b) sets forth all material Permits, including all material Environmental Permits and Transferable Permits. 4.14. NRC Licenses. (a) Seller (together with NMC) has all licenses, permits, and other material consents and approvals applicable to the Included Assets that are issued by the NRC and are necessary to the ownership and operation of the Included Assets as presently operated, pursuant to the requirements of all Nuclear Laws, and all NRC Licenses are in full force and effect. Neither Seller nor, to Seller's Knowledge, NMC has received any written notification which remains unresolved that it is in material violation of any of such NRC License, or any order, rule, regulation, or decision of the NRC with respect to the Included Assets. Each of Seller and its Affiliates, and to Seller's Knowledge, NMC is in material compliance with all Nuclear Laws and 47 all orders, rules, regulations, or decisions of NRC applicable to it with respect to the Included Assets. (b) Schedule 4.14(b) sets forth all NRC Licenses issued by the NRC applicable to the Included Assets and currently in effect. (c) The Included Assets conform in all material respects to the technical specifications included in the NRC Licenses in accordance with the requirements of 10 C.F.R. Section 50.36 and the final safety analysis reports (as updated) that are required under 10 C.F.R. Section 50.71(e). 4.15. Regulation as a Utility. Seller is a subsidiary of a "public utility holding company" as defined in the Public Utility Holding Company Act of 2005, a public utility within the meaning of the Federal Power Act and a public utility within the meaning of MCL 460.1 et seq. Except with respect to local tax and zoning laws, Seller is not, as a result of its ownership or operation of the Included Assets, subject to regulation as a public utility or public service company (or similar designation) by any state of the United States (other than Michigan), any foreign country or any municipality or any political subdivision of the foregoing. 4.16. Tax Matters. Except as set forth on Schedule 4.16 and except with respect to the portion of the Included Assets that are part of the Qualified Decommissioning Fund, with respect to the Included Assets, (i) all material Tax Returns of Seller required to be filed for taxable periods ended prior to the Closing Date regarding the ownership or operation of the Included Assets have been filed, and (ii) all material Taxes shown to be due on such Tax Returns have been paid in full, except where such Taxes are being contested in good faith through appropriate proceedings. No written notice of deficiency or assessment has been received from any taxing authority with respect to any material amount of Liabilities for Taxes of Seller, in respect of the Included Assets or, to the Knowledge of Seller, with respect to the Palisades Employees or the Big Rock ISFSI Employees, as applicable, that has not been fully paid or finally settled, except for matters that are being contested in good faith through appropriate proceedings. There are no Encumbrances for Taxes upon any of the Included Assets, except for Encumbrances for Taxes not yet due and payable and Encumbrances for Taxes that are listed on Schedule 4.16, which are being contested in good faith through appropriate proceedings. 4.17. Qualified Decommissioning Fund. (a) Except as described on Schedule 4.17, with respect to all periods prior to the Closing: (i) Seller's Qualified Decommissioning Fund has been a trust, validly existing under the Laws of the Commonwealth of Massachusetts or the State of Michigan, as applicable, with all requisite authority to conduct its affairs as it now does; (ii) Seller's Qualified Decommissioning Fund satisfied the requirements necessary for such fund to be treated as "Nuclear Decommissioning Reserve Fund" and a "Qualified Nuclear Decommissioning Fund" within the meaning of Treas. Reg. Section 1.468A-1(b)(3); (iii) Seller's Qualified Decommissioning Fund has been in compliance with all applicable Laws of the NRC, FERC, the IRS, MPSC and 48 any other Governmental Authority; (iv) Seller's Qualified Decommissioning Fund has not engaged in any acts of "self-dealing" as defined in Treas. Reg. Section 1.468A-5(b)(2); (v) no "excess contribution," as defined in Treas. Reg. Section 1.468A-5(c)(2)(ii), has been made to Seller's Qualified Decommissioning Fund which has not been withdrawn within the period provided under Treas. Reg. Section 1.468A-5(c)(2)(i); and (vi) Seller has timely made valid elections to make annual contributions to the Qualified Decommissioning Fund and Seller has made available copies of such elections requested by the Buyer for the Tax years ended December 31, 2000 through 2004. (b) Seller has heretofore delivered to Buyer a copy of Seller's Decommissioning Trust Agreement as in effect on the Effective Date. (c) Subject only to Seller's Required Regulatory Approvals, Seller and the Trustee have, or as of Closing will have, all requisite authority to cause the assets of the Qualified Decommissioning Fund to be transferred on behalf of Buyer to the Trustee of the Post-Closing Decommissioning Trust Agreement. (d) With respect to all periods prior to the Closing, (i) Seller and/or the Trustee of Seller's Qualified Decommissioning Fund has/have filed or caused to be filed with the NRC, FERC, MPSC and any other Governmental Authority all material forms, statements, reports, documents (including all exhibits, amendments and supplements thereto) required to be filed by such entities and (ii) there are no interim rate orders that may be retroactively adjusted or retroactive adjustments to interim rate orders that may affect amounts that may be contributed to the Qualified Decommissioning Fund. Seller has delivered to Buyer a copy of the schedule of ruling amounts most recently issued by the IRS for the Seller's Qualified Decommissioning Fund and a complete copy of the currently pending request for revised ruling amounts, together with all exhibits, amendments and supplements thereto. Any amounts contributed to Seller's Qualified Decommissioning Fund while such ruling request is pending before the IRS and which are finally determined to exceed the applicable amounts provided in the schedule of ruling amounts issued by the IRS will be withdrawn from Seller's Qualified Decommissioning Fund within the period provided in Treasury Reg. 1.468A-5(c)(2)(i). (e) Seller has made available to Buyer a statement of assets and liabilities verified by the Trustee for the Seller's Qualified Decommissioning Fund as of December 31, 2005 and will make such an unaudited statement as of the last Business Day before Closing available prior to Closing, and they present fairly in all material respects as of such dates the financial position of the Qualified Decommissioning Fund. (f) Seller's Qualified Decommissioning Fund has filed or as of the Closing Date will have filed all material Tax Returns required to be filed prior to the Closing Date with respect to all taxable periods ending on or prior to the Closing Date, including returns for estimated Income Taxes; such Tax Returns are true, correct and complete in all material respects, and all Taxes shown to be due on such Tax Returns have been paid in full. Except as shown in Schedule 4.17, no notice of deficiency or assessment has been received from any taxing authority with respect to any Liability for Taxes of Seller's Qualified Decommissioning Fund which have not been fully paid or finally settled, and any such deficiency shown in such Schedule 4.17 is being contested in good faith through appropriate proceedings. Except as set forth in Schedule 4.17, there are no outstanding agreements or waivers extending the applicable statutory 49 periods of limitations for any Taxes associated with Seller's Qualified Decommissioning Fund for any period. 4.18. Intellectual Property. Except as set forth on Schedule 4.18, Seller or NMC has ownership of or a fully paid-up, valid license to use all of the Intellectual Property reasonably necessary for the operation of the Facilities. Neither Seller nor NMC has received written notice of any claims or demands of any other Person pertaining to any of the Intellectual Property and no proceedings have been instituted, or are pending or, to Seller's Knowledge, threatened, which challenge the rights of Seller in respect thereof. To the Knowledge of Seller, none of the Intellectual Property materially infringes upon any intellectual property of any other Person and neither Seller nor NMC is making unauthorized use of any confidential information or trade secrets of any Person, including any former employer of any past or present employee of Seller or NMC in connection with the operation of the Included Assets. 4.19. Zoning Classification. The Palisades Site is zoned as set forth in Schedule 4.19. Palisades, as currently operated, is not a nonconforming use (legal or otherwise). The Big Rock ISFSI, as currently operated, is a legal nonconforming use. Except as set forth on Schedule 4.19, Seller has not requested, applied for, or given its consent to, and Seller has no Knowledge of, any pending change in the zoning of the Real Property. 4.20. Emergency Warning Sirens. All emergency warning sirens located at or within public property or public right of way areas are located and operating pursuant to duly issued and currently effective and valid resolutions or other authorizations from the applicable Governmental Authority(ies), and such resolutions or other authorizations are assignable to Buyer. 4.21. Disclaimer. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS yARTICLE 4, THE INCLUDED ASSETS ARE BEING SOLD AND TRANSFERRED "AS IS, WHERE IS," AND ACCORDINGLY SELLER IS NOT MAKING ANY OTHER REPRESENTATIONS OR WARRANTIES, WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, CONCERNING THE INCLUDED ASSETS, INCLUDING, IN PARTICULAR, ANY WARRANTY OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR AS TO THE WORKMANSHIP THEREOF OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS, OR AS TO THE CONDITION OF THE INCLUDED ASSETS, OR ANY PART THEREOF, ALL OF WHICH ARE HEREBY EXPRESSLY EXCLUDED AND DISCLAIMED. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS yARTICLE 4, SELLER FURTHER SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING THE ABSENCE OF HAZARDOUS MATERIALS OR LIABILITY ARISING UNDER ENVIRONMENTAL LAWS. WITHOUT LIMITING THE 50 GENERALITY OF THE FOREGOING, EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY OF ANY KIND REGARDING THE CONDITION OF THE INCLUDED ASSETS OR THE SUITABILITY OF THE FACILITIES FOR OPERATION AND NO OTHER MATERIAL OR INFORMATION PROVIDED BY OR COMMUNICATION MADE BY SELLER OR ANY OFFICER, EMPLOYEE, CONSULTANT OR AGENT THEREOF, OR ANY BROKER OR INVESTMENT BANKER WILL CAUSE OR CREATE ANY WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, CONDITION, VALUE OR QUALITY OF THE INCLUDED ASSETS OR ANY PART THEREOF. THE PROVISIONS OF THIS SECTION HAVE BEEN NEGOTIATED BY THE PARTIES HERETO AFTER DUE CONSIDERATION AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY REPRESENTATIONS AND WARRANTIES, WHETHER EXPRESS OR IMPLIED OR STATUTORY, OTHER THAN THOSE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN ARTICLES 4 AND 5 OF THIS AGREEMENT. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: 5.1. Organization; Qualification. Buyer is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware. Buyer has all requisite limited liability company power and authority to own, lease and operate its properties and to carry on its business as is now being conducted. Buyer has heretofore delivered to Seller complete and correct copies of its Certificate of Formation and limited liability company operating agreement as currently in effect. Buyer is, or on the Closing Date will be, qualified to conduct business in the State of Michigan. 5.2. Authority Relative to this Agreement. Buyer has full limited liability company power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party and to consummate the transactions contemplated hereby or thereby. The execution and delivery of this Agreement and the Ancillary Agreements and the consummation of the transactions contemplated hereby or thereby, have been duly and validly authorized by all necessary limited liability company action required on the part of Buyer and no other limited liability company proceedings on the part of Buyer are necessary to authorize this Agreement and the Ancillary Agreements to which it is a party or to consummate the transactions contemplated hereby or thereby. This Agreement and the Ancillary Agreements to which it is a party have been duly and validly executed and delivered by Buyer, or, if applicable, will be duly and validly executed and delivered by Buyer at or prior to the Closing and assuming that this Agreement and each such Ancillary Agreement constitute or will constitute at Closing valid and binding agreements of Seller, and subject to the receipt of Buyer's Required Regulatory Approvals and Seller's Required Regulatory Approvals, 51 constitute valid and binding agreements of Buyer, enforceable against Buyer in accordance with their respective terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium, and other similar Laws affecting creditors' rights generally and to general principles of equity (whether considered in a proceeding at law or in equity). 5.3. Consents and Approvals; No Violation. (a) Subject to the receipt of the third-party consents set forth in Schedule 5.3(a), the Seller's Required Regulatory Approvals and the Buyer's Required Regulatory Approvals, neither the execution and delivery of this Agreement or any Ancillary Agreements by Buyer nor the consummation of the transactions contemplated hereby or thereby will (i) conflict with or result in any breach of any provision of the Certificate of Formation or limited liability company operating agreement (or other similar governing documents) of Buyer, (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, agreement, lease or other instrument or obligation to which Buyer is a party or by which any of its assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which do not, individually or in the aggregate, create a material adverse effect on the ability of Buyer to perform its obligations hereunder (a "Buyer Material Adverse Effect"), or (iv) constitute violations of any Law applicable to Buyer, except for such violations as do not, individually or in the aggregate, create a Buyer Material Adverse Effect. (b) Except as set forth in Schedule 5.3(b) (the filings and approvals referred to in such schedule are collectively referred to as the "Buyer's Required Regulatory Approvals"), no declaration, filing or registration with, or notice to, or authorization, consent or approval of any Governmental Authority is necessary for the execution and delivery of this Agreement or any Ancillary Agreement or the consummation by Buyer of the transactions contemplated hereby or thereby. 5.4. Availability of Funds. Buyer and/or Buyer's Parent currently have sufficient funds available to it through corporate funds, credit facilities and access to capital markets to provide sufficient funds to pay the Purchase Price on the Closing Date and to enable Buyer to timely perform all of its obligations under this Agreement. 5.5. Legal Proceedings. There are no claims, actions or proceedings pending or, to the Knowledge of Buyer and Buyer's Parent, threatened against Buyer or Buyer's Parent before any court, arbitrator or Governmental Authority which, individually or in the aggregate, (i) would reasonably be expected to result in a Buyer Material Adverse Effect or (ii) prohibit or restrain the performance of this Agreement or any of the Ancillary Agreements. 52 5.6. WARN Act. Neither Buyer nor Buyer's Parent intends with respect to the Included Assets to engage in a "plant closing" or "mass layoff," as such terms are defined in the WARN Act, within sixty (60) days after the Closing Date. 5.7. Transfer of Assets of Qualified Decommissioning Fund. With respect to Seller's transfer of the assets of the Qualified Decommissioning Fund to the Trustee under the Post-Closing Decommissioning Trust Agreement, except for the fact that Palisades in the hands of Buyer may not be treated as a "nuclear power plant" within the meaning of Treasury Regulations Section 1.468A-1(b)(4) because Buyer's rates for the sale or furnishing of electricity are not established or approved by a public utility commission or under the jurisdiction of the Rural Electric Administration, Buyer will otherwise acquire and own a "qualifying interest" in Palisades within the meaning of Treasury Regulations Section 1.468A-l and will, as the transferee, satisfy each of the requirements applicable to the transferee set forth in Treasury Regulations Section 1.468A-6(b)(2). At the Closing, the Post-Closing Decommissioning Trust Agreement will satisfy the requirements of Section 468A of the Code and the regulations promulgated thereunder. At the Closing, the Post-Closing Decommissioning Trust Agreement for Buyer's Qualified Decommissioning Fund will satisfy the NRC's requirements for decommissioning trust provisions in 10 C.F.R. 50.75(h)(i). The Post-Closing Decommissioning Trust Agreement will provide that upon the occurrence of any event specified in Section 6.20(c), to the extent then permitted by applicable Law, the Trustee of the Buyer's Post-Closing Trust Agreement shall distribute the Excess Qualified Decommissioning Fund Assets (or such smaller portion of such assets as specified in Section 6.20(d)) directly to the Seller. 5.8. Foreign Ownership or Control. Buyer or, if applicable, Buyer's Parent, will conform to the restrictions on foreign ownership, control or domination contained in Section 104(d) of the Atomic Energy Act of 1954, as amended, 42 U.S.C. Sections 2133(d) and 2134(d), as applicable, and the NRC's regulations in 10 C.F.R. Section 50.38. Neither Buyer's Parent nor Buyer is currently owned, controlled or dominated by a foreign entity and neither will become owned, controlled, or dominated by a foreign entity before the Closing Date of this transaction. 5.9. Permit and License Qualifications. To the Knowledge of Buyer, as of the Closing, Buyer (or its successor or assigns) will, as the owner of the Included Assets, be qualified to hold any Permits, Environmental Permits and NRC Licenses necessary to operate the Included Assets. 53 ARTICLE 6 COVENANTS OF THE PARTIES 6.1. Conduct of Business Relating to the Included Assets. (a) Notwithstanding anything in this Agreement to the contrary, Buyer acknowledges that Seller and NMC, as the licensed operators of the Facilities, retain the exclusive responsibility for safe operation of the Facilities, and nothing in this Agreement shall in any way alter the licensed operator's duties or obligations under any Law, regulation or its operating license. Except as described in the Capital Budget, during the period from the Effective Date to the Closing Date, Seller shall operate and maintain, or cause to be operated and maintained, the Included Assets in the ordinary course consistent with Good Utility Practices and past practices; it being understood that any actions deemed reasonably necessary in the operation of the Included Assets in accordance with Good Utility Practices shall be deemed to be in the ordinary course unless such actions would reasonably be expected to create a Material Adverse Effect. Without limiting the generality of the foregoing, during the period from the Effective Date to the Closing Date; Seller (1) shall use and cause to be used Commercially Reasonable Efforts to preserve intact the Included Assets and preserve the goodwill and relationships with the Palisades Employees and Big Rock ISFSI Employees, independent contractors, customers, suppliers and others having business dealings with Seller with respect thereto, (2) shall comply in all material respects with all applicable Laws relating to the Included Assets and the Palisades Employees and Big Rock ISFSI Employees and (3) shall provide Buyer with the actual monthly calculation of the amount and Book Value of Nuclear Fuel. Notwithstanding the foregoing, during the period from the Effective Date to the Closing Date, without the prior written consent of Buyer (unless such consent would be prohibited by Law), which consent shall not be unreasonably withheld. Seller shall not directly do any of the following with respect to the Included Assets, and shall not issue any consent or approval, or otherwise take any action (or refrain from taking any action), that permits NMC to do any of the following on the Seller's behalf or otherwise with respect to the Included Assets (Buyer acknowledges, however, that NMC may be permitted to do one or more of the following without the Seller's or Buyer's consent or approval under the terms and conditions of the NPPOSA and the NRC Licenses, and if NMC proceeds to do so accordingly, Seller shall not be in violation of this Section 6.1; provided, however, that Buyer and Seller shall negotiate in good faith a fair and equitable adjustment to the Purchase Price, as a result of such NMC actions): (1) make any material change in the levels of Facility Inventories customarily maintained by Palisades with respect to the Included Assets, except for such changes as are consistent with Good Utility Practices or make any change in the levels of Nuclear Fuel Inventories other than with respect to deliveries to Seller or NMC pursuant to the Fuel Contracts; (2) except for Permitted Encumbrances (including amendments and/or replacements to the Permitted Encumbrances), sell, lease (as lessor), pledge, mortgage, encumber, restrict, transfer or otherwise dispose of, or grant any right, or suffer to be imposed any Encumbrance with respect to, any of the Included Assets, other than assets used, consumed, disposed of or replaced in the ordinary course of business consistent with Good Utility Practices; 54 (3) materially amend, extend or voluntarily terminate prior to the expiration date thereof any of Seller's Agreements or any agreement listed on Schedule 4.8 (or any other agreement to the extent that any such extension or amendment thereof would require the agreement to be disclosed on Schedule 4.8 or Schedule 4.11(a)(i)), or any Permit, Environmental Permit or NRC License, or waive any default by, or release, settle or compromise any claim against, any other party thereto, other than (a) if the terms and conditions of such modified agreement, Permit, Environmental Permit or NRC License are not materially less favorable to Buyer than the original agreement, Permit, Environmental Permit or NRC License, or (b) immaterial amendments to such agreement, Permit, Environmental Permit or NRC License to conform such agreement, Permit, Environmental Permit or NRC License for Buyer's purchase hereunder; (4) (i) reallocate or change the delivery quantities or times for any Nuclear Fuel or services contemplated under any Fuel Contract, or (ii) enter into any new commitment or agreement for the purchase or sale of Nuclear Fuel, or modify, amend, extend or terminate any existing Fuel Contract; provided, however, that Seller or NMC, as applicable, may execute the Fuel Contracts identified on Schedule 4.11(a)(ii) delivered on the Effective Date as "DRAFT, YET TO BE SIGNED" as long as such Fuel Contracts, when executed, contain substantially the same terms and conditions as the drafts provided to Buyer prior to the Effective Date; (5) enter into any power sales agreement relating to Palisades, other than an agreement to resell power purchased under the Power Purchase Agreement, having a term that extends beyond the Closing Date, except if such agreement will be terminated by Seller prior to the Closing; (6) amend in any material respect or cancel any property, liability or casualty insurance policies related thereto, or fail to use Commercially Reasonable Efforts to maintain by self insurance or with financially responsible insurance companies insurance in such amounts and against such risks and losses as are customary for such assets and businesses; (7) enter into any contracts, agreements, personal property leases, software or other licenses or other commitments for goods or services (other than employment-related services), in any case not addressed in Sections 6.1(a)(1) through 6.1(a)(6) above, that (i) are not terminable without further Liability upon notice of 90 days or less by Seller (prior to the Closing) or Buyer (following the Closing) or (ii) require payment, or delivery of goods and services with a value of, in excess of $100,000 per annum individually (and each such commitment or contract shall either become a Seller's Agreement and added to Schedule 4.11(a)(i) in accordance with Section 6.9, or, if appropriate, shall become a Non-material Contract, and a copy of each such commitment or contract shall be delivered to Buyer pursuant to Section 3.6); (8) except as required by any Law or GAAP, change, in any material respect, its Tax practice or policy (including making new Tax elections or changing Tax 55 elections and settling Tax controversies not in the ordinary course of business) to the extent such change or settlement would be binding on Buyer; (9) except as required by any Law or GAAP, change, in any material respect, its accounting practices or policies to the extent such change would be result in a revaluation of inventory items which increases the Book Value thereof; (10) (A) hire or permit NMC to hire any new Palisades Employees or Big Rock ISFSI Employees (other than to replace any such employees existing as of the Effective Date who have resigned or been terminated and employees hired to perform the duties of such employees who are on leave), (B) enter into any written employment agreements, including any retention agreements, severance agreements or change-in control-agreements, with any current or new Palisades Employees or Big Rock ISFSI Employees, (C) establish or permit NMC to establish any Benefit Plan for the benefit of Palisades Employees or Big Rock ISFSI Employees, or materially change any Benefit Plan existing as of the Effective Date, (D) except to the extent consistent with past practices or as required under the Collective Bargaining Agreement, increase or permit NMC to increase the compensation or benefits payable to any Palisades Employee or Big Rock ISFSI Employee, (E) communicate or permit NMC to communicate to Palisades Employees, Big Rock ISFSI Employees or any third party the terms and conditions of employment or potential employment with Buyer or its Affiliate, other than those established in this Agreement (F) exchange or transfer, or permit NMC to exchange or transfer, any Palisades Employees or Big Rock ISFSI Employees existing as of the Effective Date for any employees of Seller or NMC, except pursuant to contractual obligations in effect as of the Effective Date or as otherwise permitted by the NPPOSA or (G) terminate any Palisades Employee or Big Rock ISFSI Employee, other than for cause or through voluntary termination or retirement; (11) fail to make Commercially Reasonable Efforts to pursue currently pending regulatory approvals and Permit or Environmental Permit applications, approvals and renewals relating to the Included Assets that are reasonably necessary to operate the Facilities; (12) knowingly engage in any practice, take any action, fail to take any action, or enter into any transaction through the Closing Date that will result or would reasonably be anticipated to result in any breach of a material representation or warranty of Seller hereunder as of the Closing; (13) resolve, settle or compromise any Environmental Claim except to the extent that such resolution, settlement or compromise does not impose any post-Closing Liabilities on Buyer, limit Buyer's post-Closing rights and remedies relating to the Included Assets or require any post-Closing Remediation; (14) settle any claim or litigation that results in any material obligation imposed on the Included Assets that could reasonably be likely to continue past the Closing Date, provided, that Buyer hereby acknowledges and agrees that Seller shall be permitted to settle the Department of Energy Claim and any settlement by Seller of the 56 Department of Energy Claim may include a damages calculation based upon an express or implicit allocation of queue/scheduling rights in respect of the pick-up by the Department of Energy of Spent Nuclear Fuel under the Standard Spent Fuel Disposal Contract from Palisades to the Big Rock Point Plant Operating Facility and agreement as to a pre-Closing acceptance rate; provided further, however, that any such settlement shall not commit the Buyer to any valuation methodology in respect of post-Closing damages under the Standard Spent Fuel Disposal Contract (except to the extent resulting from Seller's use of an acceptance rate or an allocation of queue/scheduling rights as part of its damages calculation, as described above) or to any actual allocation of queue/scheduling rights in respect of the pick-up by the Department of Energy of Spent Nuclear Fuel or any actual acceptance rate for Spent Nuclear Fuel by the Department of Energy that would affect Buyer's calculation of its post-Closing damages under the Standard Spent Fuel Disposal Contract; (15) store any Spent Nuclear Fuel or other Nuclear Material at the Big Rock ISFSI other than the Spent Nuclear Fuel and other Nuclear Material stored at the Big Rock ISFSI as of the Effective Date; or (16) agree to enter into any of the transactions set forth in the foregoing paragraphs (1) through (15); provided, however, that nothing contained in this Agreement shall restrict the ability of Seller at any time to (i) perform or enforce any existing contract to which it is a party and which is listed on the schedules to this Agreement or (ii) take any and all actions necessary to effect the termination by Seller of the NPPOSA. In addition, notwithstanding the foregoing, Seller shall be entitled to amend, substitute or otherwise modify any Seller's Agreement if the terms and conditions of such modified Seller's Agreement constituting the Assumed Liabilities and Obligations are on terms and conditions not less favorable to Buyer than the original Seller's Agreement. (b) The Parties shall establish, as soon as practicable after the execution of this Agreement, a committee (the "Transition Committee") comprised of at least four (4) persons, including two (2) persons designated by Seller and two (2) persons designated by Buyer. The Transition Committee shall remain in existence until the Closing Date and shall oversee and manage the transition process through the Closing Date. Subject to applicable Laws, the Transition Committee will be kept fully apprised by Seller of all the Facilities' management and operating developments, including with respect to any pre-closing outage, any repairs to the Facilities and the Capital Expenditures. The Transition Committee shall have no authority to bind or make agreements on behalf of Seller or Buyer or to issue instructions to or direct or exercise authority over Seller or Buyer or any of their respective officers, employees, advisors or agents or to waive or modify any provision of this Agreement. Seller shall use Commercially Reasonable Efforts to arrange for Buyer's representatives on the Transition Committee to have access to the management of NMC. (c) Between the Effective Date and the Closing Date, in the interest of cooperation between Seller and Buyer and to plan for and facilitate an orderly transition of ownership and operation of the Included Assets from Seller to Buyer and to permit informed 57 action by Buyer regarding its rights pursuant to Section 6.1(a), the Parties agree that at the sole responsibility and expense of Buyer, and subject to compliance with all applicable NRC rules and regulations and other applicable Laws, Seller shall permit Persons reasonably designated by Buyer ("Observers") to observe all operations of Palisades and the Big Rock ISFSI that relate to the Included Assets, and such observation will be permitted on a cooperative basis in the presence of one or more individuals designated by Seller together with NMC (the "Seller's Agent(s)"); provided, however, that such Observers and their actions shall not interfere with the operation of Palisades or the Big Rock ISFSI; and provided, further, that the number of Observers observing at any particular time and the scheduling and duration of their observation shall be subject at all times to the approval of the Seller's Agent(s) (it being acknowledged and agreed that in no event shall more than five (5) such Observers be permitted on Site at any one time). Seller shall use Commercially Reasonable Efforts to provide to the Observers interim furnished office space, utilities and HVAC at the Facilities reasonably necessary to allow Buyer to conduct its transition efforts through the Closing Date at no cost to Buyer; provided that Buyer shall be responsible for all other costs relating thereto, including telecommunications expenses and the cost of workers' compensation and employer's liability coverage, which coverage shall be maintained by Buyer on such terms as may be customarily required by Seller for its contractors. (d) Buyer's members of the Transition Committee and/or the Observers may recommend or suggest to Seller that actions be taken or not be taken to improve or enhance the operation and maintenance of the Included Assets from the Effective Date through the Closing Date; provided, however, that Seller will not be under any obligation to follow any such recommendations or suggestions and Seller shall be entitled, subject to this Agreement, to conduct its business in accordance with its own judgment and discretion. Buyer's Observers shall have no authority to bind or make agreements on behalf of Seller; to conduct discussions with or make representations to third parties on behalf of Seller; or to issue instructions to or direct or exercise authority over Seller or any of Seller's officers, employees, advisors or agents. Notwithstanding anything in this Section 6.1(d) to the contrary, prior to the Closing Date, Buyer shall not have the right to perform or conduct any environmental sampling or testing at, in, on or underneath the Included Assets. Buyer shall have no Liability for any suggestions or recommendations made by an Observer. 6.2. Access to Information. (a) In addition to the rights granted by Sections 6.1(b), (c) and (d), between the Effective Date and the Closing Date, Seller will, and will use Commercially Reasonable Efforts to cause NMC to, during ordinary business hours, upon reasonable notice and subject to compliance with all applicable NRC rules and regulations and other applicable Laws and subject to approval in advance by the Seller's Agent(s) which approval shall not be unreasonably withheld or delayed (i) give Buyer and Buyer's Representatives reasonable access to all management personnel engaged in the operation of the Included Assets and all books, documents, records, plants, offices and other facilities and properties constituting the Included Assets; (ii) permit Buyer to make such reasonable inspections thereof as Buyer may reasonably request; (iii) furnish Buyer with such financial and operating data and other information with respect to the Included Assets and the Palisades Employees and the Big Rock ISFSI Employees as Buyer may from time to time reasonably request; (iv) furnish Buyer a copy of each report, 58 schedule or other document filed or received by it since the date hereof with respect to the Included Assets with the NRC, FERC or any other Governmental Authority having jurisdiction over the Included Assets; provided, however, that (A) any such investigation shall be conducted in such a manner as not to interfere unreasonably with the operation of the Included Assets, (B) Seller shall not be required to take any action which would constitute a waiver of the attorney-client privilege, and (C) Seller need not supply Buyer with any information that Seller is legally prohibited from supplying. Seller will use its Commercially Reasonable Efforts to cause NMC to provide Buyer or Buyer's Representatives with access to the Transferred Employee Records that it has, but Seller shall not be required to provide or cause to be provided access to other employee records or medical information unless required by Law or specifically authorized by the affected employee. Notwithstanding anything in this Section 6.2 to the contrary, Seller shall only provide or cause to be provided such access to Transferred Employee Records and personnel and medical records as is permitted by Law or required by legal process or subpoena. In addition, Seller will use Commercially Reasonable Efforts to cause NMC to provide Buyer or Buyer's Representatives with access to NMC personnel engaged in the supervision, operation, maintenance or otherwise supporting the Included Assets. To the extent not prohibited by applicable Law, Seller shall cause NMC to deliver in a timely manner to Buyer all documents, electronic files and records in a format sufficient (as reasonably determined by Buyer) to facilitate the anticipated Closing. Without limiting the generality of the foregoing, four (4) weeks prior to the anticipated Closing Date, (A) Seller shall provide, or cause NMC to provide, to Buyer a list of the Palisades Employees and Big Rock ISFSI Employees anticipated to become Transferred Employees, and (B) Seller shall cooperate, and shall cause NMC to cooperate, with Buyer to enable Buyer to document the transfer of the Transferred Employees according to Buyer's or Buyer's Affiliate's standard practices and employment prerequisites. (b) Buyer and Seller acknowledge that all information furnished to or obtained by Buyer or Buyer's Representatives pursuant to either Section 6.1 or this Section 6.2 shall be subject to the provisions of the Confidentiality Agreement and shall be treated as Proprietary Information. (c) For a period of five (5) years following the Closing Date (or such other date as the Parties may agree in writing), and in the case of books and records relating to the Decommissioning Funds, until the completion of Decommissioning, and subject to all applicable NRC rules and regulations, each Party and its respective Representatives shall have reasonable access to all of the Business Books and Records, including all Transferred Employee Records or other personnel and medical records required to be made available by Law, legal process or subpoena, in the possession of the other Party to the extent that such access may reasonably be required by such Party in connection with the Assumed Liabilities and Obligations or the Excluded Liabilities, or other matters relating to or affected by the operation of the Included Assets. Such access shall be afforded by the Party in possession of such books and records upon receipt of reasonable advance notice and during normal business hours. The Party exercising this right of access shall be solely responsible for any costs or expenses incurred by it pursuant to this Section 6.2(c). If the Party in possession of such books and records shall desire to dispose of any such books and records prior to the expiration of the applicable time period specified in this Section 6.2(c), such Party shall, prior to such disposition, give the other Party a reasonable opportunity at such other Party's expense, to segregate and remove such books and records as 59 such other Party may select. Notwithstanding the foregoing, the right of access to medical records and other confidential employee records shall be subject to all applicable Laws. (d) Seller agrees (i) not to release any Person (other than Buyer) from any confidentiality agreement now existing with respect to the Included Assets, or waive or amend any provision thereof, and (ii) to assign at the Closing any rights arising under any such confidentiality agreement (to the extent assignable) to Buyer. Notwithstanding the foregoing, Seller agrees and shall use Commercially Reasonable Efforts to cause NMC to agree that following the Closing, no Transferred Employee shall be subject to any confidentiality, non-solicitation or non-competition obligation for the benefit of Seller or its Affiliates or NMC. (e) Notwithstanding the terms of the Confidentiality Agreement and Section 6.2(b) above, the Parties agree that prior to the Closing Buyer may reveal or disclose Proprietary Information to other Persons to the extent reasonably necessary in connection with Buyer's financing and risk management of the Included Assets, and, to the extent that Seller consents, which consent shall not be unreasonably withheld or delayed, to such Persons with whom Buyer expects it may have business dealings regarding the Included Assets from and after the Closing Date; provided, however, that all such Persons agree in writing to maintain the confidentiality of the Proprietary Information on substantially the same terms and conditions as those contained in the Confidentiality Agreement; and provided, further, that Buyer shall be responsible for any breach by any such Persons of such confidentiality obligations. (f) Except as may be permitted under the Confidentiality Agreement, Buyer agrees that, prior to the Closing Date, it will not contact any vendors, suppliers, employees, or other contracting parties of NMC, Seller or Seller's Affiliates with respect to any aspect of the Included Assets or the transactions contemplated hereby, without the prior written consent of Seller, which consent shall not be unreasonably withheld or delayed; provided, however, that such consent shall not (subject to the notice requirement set forth in the next sentence) be required during the period beginning sixty (60) days prior to the anticipated Closing Date through the Closing Date. Notwithstanding the foregoing, prior to the Closing, (i) Buyer may conduct general employee meetings addressing the following topics: payroll, transition, compensation, health and wellness benefits, pension plans, 401(k) plan transitions, post-Closing policies and procedures and other matters of general employee concern, provided that Buyer shall provide NMC with notice of any such meeting a reasonable period of time in advance thereof and shall reasonably coordinate with NMC as to the conduct thereof and (ii) Buyer may make any contacts with Persons as expressly contemplated by this Agreement, including without limitation contacts with vendors, suppliers and customers in connection with obtaining assignments of contracts and discussing the post-Closing relationship with such Persons, provided that Buyer shall keep Seller reasonably informed as to the existence of any such contacts. (g) Upon Buyer's or Seller's (as the case may be) prior written approval (which approval shall not be unreasonably withheld or delayed), Seller or Buyer (as the case may be) may provide Proprietary Information of the other Party to the NRC, FERC or any other Governmental Authority having jurisdiction over the Included Assets or any stock exchange, as may be necessary to obtain Seller's Required Regulatory Approvals or Buyer's Required Regulatory Approvals, respectively. The disclosing Party shall seek confidential treatment for 60 the Proprietary Information provided to any such Governmental Authority and the disclosing Party shall notify the other Party as far in advance as practical of its intention to release to any Governmental Authority any such Proprietary Information. (h) Seller or Buyer (as the case may be) may, without the prior consent of the other Party, disclose Proprietary Information of the other Party as may be necessary to comply generally with any applicable Laws, requests from Governmental Authorities or with the rules of any applicable stock exchange. The disclosing Party shall notify the other Party as far in advance as practical of its intention to release to any third party any such Proprietary Information. (i) The Parties agree that the Confidentiality Agreement shall remain in effect until the Closing. Thereafter, the Parties agree that any restrictions contained in the Confidentiality Agreement with respect to Buyer's disclosure of Proprietary Information shall terminate, other than with respect to the Proprietary Information of Seller that does not relate to the Included Assets. The Parties further agree that after the Closing Date, Seller shall keep confidential all Proprietary Information provided by Buyer or which Seller possesses with respect to the Included Assets, to the extent permitted by Law, and to the same extent and under the same conditions applicable to Buyer's obligations with respect to Seller's Proprietary Information as contained in the Confidentiality Agreement between the Parties, but for a period of time equal to six (6) years from the Closing. 6.3. Expenses. (a) Except to the extent specifically provided herein, whether or not the transactions contemplated hereby are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby, including the cost of legal, technical and financial consultants and the cost of filing for and prosecuting applications for Buyer's and Seller's Required Regulatory Approvals, shall be borne by the Party incurring such costs and expenses. (b) Buyer shall be responsible for all third party vendor costs and expenses incurred and relating to work performed with respect to the Included Assets at the written request of Buyer after the date hereof. (c) Seller shall be responsible for the payment of any exit or termination fee as a result of the termination of the NPPOSA in connection with the transactions contemplated by this Agreement. 6.4. Further Assurances; Cooperation. (a) Subject to the terms and conditions of this Agreement, each of the Parties hereto will use Commercially Reasonable Efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws to consummate and make effective the sale, transfer, conveyance and assignment of the Included Assets and the assignment of the Assumed Liabilities and Obligations or the exclusion of the Excluded Liabilities pursuant to this Agreement, including using Commercially Reasonable Efforts to ensure satisfaction of the conditions precedent to each Party's obligations hereunder. 61 Notwithstanding anything in the previous sentence to the contrary, Seller and Buyer shall use Commercially Reasonable Efforts to obtain all Permits, Environmental Permits and NRC Licenses necessary for Buyer to acquire and operate the Included Assets. Seller shall be responsible at its cost for providing all notices required under, and obtaining all assignments, consents to transfer and similar documents for, each of the Seller's Agreements, Non-material Contracts, Fuel Contracts, Emergency Equipment Easements, Transferable Permits, and other items to be delivered by Seller at Closing. Buyer shall use its Commercially Reasonable Efforts to assist Seller in obtaining such consents and assignments, but shall not be required to assume additional out-of-pocket costs, expenses or Liabilities in connection therewith. Neither Buyer nor Seller shall, without the prior written consent of the other, advocate or take any action that would reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement or which could reasonably be expected to cause, or to contribute to causing, the other to receive less favorable regulatory treatment than that sought by the other. Buyer further agrees that prior to the Closing Date, neither it nor its Affiliates will enter into any other contract to acquire or market or control the output of, nor acquire or market or control the output of, electric generation facilities or uncommitted generation capacity if the proposed acquisition or the ability to market or control output of such additional electric generation facilities or uncommitted generation capacity would increase the market power attributable to Buyer in a manner materially adverse to approval of the transactions contemplated hereby or would otherwise prevent or materially interfere with the transactions contemplated by this Agreement. (b) From time to time after the Closing, Seller will execute and deliver such documents to Buyer as Buyer may reasonably request, at Seller's expense, in order to more effectively consummate the sale and purchase, including the transfer, conveyance and assignment, of the Included Assets or to more effectively vest in Buyer such title to the Included Assets (or such rights to use, with respect to Seller's interest in Included Assets not owned by Seller), subject to the Permitted Encumbrances. From time to time after the Closing, without further consideration, Buyer will, at its own expense, execute and deliver such documents to Seller as Seller may reasonably request in order to evidence Buyer's assumption of the Assumed Liabilities and Obligations. (c) The Parties shall use Commercially Reasonable Efforts to cooperate with each other, and Seller shall use Commercially Reasonable Efforts to cause NMC to cooperate with Buyer, to facilitate the transition of the information systems, computer applications and processing of data at the Facilities in a timely manner and in formats reasonably acceptable to Buyer. (d) To the extent that Seller's rights under any Non-material Contract may not be assigned without the consent of another Person which consent has not been obtained, this Agreement shall not constitute an agreement to assign the same if an attempted assignment would constitute a breach thereof or be unlawful, and Seller, at its expense, shall use Commercially Reasonable Efforts to obtain any such required consent(s) as promptly as possible. Seller and Buyer agree that if any consent to an assignment of any Non-material Contract shall not be obtained or if any attempted assignment would be ineffective or would impair Buyer's rights and obligations under the applicable Non-material Contract so that Buyer would not in effect acquire the benefit of all such rights and obligations, then Seller, to the maximum extent 62 permitted by Law and such Non-material Contract (as reasonably determined by Seller in consultation with its counsel), shall, after the Closing (i) appoint Buyer to be Seller's agent with respect to such Non-material Contract and/or (ii) enter into such arrangements with Buyer as are reasonably necessary to provide Buyer with the benefits and obligations (including post-Closing Liabilities) of such Non-material Contract. Seller and Buyer shall cooperate and Seller shall continue to use Commercially Reasonable Efforts after the Closing to obtain an assignment of such Non-material Contract to Buyer. In the event that any such consent to assignment has not been obtained, the Parties agree to proceed under this Agreement to the extent permissible. (e) For a reasonable period of time after the Closing Date, Buyer and Seller agree to provide such services to each other, and to the extent Commercially Reasonable, Seller shall cause NMC to provide such services to Buyer, as are reasonably required to the extent necessary to ensure the continuity of support for Palisades, the Big Rock ISFSI and the Seller's other facilities and the orderly completion of projects or other work in progress that would be adversely affected if those services were interrupted, including mutually acceptable arrangements regarding the lease of the facility located in South Haven, Michigan that is part of Emergency Operations Facilities from Seller to Buyer for a period of up to three (3) years pursuant to the Emergency Operations Facilities Lease. Buyer and Seller will agree, as promptly as practicable, following the Effective Date, on the nature of such services. (f) Seller shall cooperate with Buyer and use Commercially Reasonable Efforts to cause NMC to agree to (i) maintain all data relating to the Indus PassPort and Indus EMPAC software applications (the "Indus Software") on NMC's or third party service provider's servers for the 12-month period following the Closing and (ii) allow Buyer and its Affiliates to interface with such servers and provide such related services such that Buyer and its Affiliates shall be able to access and import all data relating to the Included Assets that is included in the Indus Software. (g) Not earlier than 90 days prior to the Closing Date and before the Closing Date, Seller shall cause to be prepared and shall deliver to Buyer an update of the Phase I environmental site assessment of the Palisades Site and the Big Rock ISFSI Site and amendments thereto previously provided to Buyer. Such Phase I updates will ensure that the Phase I environmental site assessments, as amended, meet the requirements of 40 C.F.R. Section 312 as of the Closing Date. The cost of such updates shall be shared equally between Buyer and Seller. (h) At the Closing, Seller shall have caused all revenue meters, telemetering equipment and other equipment required under or necessary for performance by Buyer (in its capacity as the seller of energy) under the Power Purchase Agreement and the Interconnection Agreement to be installed and operational within the accuracy and tolerances required pursuant to such agreements, and shall have caused the Facilities to be capable of producing and absorbing all ancillary services which are required to be produced and absorbed under such agreements. 6.5. Public Statements. Prior to the Closing, the Parties shall not issue any press release or other public disclosure with respect to this Agreement or the transactions contemplated hereby without first 63 affording the non-disclosing Party the opportunity to review and comment on such disclosure, except as may be required by applicable Law or stock exchange rules. In addition, the Parties shall confer with each other regarding the substance and form of their initial post-Closing public announcement relating to the Closing. 6.6. Consents and Approvals. (a) Seller and Buyer shall each file or cause to be filed with the Federal Trade Commission and the Department of Justice any notifications required to be filed under the HSR Act and the rules and regulations promulgated thereunder with respect to the transactions contemplated hereby. The Parties shall consult with each other as to the appropriate time of filing such notifications and shall agree upon the timing of such filings, and respond promptly to any requests for additional information made by either of such agencies. The Parties shall use their Commercially Reasonable Efforts to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date after the date of filing. All filing fees under the HSR Act shall be borne by Buyer and each Party will bear its own costs for the preparation of any such filing. (b) As promptly as practicable after the Effective Date and after the receipt of any determinations required to be made by any other Governmental Authority as a condition to Buyer making the filings contemplated by this paragraph, (i) Buyer shall file with FERC (and if requested by Buyer, Seller shall support) a notice of self-certification or a petition seeking certification, at Buyer's election, regarding Exempt Wholesale Generator status for Buyer, which filing may be made individually by Buyer or jointly with Seller, as reasonably determined by Buyer, and (ii) Buyer shall file with FERC any necessary applications requesting authority to sell electric capacity, energy and ancillary services at wholesale. In fulfilling its obligations set forth in part (i) of the immediately preceding sentence, Buyer shall use best efforts to effect the referenced filings with FERC within forty-five (45) days after receipt of the last of any determinations required to be made by any other Governmental Authority as a condition to Buyer and Seller making the filings. In fulfilling its obligations set forth in part (ii) of the immediately preceding sentence, Buyer shall use best efforts to effect the referenced filings with FERC within forty-five (45) days of the Effective Date. During preparation of such FERC applications, Buyer shall coordinate with Seller, shall allow Seller to communicate with any witnesses who submit testimony or evidence accompanying such applications, and shall provide Seller with notice and an opportunity to attend any meetings with the FERC staff regarding such applications. No later than ten (10) days prior to submitting any such applications with FERC, Buyer shall submit the application to Seller for review and comment, and Buyer shall in good faith consider any revisions reasonably requested by Seller. Buyer shall be solely responsible for its own cost of preparing, reviewing and filing its respective application, responses and any petition(s) for rehearing or any reapplication(s). (c) As promptly as practicable after the Effective Date, Buyer and Seller shall jointly prepare and file with NRC an application requesting consent under Section 184 of the Atomic Energy Act and 10 C.F.R. Section 50.80 for the transfer of the NRC Licenses from Seller to Buyer and Buyer's Affiliate, and approval of any conforming license amendments or other related approvals. In fulfilling their respective obligations set forth in the immediately preceding sentence, each of Buyer and Seller shall use its best efforts to effect any such filing within forty- 64 five (45) days of the Effective Date. Each Party will bear its own costs of the preparation of any such filing and Buyer and Seller will each pay 50% of any NRC fees. Thereafter, Buyer and Seller shall cooperate with one another to facilitate NRC review of the application, including by providing the NRC staff with such documents or information that the NRC staff may reasonably request or require any of the Parties to provide or generate. (d) As promptly as practicable after the Effective Date, Seller and Buyer shall jointly prepare as co-applicants, and Seller shall file with FERC, an application for approval of this transaction under Section 203 of the Federal Power Act. During preparation of such FERC application, Seller shall coordinate with Buyer, shall allow Buyer to communicate with any witnesses who submit testimony or evidence accompanying such application, and shall provide Buyer with notice and an opportunity to attend any meetings with the FERC staff regarding such application. No later than fifteen (15) days prior to Seller's submission of such application with FERC, Seller shall submit such application to Buyer for review and comment and Seller shall consider in good faith any revisions reasonably requested by Buyer. Seller and Buyer shall respond promptly to all requests from FERC or its staff for additional information regarding such application and use their respective Commercially Reasonable Efforts to participate in any hearings, settlement proceedings or other proceedings ordered by FERC with respect to the application. In fulfilling their respective obligations set forth in this Section 6.6(d), each of Buyer and Seller shall use best efforts to effect the referenced filings with FERC within forty-five (45) days of the Effective Date. Seller shall be solely responsible for the cost of filing this application, any petition(s) for rehearing, or any reapplication(s). Each Party will bear its own costs of the preparation and review of such filing, provided that Buyer shall be solely responsible for the cost of any market power study or analysis associated with such filing. (e) Seller and Buyer shall cooperate with each other and use Commercially Reasonable Efforts to, as promptly as practicable after the Effective Date, (i) prepare and make with FERC or any other Governmental Authority having jurisdiction over Seller, Buyer or the Included Assets, all necessary filings required to be made with respect to the transactions contemplated hereby (including those specified above), (ii) effect all necessary applications, notices, petitions and filings and execute all agreements and documents, (iii) obtain the transfer or reissuance to Buyer of all necessary Permits, Environmental Permits, consents, approvals and authorizations of all Governmental Authorities, and (iv) obtain all necessary consents, approvals and authorizations of all other parties, in the case of each of the foregoing clauses (i), (ii) and (iii), necessary or advisable to consummate the transactions contemplated by this Agreement (including Seller's Required Regulatory Approvals and Buyer's Required Regulatory Approvals and the renewal of the Palisades NRC License) or required by the terms of any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument to which Seller or Buyer is a party or by which any of them is bound. The Parties shall respond promptly to any requests for additional information made by such agencies, use their respective Commercially Reasonable Efforts to participate in any hearings, settlement proceedings or other proceedings ordered with respect to the applications, and use their respective Commercially Reasonable Efforts to cause regulatory approval or other consent to be obtained at the earliest possible date after the date of filing or other request. Each Party will bear its own costs of the preparation and review of any such filing or request. Seller and Buyer shall have the right to review in advance all characterizations of the information relating to the transactions contemplated by this Agreement which appear in any filing made in connection with 65 the transactions contemplated hereby and the filing Party shall consider in good faith any revisions reasonably requested by the non-filing Party. In fulfilling its obligations set forth in this subsection (e) with respect to the making of any filings with the MPSC set forth on Schedule 4.3(b), Buyer shall use best efforts to effect such filings with the MPSC within forty-five (45) days of the Effective Date. (f) The Parties shall reasonably cooperate prior to Closing in communicating with the Hayes Township assessor to obtain assurance that a separate tax parcel number will be issued for the Big Rock ISFSI Site as soon as practicable. In the event that despite the Parties' use of all reasonable efforts, the Big Rock ISFSI Site is not assigned a separate tax parcel number by the Hayes Township assessor in time for any Tax bill rendered after Closing to be rendered to Buyer on the Big Rock ISFSI Site as a separate parcel, then the Parties will pro-rate any such Tax bill on the basis of the acreage of the pre-existing tax parcel that is included in the Big Rock ISFSI Site and the acreage that is outside the Big Rock ISFSI Site with Buyer paying the former portion and Seller paying the latter portion. (g) Buyer shall have the primary responsibility for securing the transfer, reissuance or procurement of the Permits and Environmental Permits other than Transferable Permits, effective as of the Closing. Seller shall cooperate with Buyer's efforts in this regard and assist in any transfer or reissuance of a Permit or Environmental Permit held by Seller or the procurement of any other Permit or Environmental Permit when so requested by Buyer. In the event that Buyer is unable, despite its Commercially Reasonable Efforts, to obtain a transfer or reissuance of one or more of the Permits or Environmental Permits as of the Closing Date, Buyer may use the applicable Permit or Environmental Permit issued to Seller, provided (i) such use is not unlawful, (ii) Buyer notifies Seller prior to the Closing Date, (iii) Buyer continues to make Commercially Reasonable Efforts to obtain a transfer or reissuance of such Permit or Environmental Permit after the Closing, and (iv) Buyer indemnifies Seller for any losses, claims or penalties suffered by Seller in connection with the Permit or Environmental Permit that is not transferred or reissued as of the Closing resulting from Buyer's ownership or operation of the Included Assets following the Closing. In no event shall Buyer use or otherwise rely on a Permit or Environmental Permit issued to Seller beyond one (1) year after the Closing Date. 6.7. Brokerage Fees and Commissions. Seller and Buyer each represent and warrant to the other that, other than with respect to fees and commissions of Concentric Energy Advisors Inc., which shall be the sole responsibility of Seller, no other Person is entitled to any brokerage fees, commissions or finder's fees in connection with the transaction contemplated hereby by reason of any action taken by the Party making such representation or its Affiliates. Seller and Buyer will pay to the other or otherwise discharge, and will indemnify and hold the other harmless from and against, any and all claims or liabilities for all brokerage fees, commissions and finder's fees incurred by reason of any action taken by the indemnifying party or its Affiliates. 6.8. Tax Matters. (a) All Transfer Taxes incurred in connection with this Agreement and the transactions contemplated hereby, if any, shall be shared equally between Seller and Buyer. 66 Seller will, at its own expense, file, to the extent required by applicable Law, all necessary Tax Returns and other documentation with respect to all such Transfer Taxes, and Buyer shall be entitled to review such returns prepared by Seller in advance and provide comments thereon, which Seller shall accept to the extent such comments are reasonable, and, if required by applicable Law, Buyer will join in the execution of any such Tax Returns or other documentation. Buyer will provide to Seller, to the extent possible, an appropriate exemption certificate in connection with this Agreement and the transactions contemplated hereby, due from each applicable taxing authority, and the Parties shall comply with all requirements and use Commercially Reasonable Efforts to secure applicable sales tax exemptions for the transactions contemplated by this Agreement. (b) [Intentionally omitted] (c) With respect to Seller's Qualified Decommissioning Fund, prior to the Closing Date, Seller shall cause the Trustee of Seller's Qualified Decommissioning Fund to pay estimated Income Taxes for the taxable period that ends on the Closing Date in an amount equal to the estimated Income Tax Liability of Seller's Qualified Decommissioning Fund for the taxable period that ends on the Closing Date. To the extent the amount of estimated Income Taxes paid pursuant to this Section 6.8(c) is less than the Income Tax Liability of Seller's Qualified Decommissioning Fund for the taxable period that ends on the Closing Date, any such deficiency will be paid by the Trustee of the Post-Closing Decommissioning Trust Agreement and charged against the Excess Qualified Decommissioning Fund assets, or if such Excess Qualified Decommissioning Fund assets are not sufficient to pay such Income Tax Liability, such deficiency will be paid by Seller. Such payment will be made no later than the due date, as extended, of the initial Tax Return. (d) Each of the Parties shall provide the other with such assistance as may reasonably be requested by the other Party in connection with the preparation of any Tax Return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to Liability for Taxes and each will retain and provide the requesting Party with any records or information which may be relevant to such return, audit or examination, proceedings or determination. Any information obtained pursuant to this Section 6.8(d) or pursuant to any other Section hereof providing for the sharing of information or review of any Tax Return or other schedule relating to Taxes shall be kept confidential by the Parties hereto, except to the extent such information is required to be disclosed by Law. (e) Seller shall use Commercially Reasonable Efforts to cooperate with NMC and cause any of Seller's Affiliates that provide or have provided an IRS Form W-2 to any Transferred Employee to cooperate with Buyer and Buyer's Affiliate in the efforts to obtain "successor employer" or "same employer" status for federal and state employment Tax and unemployment Tax purposes. Such cooperation shall include but not be limited to compliance with all requirements of applicable Laws and administrative practice of any Governmental Authority relevant to obtaining such status to assist Buyer and its Affiliate in meeting the requirements for obtaining such status. Seller shall also use Commercially Reasonable Efforts to cooperate with NMC and cause any of Seller's Affiliates to provide to Buyer all information reasonably available and necessary to enable Buyer or its Affiliate to successfully transfer and transition payroll functions with respect to the Transferred Employees. Such cooperation shall 67 include but not be limited to payroll, salary, benefits and withholding and employment Tax records and returns with respect to such Transferred Employees 6.9. Advice of Changes; Supplements to Schedules. (a) Prior to the Closing, each Party will promptly advise the other in writing of any change or discovery occurring after the Effective Date that, if occurring on or prior to the Effective Date, would have been required to be disclosed to the other Party and/or set forth or described in the representations, warranties or covenants contained in this Agreement or on the Schedules to this Agreement so as to have avoided a material breach of any representation, warranty or covenant of the advising or other Party under this Agreement. If a Party advises the other Party of any such matter with respect to a deemed material breach by the advising Party, the other Party shall have the right to terminate this Agreement in accordance with and subject to the provisions of Sections 9.1(e) or (f), as the case may be. If a Party advises the other Party of any such matter with respect to a deemed material breach by the other Party, the advising Party shall have the right to terminate this Agreement in accordance with and subject to the provisions of Sections 9.1(e) or (f), as the case may be. If a Party fails to exercise its termination right, the written notice under this Section 6.9(a) will be deemed to have amended this Agreement, including the appropriate schedule, or to have qualified the applicable representations and warranties and no indemnification may be sought with respect to such matters. (b) Five (5) Business Days prior to the Closing, each of the Parties shall provide the other Party with any and all revisions, modifications and updates to the Schedules, solely with respect to matters arising after the Effective Date which if existing or occurring as of the Effective Date, would have been required to be set forth or described in such Schedules, such that the Schedules will be true and correct as of such date of delivery. To the extent that such revisions, modifications and updates do not, either individually or in the aggregate, create a Material Adverse Effect or a Buyer Material Adverse Effect, then such revisions, modifications and updates shall be deemed to be automatically incorporated into the Schedules. 6.10. Employees. (a) Buyer shall offer employment, commencing as of the Closing, to all Palisades Employees and Big Rock ISFSI Employees employed immediately prior to the Closing, which Palisades Employees and Big Rock ISFSI Employees are set forth on Schedule 6.10(a), as amended between the Effective Date and the Closing Date to reflect any changes in the identities of work force personnel. Notwithstanding the foregoing any individual who is absent from service due to illness, leave of absence, military service or otherwise on the Closing Date shall not be considered a Palisades Employee or a Big Rock ISFSI Employee (and shall not be entitled to any wages, compensation, or benefits from Buyer) unless or until such individual returns to work and is actively employed by Buyer no later than fifty-two (52) weeks from the date his/her leave began or such later date as required by Law or the Collective Bargaining Agreement, in which case any wages, compensation, or benefits eligibility shall be prospective only, from the date of such individual's active employment with Buyer. Each offer of employment made by Buyer to a Palisades Employee or a Big Rock ISFSI Employee shall be consistent with the standard hiring practices and employment prerequisites of Buyer (applied consistent with Buyer's past practices), and to the receipt by Buyer of confirmation from Seller 68 or NMC that such individual (i) is currently performing and is qualified, licensed, certified, or trained in accordance with any applicable requirement of Governmental Authority to perform the duties and responsibilities of his or her current job assignment or the position to be offered to him or her by Buyer; and (ii) has the appropriate nuclear power plant access authorization. At the Closing, Buyer shall assume the Collective Bargaining Agreement and shall assume all of Seller's or NMC's obligations under the Collective Bargaining Agreement with respect to each Bargaining Unit Transferred Employee as of the date he or she commences employment with Buyer, including the provision of retirement and insurance benefits, for the remainder of the term of the Collective Bargaining Agreement. For purposes of this Section 6.10, Buyer shall include any Affiliate of Buyer which offers employment to Palisades Employees or Big Rock ISFSI Employees. Buyer does not assume any Liability under the Collective Bargaining Agreement or otherwise with respect to any Palisades Employee unless and until he or she becomes a Transferred Employee. Buyer's agreement to offer employment to the Palisades Employees and Big Rock ISFSI Employees under this Section 6.10(a) shall not constitute an employment agreement or contract with any Palisades Employee or Big Rock ISFSI Employee, and each Transferred Employee shall be an "at-will" employee, subject to the Collective Bargaining Agreement, if applicable. (b) Each Palisades Employee or Big Rock ISFSI Employee who is offered, accepts and commences employment with Buyer will be referred to herein as a "Transferred Employee." With respect to each Big Rock ISFSI Employee who is a Transferred Employee, Buyer shall not be required to provide any replacement welfare, benefit, defined benefit or retiree coverages or plans separate from or in addition to those being provided to the other Transferred Employees hereunder. If, but only if, any Big Rock ISFSI Employee participates in a plan or has a coverage as of the Effective Date identified in Schedules 4.8 or 4.9(a) that is being replicated by Buyer hereunder, then such Big Rock ISFSI Employee shall be permitted to participate in such replicated plan or coverage of Buyer. Otherwise, such Big Rock ISFSI Employees shall be treated for all purposes under this Agreement as Non-Bargaining Unit Transferred Employees. (c) For the period commencing on the Closing Date and ending thirty-six (36) months thereafter (regardless of whether a Non-Bargaining Unit Transferred Employee becomes a Non-Bargaining Unit Transferred Employee after the Closing Date), except as Buyer and any Non-Bargaining Unit Transferred Employee may otherwise mutually agree, Buyer shall provide Non-Bargaining Unit Transferred Employees with annualized total compensation, including base pay, authorized overtime, bonuses, incentive compensation and benefits provided under all applicable employee benefits plans and programs, and fringe benefit arrangements (other than severance benefits, which are as set forth in Section 6.10(m)) (collectively, "Total Compensation") that in the aggregate is comparable in value to the Non-Bargaining Unit Transferred Employees' annualized Total Compensation immediately prior to the Closing Date. For the period commencing on the Closing Date and ending on the date on which the Collective Bargaining Agreement expires or terminates (such date, the "CBA Termination Date"), except as Buyer and any Bargaining Unit Transferred Employee may otherwise mutually agree, Buyer shall provide Bargaining Unit Transferred Employees with Total Compensation in accordance with the terms set forth in the Collective Bargaining Agreement. Notwithstanding anything to the contrary herein, Buyer shall take all actions necessary to comply with the requirements of MCL Section 460.10p, to the extent applicable. 69 (d) Effective as of the Closing Date or such later date as they become Transferred Employees, all Transferred Employees shall cease to participate in the Employee Welfare Benefit Plans maintained or sponsored by NMC, Seller or their Affiliates and shall commence participation (if applicable eligibility requirements are satisfied) in the Employee Welfare Benefit Plans of Buyer or its Affiliates (the "Replacement Welfare Plans") that (i) for Non-Bargaining Unit Transferred Employees, will, when combined with the other elements of Total Compensation, provide benefits and coverage that are comparable on average to the benefits and coverage provided to the Non-Bargaining Unit Transferred Employees on average under NMC's, Seller's, or their Affiliates', as the case may be, Employee Welfare Benefit Plans in effect for the Non-Bargaining Unit Transferred Employees immediately prior to the Closing Date and (ii) for Bargaining Unit Transferred Employees, will provide benefits and coverage in accordance with the terms set forth in the Collective Bargaining Agreement. Buyer shall not be obligated to maintain such benefits and coverage in the Replacement Welfare Plans as described in the preceding sentence (regardless of whether any Transferred Employee becomes a Transferred Employee after the Closing Date) (A) beyond the 36-month period following the Closing Date with respect to Non-Bargaining Unit Transferred Employees, and (B) beyond the remaining term of the Collective Bargaining Agreement with respect to Bargaining Unit Transferred Employees. Buyer shall (i) waive all limitations as to pre-existing condition exclusions and waiting periods with respect to the Transferred Employees under the Replacement Welfare Plans, other than, but only to the extent of, limitations or waiting periods that were in effect with respect to such employees under the corollary Employee Welfare Benefit Plans maintained by NMC, Seller or their Affiliates and that have not been satisfied as of the Closing Date, and (ii) provide each Transferred Employee with credit for any coinsurance limit payments and deductibles paid prior to the Closing Date during a plan year under NMC's, Seller's or their Affiliates' plans that have not ended as of the Closing Date, in satisfying any deductible or coinsurance limit requirements under the Replacement Welfare Plans (on a pro-rata basis in the event of a difference in plan years). In administering any lifetime maximum claims amount, Buyer and its Affiliates shall reserve the right to recognize claims under the corollary Employee Welfare Benefit Plans maintained by NMC, Seller or their Affiliates. (e) Other than with respect to Buyer's replacement 401(k) plans and defined contribution plans, Replacement Defined Benefit Plans and Replacement Retiree Coverages which are governed by Sections 6.10(f), (g) and (l), respectively, Buyer shall give all Transferred Employees credit for all service with NMC, Seller and their Affiliates under all Employee Welfare Benefit Plans and all fringe benefit plans, programs and arrangements of Buyer ("Replacement Benefit Plans") in which they become participants to the extent such service would be credited under the corollary plans and arrangements maintained by NMC, Seller or their Affiliates ("Credited Service"). The Credited Service given is for purposes of eligibility, vesting and service related level of benefits, but not benefit accrual (except as provided in the following sentence). For purposes of benefit accrual, Buyer shall give Transferred Employees credit for all Credited Service with NMC, Seller and their Affiliates under all Replacement Benefit Plans, but the ultimate benefits provided under Replacement Benefit Plans shall be offset by the corresponding benefits previously provided by NMC, Seller or their Affiliates or benefit plans of NMC, Seller or their Affiliates, or by the corresponding benefits accrued under the benefit plans of Seller or its Affiliates or otherwise committed to be provided by NMC, Seller or their Affiliates in the future. 70 (f) Effective as of the Closing Date or such later date as they become Transferred Employees, Buyer agrees to allow the Non-Bargaining Unit Transferred Employees to be eligible to commence participation in one or more tax-qualified 401(k) plans sponsored by Buyer or its Affiliates that will, when combined with the other elements of Total Compensation, provide benefits which in the aggregate are comparable in value to the benefits provided to the Non-Bargaining Unit Transferred Employees under the tax-qualified 401(k) plans sponsored by NMC or its Affiliates in effect for Non-Bargaining Unit Transferred Employees immediately prior to the Closing Date (the "Existing Savings Plans"). Effective as of the Closing Date, or such later date as they become Transferred Employees, Buyer agrees to allow the Bargaining Unit Transferred Employees to commence participation in one or more tax-qualified 401(k) plans sponsored by Buyer or its Affiliates that will provide benefits in accordance with the terms set forth in the Collective Bargaining Agreement. In addition, Buyer agrees to allow the Bargaining Unit Transferred Employees who participate in the Consumers Defined Company Contribution Plan (the "Palisades Defined Contribution Plan"), effective on the Closing Date, or such later date as they become Transferred Employees, to be eligible to commence participation in one or more defined contribution plans that will provide benefits which are equivalent in value to the benefits provided to such employees under the Palisades Defined Contribution Plan. Buyer shall give all Transferred Employees credit for all service with NMC, Seller and their Affiliates under Buyer's replacement 401(k) plans and defined contribution plans in which they become participants to the extent such service would be credited under the Existing Savings Plans and the Palisades Defined Contribution Plan, provided that such service credit shall be given only for purposes of eligibility and vesting, but not benefit accrual. Buyer shall not be obligated to maintain such participation and benefits under such defined contribution plans (regardless of whether any Transferred Employee becomes a Transferred Employee after the Closing Date) (A) beyond the 36-month period following the Closing Date with respect to Non-Bargaining Unit Transferred Employees, and (B) beyond the remaining term of the Collective Bargaining Agreement with respect to Bargaining Unit Transferred Employees (provided, however, that if changes in the Collective Bargaining Agreement or the Law, or failure to otherwise meet any legal qualification requirements under existing Law, require(s) any terms of such defined contribution plans to be modified, or if any such terms are required by the IRS to be modified in connection with Buyer's application for a determination letter for such defined contribution plans, Buyer may modify such terms to the extent that it deems necessary to comply with such Laws, IRS directives or changes in the Collective Bargaining Agreement). To the extent allowable by Law and the applicable Seller plan, Buyer shall take any and all necessary action to cause the trustee of any tax-qualified defined contribution plan of Buyer or its Affiliates in which any Transferred Employee becomes a participant to accept a direct "rollover" in cash of all or a portion of said employee's "eligible rollover distribution" within the meaning of Section 402 of the Code from the Existing Savings Plans and/or the Palisades Defined Contribution Plan, if requested to do so by the Transferred Employee. Seller covenants that Transferred Employees shall be fully vested under the Existing Savings Plans and the Palisades Defined Contribution Plan as of the Closing Date. (g) (1) Effective as of the Closing Date or such later date as they become Transferred Employees, Buyer shall cause to be provided to those Transferred Employees participating in the Pension Plan for Employees of Consumers Energy and Other CMS 71 Energy Companies (the "Palisades Defined Benefit Plan") one or more defined benefit pension plans ("Replacement Defined Benefit Plans"). The Replacement Defined Benefit Plans shall provide benefit formulas and provisions that are identical to the final average pay benefit plan formulas and provisions for such Transferred Employees in the Palisades Defined Benefit Plan effective immediately prior to the Closing. For the purposes of this Section 6.10(g), except as required by the Collective Bargaining Agreement or Law, or as required by the IRS in connection with applications for determination letters for the Palisades Defined Benefit Plan, no material change shall be made to such benefit formulas and provisions referenced above in the Palisades Defined Benefit Plan for the Transferred Employees after the Effective Date and prior to the Closing without the written consent of Buyer which consent shall not be unreasonably withheld. Buyer agrees to maintain such final average pay benefit formulas and provisions (A) for Non-Bargaining Unit Transferred Employees for the period commencing on the Closing Date and ending thirty-six (36) months thereafter and (B) for Bargaining Unit Transferred Employees commencing on the Closing Date and for the remaining term of the Collective Bargaining Agreement, (provided, however, that if changes in the Collective Bargaining Agreement or the Law, or failure to otherwise meet any legal qualification requirements under existing Law, require(s) any such terms to be modified or if any such terms are required by the IRS to be modified in connection with Buyer's application for a determination letter for the Replacement Defined Benefit Plans, Buyer may modify such terms to the extent that it deems necessary to comply with such Laws, IRS directives or changes in the Collective Bargaining Agreement). Following the end of the 36-month period described in the preceding sentence for Non-Bargaining Unit Transferred Employees and the end of the term of the Collective Bargaining Agreement for Bargaining Unit Transferred Employees, nothing in this Section 6.10(g) shall require Buyer to increase any benefits accrued under the Replacement Defined Benefit Plans that are attributable to Credited Service or for any other purpose. (2) The Transferred Employees participating in the Palisades Defined Benefit Plan shall be given credit in the Replacement Defined Benefit Plans for all service with and compensation from NMC, Seller, or their Affiliates as if it were service with and compensation from Buyer for purposes of determining eligibility for benefits, the amount of any benefits or benefit accruals, vesting and service related levels of benefits under the Replacement Defined Benefit Plans. (3) At least thirty (30) days prior to the Closing Date, Seller and Buyer shall file or cause to be filed any forms 5310-A that may be required to be submitted to the IRS in connection with the transfers described in this Section 6.10(g). The transfers and payments described in this Section 6.10(g) shall in no event be made prior to the thirtieth (30th) day following the filing of such form 5310-A with the IRS. In the event that the IRS, the PBGC or any other Governmental Authority raises any objections to the transfer, Seller and Buyer shall cooperate in good faith to resolve any such objections. (4) At the Closing, Seller shall cause to be transferred from the Palisades Defined Benefit Plan to the corresponding Replacement Defined Benefit Plans, assets equal to Seller's good faith estimate of the amount that is required to be transferred in compliance with the requirements of Section 414(l) of the Code and Treasury 72 Regulation Section 1.414(l)-1 (determined under assumptions used by the PBGC as of the Closing Date including the assumptions set forth in Schedule 6.10(g)) (the "Initial Transfer"). (5) Seller shall furnish to Buyer, within forty-five (45) days or as soon as reasonably practicable following the Closing Date, the amount of the accrued benefits under the Palisades Defined Benefit Plan for each Transferred Employee, and shall provide to Buyer a complete employment history for each Transferred Employee, including date of birth, date of hire, credited service, vesting service, breaks in employment, monthly pensionable earnings history, and any other information, including actuarial assumptions, necessary for Buyer to administer the accrued benefits transferred pursuant to this Section 6.10(g), and to permit Buyer's actuary to review and confirm the amounts of the benefit Liabilities determined by Seller's actuary, and shall provide Buyer with any actuarial tables or factors which Buyer may require in order to properly administer the accrued benefits transferred. (6) Within one hundred fifty (150) days after the Closing Date, Seller shall calculate the actual amount that is required to be transferred in compliance with the requirements of Section 414(l) of the Code and Treasury Regulation Section 1.414(l)-1 (determined under assumptions used by the PBGC as of the Closing Date including the assumptions set forth in Schedule 6.10(g)) (the "Actual Amount"). To the extent that the Actual Amount is less than the Initial Transfer, the amount of such differential (together with interest accrued thereon at the Interest Rate from and including the Closing Date to but excluding the date of payment) shall be transferred by the applicable Replacement Defined Benefit Plan to the Palisades Defined Benefit Plan within 10 days of such determination. To the extent that the Actual Amount is greater than the Initial Transfer, Seller shall cause to be transferred from the Palisades Defined Benefit Plan to the applicable Replacement Defined Benefit Plan the amount of such differential (together with interest accrued thereon at the Interest Rate from and including the Closing Date to but excluding the date of payment) within 10 days of such determination. To the extent the Actual Amount is less than Eighteen Million Nine Hundred Thousand Dollars ($18,900,000), the Purchase Price shall be decreased by the amount of the shortfall as part of the Post-Closing Adjustment, which shall be completed in the manner specified in Section 3.3(c). During the fifty-sixth week following the Closing, Seller shall calculate the Actual Amount (the "Additional Actual Amount") with respect to any Transferred Employee who was not included in the calculation of the Actual Amount referred to in the first sentence of this Section 6.10(g)(6) and Seller shall true up, to the extent required, the adjustment provided in the previous sentence as if the Additional Actual Amount had been included in the original determination of the Actual Amount. (7) All assets transferred under this Section 6.10(g) shall be made in cash, or in marketable securities that are reasonably acceptable to Buyer. (8) Upon completion of the Initial Transfer under this Section 6.10(g), all benefit payments from the Replacement Defined Benefit Plans shall be the responsibility of Buyer. Buyer shall not assume or bear any Liability attributable to the costs of any changes to benefit formulas or other benefits provisions or practices with 73 respect to Transferred Employees for periods prior to the Closing that are required by the IRS or any court regarding the Tax-qualification requirements under Section 401(a) of the Code, or any other legal requirements, including any age discrimination requirements. (h) Buyer and Seller do not anticipate the issuance of any notices pursuant to the WARN Act. Notwithstanding the foregoing, Seller agrees to timely perform and discharge all requirements under the WARN Act and under applicable Laws for the notification of employees arising from the sale of the Included Assets to Buyer up to the Closing Date for those employees who will not become Transferred Employees effective as of the Closing Date. On and after the Closing Date, Buyer shall be responsible for performing and discharging all requirements under the WARN Act and under applicable Laws for the notification of Transferred Employees with respect to the Included Assets. At Closing, Seller shall provide to Buyer a certificate setting forth the number of employees, if any, who suffered an "employment loss," as defined under the WARN Act, at the Included Assets in the ninety (90) days immediately preceding the Closing Date, as well as the dates of their respective employment loss (the "WARN Certificate"). (i) On and after the Closing Date, Buyer shall be responsible for providing COBRA continuation coverage only to Transferred Employees and qualified beneficiaries of such employees who become entitled to COBRA continuation coverage by reason of the occurrence of a COBRA qualifying event after becoming Transferred Employees. (j) Seller shall remain responsible for paying Transferred Employees for: (1) all salary, wages, Benefit Plan benefits (excluding under the Palisades Defined Benefit Plan), and a pro rata portion of any bonuses or incentive compensation that were earned for time worked for Seller or its Affiliates or NMC prior to the respective dates they become Transferred Employees; (2) any change-of-control, retention or similar payments to Transferred Employers arising out of the consummation of the transactions contemplated by this Agreement; and (3) all workers' compensation, disability benefits, or life insurance benefits for which entitlement to payment is based upon events occurring prior to the Closing including any incurred but unreported claims and/or unpaid insurance premiums under the Benefit Plans. At Closing, and thereafter as they become Transferred Employees, Seller shall pay to Buyer the cash equivalent for all vacation time, floating holidays, paid time-off plan Liabilities (including employee purchased paid time-off), sick days, personal days and bonuses and incentive compensation for Transferred Employees (including amounts carried over from prior years) which have accrued prior to but remain unpaid as of the date of commencement of employment with Buyer (holiday time shall not be included in such payment). For purposes hereof, the foregoing calculations shall be determined consistent with NMC's and Seller's past practices, as applicable. (k) Consistent with the Collective Bargaining Agreement and applicable Law, no provision of this Agreement shall be deemed to create any express or implied obligation for Buyer not to modify any particular compensation or benefits provided to Bargaining Unit Transferred Employees after the Closing. (l) 74 (1) For the period commencing on the Closing Date and ending thirty-six (36) months thereafter for Non-Bargaining Unit Transferred Employees, and beginning on the Closing Date and for the remaining term of the Collective Bargaining Agreement for Bargaining Unit Transferred Employees, Buyer shall provide all Transferred Employees who retire within such period with retiree medical, prescription drug, dental and life insurance (and with respect to Non-Bargaining Unit Transferred Employees, executive survivor) coverages (the "Replacement Retiree Coverages") that are equivalent on average in value (A) with respect to Non-Bargaining Unit Transferred Employees (other than Big Rock ISFSI Employees), to the retiree medical, prescription drug, dental, life insurance and executive survivor coverages available to eligible Palisades Employees who retire from Seller or NMC immediately prior to the Closing Date, (B) with respect to Big Rock ISFSI Employees, to the retiree medical, prescription drug, dental, life insurance and executive survivor coverages available to eligible Palisades Employees, but only if such Big Rock ISFSI Employees would be eligible for such coverages if they retired from Seller or NMC immediately prior to the Closing Date and (C) with respect to Bargaining Unit Transferred Employees, the retiree medical, prescription drug, dental and life insurance coverages in accordance with the terms set forth in the Collective Bargaining Agreement (the "Palisades Retiree Coverages"). Buyer shall (i) waive all limitations as to pre-existing condition exclusions and waiting periods with respect to the Transferred Employees under the Replacement Retiree Coverages, other than, but only to the extent of limitations or waiting periods that were in effect with respect to such employees under the Palisades Retiree Coverages and that have not been satisfied as of the Closing Date, and (ii) provide each Transferred Employee with credit for any coinsurance limit payments and deductibles paid prior to the Closing Date during a plan year under each applicable Palisades Retiree Coverages plan that has not ended as of the Closing Date, in satisfying any deductible or coinsurance limit requirements under the Replacement Retiree Coverages (on a pro-rata basis in the event of a difference in plan years). Buyer shall give all Transferred Employees credit for all service with NMC, Seller and their Affiliates with respect to the Replacement Retiree Coverages to the extent such service would be credited under the corollary Palisades Retiree Coverages, provided that such service credit shall be given only for purposes of eligibility and service-related levels of benefits. Notwithstanding the foregoing, for purposes of Replacement Retiree Coverages with respect to the Non-Bargaining Unit Transferred Employees who participated in the NMC retiree coverages, Buyer shall not be required to recognize such Transferred Employees' past service with Seller, NMC or their Affiliates for any purpose whatsoever. Effective as of the date any Transferred Employee becomes a Transferred Employee, neither Seller nor NMC shall have any responsibility to provide retiree medical, dental, prescription drug, life insurance or executive survivor coverages for such Transferred Employee. Following the end of such thirty-six month period for Non-Bargaining Unit Transferred Employees and the end of the term of the Collective Bargaining Agreement for Bargaining Unit Transferred Employees, nothing in this Section 6.10(l) shall prohibit Buyer from changing or eliminating the Replacement Retiree Coverages for Transferred Employees who retire within such period or thereafter, including but not limited to prohibiting Buyer from implementing retiree cost sharing or other provisions under the Replacement 75 Retiree Coverages that do not take into account service with Seller, NMC or their Affiliates. (2) At the Closing, Seller shall transfer to Buyer, either in cash or from the Consumers Energy Co. Non-Union Welfare Benefit Trust to Provide for Retiree Health Care & Other Benefits, the Consumers Energy Co. Non-Union Welfare Benefit Trust to Provide for Retiree Life Insurance & Other Benefits, the Consumers Energy Co. Union Welfare Benefit Trust to Provide for Retiree Health Care & Other Benefits and the Consumers Energy Co. Union Welfare Benefit Trust to Provide for Retiree Life Insurance & Other Benefits to Buyer's applicable welfare benefit trusts for the Replacement Retiree Coverages assets equal to Seller's good faith estimate of the product of (i) the Accumulated Postretirement Benefit Obligation ("APBO") of Transferred Employees determined as of the Closing Date under Statement of Financial Accounting Standards Number 106 ("SFAS 106"), based on the actuarial assumptions used by Seller for the most recent SFAS 106 measurement date prior to the Closing Date (and for this purpose, no future medical inflation is assumed) and (ii) for Non-Bargaining Unit Transferred Employees, the funded percentage of Seller's overall Non-union SFAS 106 APBO, and for Bargaining Unit Transferred Employees, the funded percentage of Seller's overall Union SFAS 106 APBO (in the aggregate, the "Initial Retiree Medical and Life Insurance Transfer"). Such funded percentages will be determined as of the Seller's most recent SFAS 106 measurement date prior to the Closing Date, based on the actuarial assumptions used by Seller as of that date for SFAS 106 purposes and the fair market value of SFAS 106 assets respectively for Non-Bargaining Unit Transferred Employees and Bargaining Unit Transferred Employees. Such asset transfers shall be allocated among Seller's welfare benefit trusts based on the transfer amounts determined for Bargaining Unit Transferred Employees and Non-Bargaining Unit Transferred Employees in accordance with the preceding two (2) sentences. These asset transfer amounts shall be further allocated, separately for Bargaining Unit Transferred Employees and Non-Bargaining Unit Transferred Employees between Seller's retiree health care and retiree life insurance trusts for the respective employee groups, in proportion to the assets of the four (4) trusts. (3) Within sixty (60) days after the Closing Date, Seller shall calculate the actual amount based on the product of subclauses (i) and (ii) in Section 6.10(l)(2) above (the "Actual Retiree Medical and Life Insurance Amount"). To the extent that the Actual Retiree Medical and Life Insurance Amount is less than the Initial Retiree Medical and Life Insurance Transfer, the amount of such differential (together with interest accrued thereon at the Interest Rate from and including the Closing Date to but excluding the date of payment) shall be transferred by Buyer to Seller within 10 days of such calculation. To the extent that the Actual Retiree Medical and Life Insurance Amount is greater than the Initial Retiree Medical and Life Insurance Transfer, the amount of such differential (together with interest accrued thereon at the Interest Rate from and including the Closing Date to but excluding the date of payment) shall be transferred by Seller to Buyer within 10 days of such calculation. If the Actual Retiree Medical and Life Insurance Amount is less than Six Million Two Hundred Fifty Thousand ($6,250,000), the Purchase Price shall be decreased by the amount of the shortfall as part of the Post-Closing Adjustment. During the fifty-sixth week following 76 the Closing, Seller shall calculate the Actual Retiree Medical and Life Insurance Amount (the "Additional Retiree Medical and Life Insurance Amount") with respect to any Transferred Employee who was not included in the calculation of the Actual Retiree Medical and Life Insurance Amount referred in this Section 6.10(l)(3), and Seller shall true up, to the extent required, the adjustment provided in the previous sentence as if the Additional Retiree Medical and Life Insurance Amount had been included in the original determination of the Actual Retiree Medical and Life Insurance Amount. (m) Except as Buyer and any Transferred Employee may otherwise mutually agree, Buyer shall pay to each Non-Bargaining Unit Transferred Employee whose employment is terminated without cause by Buyer or one of its Affiliates within the period commencing on the Closing Date and ending eighteen (18) months thereafter severance payments equal to the greater of (i) such Transferred Employee's Total Compensation for the remainder of such eighteen (18) month period as if still employed and (ii) an amount equal to one (1) week's base pay for each full year of service with Seller and/or NMC (up to a maximum of thirty (30) weeks' base pay). Buyer is not establishing any separation plan or severance agreement, plan or coverage to replicate any separation plan or severance agreement, plan or coverage for the Non-Bargaining Unit Transferred Employees that is identified in Schedules 4.8 or 4.9(a) (including any agreement, coverage or plan so identified in Schedules 4.8 or 4.9(a) as being specifically applicable to one or more Big Rock ISFSI Employees), and Buyer shall not be obligated to provide any Non-Bargaining Unit Transferred Employee any severance payment or other benefits upon the termination of such Non-Bargaining Unit Transferred Employee's employment by Buyer without cause other than as provided in the preceding sentence. Nothing contained herein shall alter the at-will employment relationship of any Non-Bargaining Unit Transferred Employee. (n) Buyer shall provide relocation assistance to any Bargaining Unit Transferred Employee transferred more than sixty (60) miles from his/her current place of employment to one of Buyer's other facilities, in accordance with the terms of the Collective Bargaining Agreement. (o) Seller shall inform Buyer of any planned termination of employment by any executive, key employee or group of five (5) or more employees at Palisades reasonably promptly after Seller acquires Knowledge thereof. 6.11. Risk of Loss. (a) Prior to the Closing, Buyer shall not bear any risk of loss or damage to the property included in the Included Assets. Seller shall replace or repair any damage to the Included Assets in accordance with Good Utility Practices, except as otherwise provided in paragraphs (b) or (c) below. (b) If, before the Closing, all or any material portion of the Included Assets are taken by eminent domain or are the subject of a pending or (to the Knowledge of Seller) contemplated taking which has not been consummated, Seller shall notify Buyer promptly in writing of such fact. Buyer and Seller shall negotiate in good faith to settle the Loss resulting from such taking (including by making a fair and equitable adjustment to the Purchase Price) 77 and, upon such settlement, consummate the transactions contemplated by this Agreement pursuant to the terms of this Agreement. If no such settlement is reached within sixty (60) days after Seller has notified Buyer of such taking, and if such taking creates a Material Adverse Effect, then Buyer or Seller may terminate this Agreement pursuant to Section 9.1(g); provided, that any such termination notice must be given no later than ten (10) Business Days after the expiration of such sixty (60) day period. (c) If, before the Closing, all or any material portion of the Included Assets is damaged or destroyed by fire, or other casualty, Seller shall notify Buyer promptly in writing of such fact. If Seller has not notified Buyer within fifteen (15) days after its occurrence of its intention to repair such damage, degradation or destruction (such repair to be reasonably satisfactory to Buyer), Buyer and Seller shall negotiate in good faith to settle the Loss resulting from such casualty (including by making a fair and equitable adjustment to the Purchase Price) and, upon such settlement, consummate the transactions contemplated by this Agreement pursuant to the terms of this Agreement. If no such settlement is reached within sixty (60) days after Seller has notified Buyer of such casualty, and if such damage or destruction creates a Material Adverse Effect, then Buyer or Seller may terminate this Agreement pursuant to Section 9.1(g); provided, that any such termination notice must be given no later than ten (10) Business Days after the expiration of such sixty (60) day period. 6.12. Qualified Decommissioning Fund. (a) At the Closing, Seller shall cause to be transferred to the Trustee under the Post-Closing Decommissioning Trust Agreement all of the assets of the Seller's Qualified Decommissioning Fund, unless prior to such time Seller shall have received a favorable private letter ruling from the IRS in respect of withdrawing excess decommissioning funds, as contemplated by Section 6.18, in which case Seller shall transfer an amount equal to the Decommissioning Target or such other amount (but not less than the Decommissioning Target) specified in such private letter ruling (the "PLR Decommissioning Amount"). Any assets held by Seller's Qualified Decommissioning Fund that are in excess of the PLR Decommissioning Amount (the "Excess PLR Decommissioning Amount") shall be retained by the Seller's Qualified Decommissioning Fund for distribution to the Seller as provided by the private letter ruling contemplated by Section 6.18. (b) Buyer shall take all reasonable steps necessary to satisfy any requirements imposed by the NRC regarding the Buyer's Qualified Decommissioning Fund, in a manner sufficient to obtain NRC approval of the transfer of Qualified Decommissioning Fund assets from Seller to Buyer. (c) The Parties shall not take any actions that would cause the actual Tax consequences of the transactions contemplated by this Agreement to differ from or be inconsistent with the Requested Rulings set forth in Section 6.18. (d) Seller shall cause the Trustee of Seller's Qualified Decommissioning Fund to pay final expenses for trustee and investment management fees and other administrative expenses of Seller's Qualified Decommissioning Fund to the extent practicable before the Closing. Seller shall cause the Trustee of Seller's Qualified Decommissioning Fund to notify 78 Buyer in writing of any such Qualified Decommissioning Fund expenses due after the Closing. Buyer agrees to direct the Trustee of the Post-Closing Qualified Decommissioning Trust Agreement to pay the Qualified Decommissioning Fund expenses identified in the preceding sentence to the extent not paid before the Closing and such amount shall be charged against the Excess Qualified Decommissioning Fund assets, or if such Excess Qualified Decommissioning Fund assets are not sufficient to pay such expenses, Seller shall pay the same. Buyer agrees to ensure that its trust agreements allow for the payment of such expenses. (e) Any Excess Qualified Decommissioning Fund assets transferred to Buyer pursuant to this Section 6.12 shall be distributed to Seller if and to the extent required by Section 6.20(c). (f) Seller agrees not to amend Seller's Decommissioning Trust Agreement between the date of this Agreement and the Closing Date without Buyer's prior written consent, which shall not be unreasonably withheld, except for any amendment which may be required to be made to the Seller's Decommissioning Trust Agreement by any Law or to permit the transfers referred to in this Section 6.12 or to permit return to Seller of assets of the Qualified Decommissioning Fund in excess of the Decommissioning Target. 6.13. Spent Nuclear Fuel Fees. Before the Closing and at all times thereafter, Seller shall remain liable for, and pay as they come due, all Spent Nuclear Fuel Fees attributable to electricity generated at Palisades and the Big Rock Point Plant Operating Facility and sold prior to the Closing, including the Pre-1983 Fee, and Buyer shall have no Liability or responsibility therefor. Buyer shall be liable for all Spent Nuclear Fuel Fees attributable to electricity generated at Palisades and sold after the Closing, and Seller shall have no Liability or responsibility therefor. 6.14. Standard Spent Fuel Disposal Contract; Spent Nuclear Fuel Litigation. (a) At the Closing, (i) Seller shall assign to Buyer, and Buyer shall assume, Seller's rights, duties, title and interest in and to the Standard Spent Fuel Disposal Contract (except for the obligation to pay the Pre-1983 Fee), including, to the extent permitted by Law but subject to the Department of Energy Claim and Section 6.14(d) below, the right to pursue and recover damages arising post-Closing from the Department of Energy's failure to commence the removal, transportation and acceptance or its delay in accepting Spent Nuclear Fuel from Palisades and from the Big Rock Point Plant Operating Facility (now located at the Big Rock ISFSI) for disposal pursuant to the Standard Spent Fuel Disposal Contract (the "Post-Closing SNF Claim") and (ii) Buyer shall assume title to, and responsibility for the management, storage, removal, transportation and disposal of, all Spent Nuclear Fuel of Palisades located at the Palisades Site and all Spent Nuclear Fuel located at the Big Rock ISFSI Site in each case as of the Closing. Seller shall provide the required notice to the Department of Energy of the assignment of the Standard Spent Fuel Disposal Contract to Buyer within ninety (90) days of Closing, such notice to be in a form reasonably acceptable to Seller and Buyer and to include a copy of this Agreement therewith. Notwithstanding the foregoing, if a court of competent jurisdiction finally determines that the Post-Closing SNF Claim is not assignable hereunder, then Seller shall retain and prosecute such claim in a manner as reasonably directed by Buyer and, to 79 the extent Seller actually recovers damages relating to any Post-Closing SNF Claim, such amounts shall paid over to Buyer after deducting therefrom any reasonable and documented costs, fees (including, without limitation, attorney, consultant, engineer and expert fees) and expenses related to the prosecution of such claims. (b) In determining the scope of the Department of Energy Claim, it shall be assumed that Seller would have made all improvements to Palisades that would have been required for the acceptance, removal, transportation and/or disposal of Spent Nuclear Fuel pursuant to the Standard Spent Fuel Disposal Contract in a timely manner and that Seller was not required to make increased contributions to Seller's Qualified Decommissioning Fund or other Decommissioning trust as a result of the Department of Energy's failure to commence the removal, transportation, acceptance or any delay in accepting Spent Nuclear Fuel from Palisades and from the Big Rock Point Plant Operating Facility (now located at the Big Rock ISFSI) for disposal pursuant to the Standard Spent Fuel Disposal Contract. Seller agrees not to bring any claim against the Department of Energy (or include any such claim within the Department of Energy Claim) asserting that the amount of the Purchase Price was diminished or that there has been any diminution in value of the Palisades Assets at or prior to the Closing, that the Palisades Facility was subject to a taking by eminent domain or otherwise, or that Seller was required to make increased contributions to Seller's Qualified Decommissioning Fund as a result of the Department of Energy's failure to commence the removal, transportation, acceptance or any delay in accepting Spent Nuclear Fuel from Palisades and from the Big Rock Point Plant Operating Facility (now located at the Big Rock ISFSI) for disposal pursuant to the Standard Spent Fuel Disposal Contract. Seller also agrees that any diminished value claim relating to the period from and after the Closing that it brings against the Department of Energy with respect to the Big Rock ISFSI shall be limited to a claim for Thirty Million Dollars ($30,000,000), plus interest from and after the Closing. (c) Buyer acknowledges and agrees that, in connection with the Department of Energy Claim, Seller has calculated its claim for pre-Closing damages and taken the position with the Department of Energy that Seller would have allocated certain queue/scheduling rights under the Standard Spent Fuel Disposal Contract in respect of the pick-up by the Department of Energy of Spent Nuclear Fuel from Palisades to the Big Rock Point Plant Operating Facility, such that all Spent Nuclear Fuel from the Big Rock Point Plant Operating Facility would have been picked-up by the Department of Energy prior to any pick-up of Spent Nuclear Fuel from Palisades and therefore Seller would not have had to construct the Big Rock ISFSI but for the Department of Energy's breach of the Standard Spent Fuel Disposal Contract. Buyer agrees not to take any position inconsistent with the foregoing or to otherwise impair the potential damages recoverable by Seller pursuant to the Department of Energy Claim. (d) Buyer acknowledges and agrees that (i) the Post-Closing SNF Claim does not include, and Seller has retained, the right to claim certain post-Closing damages under the Standard Spent Fuel Disposal Contract in respect of the Big Rock ISFSI, as more particularly described in the definition of the Department of Energy Claim, (ii) Seller has retained rights under the Standard Spent Fuel Disposal Contract to the extent necessary to prosecute such claims and (iii) it shall not to take any position inconsistent with the foregoing. 80 (e) Seller acknowledges and agrees that Buyer shall be entitled to prosecute any and all claims for post-Closing damages arising under the Standard Spent Fuel Disposal Contract, including post-Closing damages with respect to the Big Rock ISFSI Assets in excess of the Big Rock Amount. (f) Buyer agrees to provide Seller with a copy within ten (10) Business Days of receipt of all notices provided to Buyer from the Department of Energy regarding the date on which the Pre-1983 Fee will become due and payable in accordance with the terms of the Standard Spent Fuel Disposal Contract, and Seller agrees to cause such amounts to be duly paid when due as provided in Section 2.4(h), subject to any rights of set-off to which Seller may be entitled by reason of the Department of Energy's defaults under the Standard Spent Fuel Disposal Contract. (g) Seller shall deliver to Buyer at the Closing security in respect of Seller's obligation to pay the Pre-1983 Fee in the form of cash, letter(s) of credit, or other security reasonably acceptable to Buyer in an amount not less than the then-outstanding amount of the Pre-1983 Fee (such cash, letter of credit or security to be adjusted not less than annually to reflect changes in the amount of the Pre-1983 Fee due); provided, however, that if at any time the rating of the unsecured, senior long-term debt obligations (not supported by third-party credit enhancements) of Seller's Parent shall equal or exceed Baa3 by Moody's Investment Services, Inc. (or its successor), or BBB- by Standard and Poor's Rating Group (or its successor), Seller shall be permitted to substitute in lieu of such cash, letter(s) of credit or other security a guaranty of Seller's Parent in the form attached hereto as Exhibit K (the "Consumers Guaranty"). (h) If future litigation by Buyer against the Department of Energy for damages from the Department of Energy's failure to commence the removal, transportation or acceptance or its delay in accepting Spent Nuclear Fuel from Palisades or the Big Rock Point Plant Operating Facility (now located at the Big Rock ISFSI) should result in a final, unappealable ruling that Buyer is entitled to damages, but that such damages, in part or in full, must be offset against any Liability to pay the Pre-1983 Fee, then Seller shall promptly pay to Buyer the amount of any such offset, subject to receipt by Seller of either a written acknowledgement by the Department of Energy or a Government Order that Seller's liability for the Pre-1983 Fee shall be reduced by the amount of any such offset. 6.15. Department of Energy Decontamination and Decommissioning Fees. Seller will continue to pay all Department of Energy Decontamination and Decommissioning Fees relating to separative work units purchased and/or consumed at Palisades and the Big Rock Point Plant Operating Facility prior to the Closing Date, including all annual Special Assessment invoices to be issued after the Closing Date by the Department of Energy, as contemplated by its regulations at 10 C.F.R. Part 766 implementing Sections 1801, 1802, and 1803 of the Atomic Energy Act. 6.16. Cooperation Relating to Insurance and Price-Anderson Act. Until the Closing, Seller will maintain, or cause to be maintained, in effect (i) insurance in amounts and against such risks and losses as is customary in the commercial nuclear 81 power industry and (ii) not less than the level of property damage and liability insurance for the Facilities as in effect on the Effective Date. Seller shall cooperate with Buyer's efforts to obtain insurance, including insurance required under the Price-Anderson Act or other Nuclear Laws with respect to the Palisades Assets and the Big Rock ISFSI Assets. In addition, subject to Buyer's written commitment to satisfy its indemnification obligations under Section 8.1(a), Seller agrees to use Commercially Reasonable Efforts to assist Buyer in making any claims against pre-Closing insurance policies that may provide coverage related to Assumed Liabilities and Obligations. 6.17. Release of Seller. Buyer shall use Commercially Reasonable Efforts to support Seller's efforts to obtain a written release of Seller effective as of the Closing with respect to obligations arising after the Closing under any of the Seller's Agreements, Fuel Contracts or Non-material Contracts assigned to Buyer hereunder, provided that Buyer shall not be required to assume additional costs, expenses or Liabilities in connection therewith. 6.18. Private Letter Ruling. The Parties agree to cooperate in good faith in the preparation and joint filing of the private letter ruling request(s) to be made by Buyer and Seller in order to obtain the Requested Rulings. Buyer and Seller shall use Commercially Reasonable Efforts to obtain prior to the Closing Date one or more private letter ruling(s) from the IRS (but receipt of any such letter rulings shall not be a condition to the occurrence of the Closing) determining that (i) the transfer of assets from the Seller's Qualified Decommissioning Fund to the Buyer's Qualified Decommissioning Fund is a disposition that either satisfies or is treated as satisfying the requirements of Treas. Reg. 1.468A-6(b) pursuant to the IRS's exercise of discretion under Treas. Reg. 1.468A-6(g)(1) (including a ruling that the Seller's Qualified Decommissioning Fund may transfer at Closing a portion of its assets equal to the PLR Decommissioning Amount), (ii) none of Seller, Buyer nor their respective Qualified Decommissioning Funds will recognize gain or loss upon the transfer of assets from the Seller's Qualified Decommissioning Fund to the Buyer's Qualified Decommissioning Fund, (iii) the Buyer's Qualified Decommissioning Fund will be treated as satisfying the requirements of Code Section 468A, (iv) the Buyer's Qualified Decommissioning Fund will have a carryover Tax basis in the assets received from the Seller's Qualified Decommissioning Fund and (v) Buyer is not treated as in constructive receipt of any Excluded Assets comprised of any fund relating to Decommissioning, other than the Seller's Qualified Decommissioning Fund, which Excluded Assets shall be released from being dedicated to Decommissioning Palisades (the "Requested Rulings"). The Requested Rulings shall be modified, as necessary, to take into account any legislation enacted on or after the Effective Date or any change in the Code or the Treasury Regulations promulgated thereunder or the issuance of any notice, revenue procedure, private letter ruling or similar administrative item by the IRS occurring on or after the Effective Date. Neither Buyer nor Seller shall take any action that would cause the transfer of assets from the Seller's Qualified Decommissioning Fund to the Buyer's Qualified Decommissioning Fund to fail to be treated as satisfying the requirements of Treas. Reg. 1.468A-6(b) (assuming solely for purposes of this sentence that Palisades in the hands of Buyer qualifies as a "nuclear power plant" within the meaning of Treasury Regulation Section 1.468A-1(b)(4) because Buyer's rates for the sale or furnishing of 82 electricity are not established or approved by a public utility commission or under the jurisdiction of the Rural Electric Administration), or cause Buyer and Seller to fail to obtain the Requested Rulings. The user fee set forth in the applicable IRS Revenue Procedure for substantially identical letter rulings by a common sponsor shall be shared equally by both Parties. Each Party will bear its own legal fees with respect to any requests. The Parties agree to use Commercially Reasonable Efforts to file the private letter ruling request seeking the Requested Rulings within forty-five (45) days of the Effective Date. 6.19. NRC Commitments. Following the Closing, Buyer shall maintain and operate the Facilities in accordance with the NRC Commitments, the NRC Licenses, applicable NRC regulations and policies and with applicable Nuclear Laws. 6.20. Decommissioning; Return of Excess Qualified Decommissioning Fund Assets. (a) Buyer hereby agrees that it will complete, at its expense, the Decommissioning of the Facilities and each Site once that Site is no longer utilized (i) in the case of Palisades, either for power generation of any kind or for any storage of Spent Nuclear Fuel or other Nuclear Material and (ii) in the case of the Big Rock ISFSI, for storage of Spent Nuclear Fuel or other Greater Than Class C Waste, and that it will complete all Decommissioning activities in accordance with all Nuclear Laws and Environmental Laws, including applicable requirements of the Atomic Energy Act and the NRC's rules, regulations, orders and pronouncements thereunder. The Parties acknowledge that Seller shall have no obligation to audit, monitor or enforce rights and obligations with respect to this Section 6.20. (b) Buyer shall use Commercially Reasonable Efforts to obtain all consents and approvals necessary to permit Buyer to ship Spent Nuclear Fuel and other Nuclear Material stored at the Big Rock ISFSI from the Big Rock ISFSI to Palisades in the event the current Law is amended to permit such storage. (c) Without regard to the actual Decommissioning expenses incurred by the Buyer or the Buyer's Qualified Decommissioning Fund, Buyer shall remit, or cause Buyer's Qualified Decommissioning Fund to remit, to Seller an amount in cash equal to (i) the assets of the Qualified Decommissioning Fund transferred to Buyer, pursuant to Section 6.12 or Section 2.1 in excess of the Decommissioning Target, if any, plus or less (as the case may be) (ii) earnings (or losses) thereon accrued from and after the Closing Date to but not including the date paid, at a rate equal to the total pre-tax return earned by the Buyer's Qualified Decommissioning Fund during such period of time (such amounts under clauses (i) and (ii) constituting the "Notional Investment Amount") (it being understood earnings and losses shall be proportionately allocated to the Notional Investment Amount), less (iii) the amount of any Income Taxes imposed upon the Buyer's Qualified Decommissioning Fund properly allocable to the Notional Investment Amount and any administrative expenses properly allocable to such Notional Investment Amount (it being understood such Income Taxes and administrative expenses shall be proportionately allocated to the Notional Investment Amount), less (iv) any Income Taxes that would be imposed upon the Buyer's Qualified Decommissioning Fund with respect to the distribution of such excess to the Buyer if and to the extent that liquidation of investments would 83 be required in order to make such distribution in cash in accordance with Section 6.20(e) below or Income Taxes that would be imposed upon Buyer's Qualified Decommissioning Fund on the distribution of assets, less (v) any Income Tax liability that would be imposed upon Buyer upon withdrawal of the sum required by this Section 6.20(c) from the Buyer's Qualified Decommissioning Fund calculated by applying the then-maximum Tax rate applicable under Code Section 11 and relevant state Laws and assuming a full deduction for any state Taxes (the "Tax Rate") (it being understood that the Income Tax basis of the assets distributed or liquidated under clause (iv) or this clause (v) shall be proportionate to the Income Tax basis of all of the assets in Buyer's Qualified Decommissioning Fund), plus (vi) the net present value of any Income Tax benefit, if any, accruing to Buyer resulting from the Buyer's obligation to make or the making of the payment required by this Section 6.20(c) (it being understood that to calculate the Tax benefit, the Parties shall utilize the Tax Rate in effect on the date of payment and the long-term IRS applicable federal rates, compounded annually, in effect on such date (or if applicable federal rates are no longer published by the IRS, a comparable measure) less (vii) Buyer's Qualified Decommissioning Fund Tax Amount (collectively, the "Excess Qualified Decommissioning Fund Assets") promptly upon the occurrence of the first to occur of the following events: (1) The Palisades Facilities and the Palisades Site are Decommissioned by Buyer or no funds remain in the Buyer's Qualified Decommissioning Fund; (2) (A) a change in the Code or the Treasury Regulations promulgated thereunder or (B) the issuance of a notice, revenue procedure or similar administrative item by the IRS, in either case, permitting the Buyer without seeking a private letter ruling from the IRS to withdraw a portion of the assets held by Buyer's Qualified Decommissioning Fund which were transferred from Seller's Qualified Decommissioning Fund or attributable to such assets without the imposition upon the Buyer or the Buyer's Qualified Decommissioning Fund of any Tax (including any Tax resulting from the failure of Buyer's Qualified Decommissioning Fund to continue to satisfy the applicable requirements of Code Section 468A) other than the Taxes specified in clauses (iii), (iv) and (v) above in this Section 6.20(c); provided that Buyer shall not be required to rely on such Code, Treasury Regulations or administrative item prior to Seller having furnished Buyer and the Trustee of the Post-Closing Decommissioning Trust Agreement with a legal opinion of Tax counsel (reasonably acceptable to Buyer and the Trustee of the Post-Closing Decommissioning Trust Agreement), in form and substance reasonably acceptable to Buyer and such Trustee, to the effect that no Tax or penalty will be imposed upon the Buyer or the Buyer's Qualified Decommissioning Fund (other than the Taxes specified in clauses (iii), (iv) and (v) above in this Section 6.20(c)) in connection with the distribution by the Buyer's Qualified Decommissioning Fund of a specified portion of its assets to Buyer; or (3) The receipt of a favorable private letter ruling from the IRS that a portion of the assets of Buyer's Qualified Decommissioning Fund and which were transferred from Seller's Qualified Decommissioning Fund or attributable to such assets may be distributed by the Buyer's Qualified Decommissioning Fund to the Buyer without the imposition of any Tax other than the Taxes specified in clauses (iii), (iv) and (v) 84 above in this Section 6.20(c); provided that the Buyer shall not be required to seek such private letter ruling from the IRS unless and until Seller shall have furnished to Buyer a legal opinion of Tax counsel (reasonably acceptable to Buyer), in form and substance reasonably acceptable to Buyer, to the effect that no Tax (including any Tax resulting from the failure of Buyer's Qualified Decommissioning Fund to continue to satisfy the applicable requirements of Code Section 468A) should be imposed upon the Buyer or the Buyer's Qualified Decommissioning Fund (other than the Taxes specified in clauses (iii), (iv) and (v) above in this Section 6.20(c) in connection with the distribution by the Buyer's Qualified Decommissioning Fund of a specified portion of its assets to the Buyer, in which case Buyer shall promptly prepare and file such private letter ruling request and diligently pursue the same. The fees and costs in connection with obtaining such private letter ruling shall be shared equally by Buyer and Seller. (d) If one of the events described in Section 6.20(c) shall have occurred, but such event shall only permit the withdrawal of a portion, but not all, of the Excess Qualified Decommissioning Fund assets, then the payment obligation of Buyer contained in Section 6.20(c) shall nonetheless apply with respect to such portion of the Excess Qualified Decommissioning Fund assets and the provisions of Section 6.20(c) shall remain in full force and effect with respect to any remaining Excess Qualified Decommissioning Fund assets not yet paid to Seller. (e) Following Closing and at all times thereafter until the Excess Qualified Decommissioning Fund Assets are paid to the Seller pursuant to Section 6.20(c), Buyer shall (i) deliver or cause Trustee of the Buyer's Post-Closing Decommissioning Trust Agreement to deliver to Seller all financial reports, documents, information statements and schedules relating to the Buyer's Qualified Decommissioning Fund promptly upon issuance thereof, (ii) provide Seller promptly with copies of all written communications to or from the NRC and the MPSC regarding Decommissioning of either the Big Rock ISFSI or Palisades or regarding the level of Decommissioning funding for either Facility, including but not limited to the periodic reports to the NRC regarding such funds, (iii) use Commercially Reasonable Efforts to cause the Trustee to maintain all the assets transferred by the Seller's Qualified Decommissioning Fund to the Buyer's Qualified Decommissioning Fund in excess of the Decommissioning Target (plus all earnings related thereto) in one separate account (the "First Decommissioning Account") and assets in an amount equal to the Decommissioning Target (plus all earnings related thereto) in a second separate account (the "Second Decommissioning Account"), (iv) maintain sufficient funds in the Second Decommissioning Account to comply with all NRC regulations, orders or directives regarding the adequacy of Decommissioning funding, as if the First Decommissioning Account were unavailable for Decommissioning, whether by additional contributions or otherwise, (v) except to the extent provided in Section 6.20(c), use Commercially Reasonable Efforts to cause the Trustee to disburse funds from the Buyer's Qualified Decommissioning Fund only for Decommissioning, the payment of the Buyer's Qualified Decommissioning Trust's expenses and related purposes, and (vi) upon Decommissioning, use and exhaust all funds in the Second Decommissioning Account before expending any funds from the First Decommissioning Account. At Closing, all assets transferred by the Seller's Qualified Decommissioning Fund to the Buyer's Qualified Decommissioning Fund shall be apportioned pro rata between the First Decommissioning Account and the Second Decommissioning Account with each account receiving an identical percentage of each class or type of transferred assets to 85 the greatest extent possible. Each account shall be managed by the same investment manager applying the same investment guidelines principles and all expenses (including Taxes) shall be shared proportionately between the two accounts. To the extent it is not possible under applicable Law to establish separate accounts representing the First Decommissioning Account and the Second Decommissioning Account, Buyer shall cause the Trustee of Buyer's Qualified Decommissioning Fund to establish separate books and records containing notional accounts for the amounts described in clause (iii) above, and Buyer shall otherwise treat such notional accounts as separate accounts for all purposes and comply with all of the requirements of this Section 6.20(e) with respect to such notional accounts, as though such notional accounts were the First Decommissioning Account and the Second Decommissioning Account, respectively. (f) If any event described in Section 6.20(c) shall have occurred, Buyer and Seller agree to cooperate and take all Commercially Reasonable Efforts necessary to receive any additional consents (including any NRC consents) or to satisfy any requirements not specified in Section 6.20(c) in order to permit the transfers required by Section 6.20(c) above. (g) Buyer agrees to deliver to Seller a copy of Buyer's Post-Closing Decommissioning Trust Agreement (reflecting the requirements stated in Section 5.7) at least 20 days prior to the Closing Date and, except to the extent required by law, to not amend the Buyer's Post Closing Decommissioning Trust Agreement following such delivery in a manner that would be adverse to Seller, without the Seller's prior written consent, which consent shall not be unreasonably withheld. 6.21. Buyer's Parent Guaranty. Buyer's Parent shall provide on the date hereof the Buyer's Parent Guaranty to provide security for compliance with Buyer's payment obligations under this Agreement, which guaranty shall remain in effect until the earliest to occur of (i) all such obligations having been fully and irrevocably performed and satisfied, (ii) the occurrence of the Closing and (iii) if applicable, the termination of this Agreement pursuant to Section 9.1 (other than a termination under Section 9.1(f)). If at any time there shall occur a Downgrade Event with respect to Buyer's Parent, then Seller shall supplement the Buyer's Parent Guaranty with either (i) a cash deposit in the amount of Thirty Million Dollars ($30,000,000), which deposit shall earn interest at the Interest Rate or (ii) a letter of credit in the amount of Thirty Million Dollars ($30,000,000). Any such letter of credit shall be reasonably satisfactory to Seller in form and substance, shall be issued by a financial institution reasonably acceptable to Seller, shall remain in effect until the expiration of the Buyer's Parent Guaranty. Any such security shall be subject to all terms and conditions of this Agreement otherwise applicable to the Buyer's Parent Guaranty. In the event Buyer shall fail to provide such security within five (5) Business Days of receipt of written notice, then a breach of this Agreement shall be deemed to have occurred. 6.22. Nuclear Insurance Policies. Following the Closing, Buyer shall use Commercially Reasonable Efforts to maintain in effect policies of liability and property insurance with respect to the ownership, operation and maintenance of the Facilities which shall afford protection against the insurable hazards and risks with respect to which nuclear facilities of similar size and type to the Facilities 86 customarily maintain insurance, and which meets the requirements of 10 C.F.R. Section 50.54(w) and 10 C.F.R. Part 140. Such coverage shall include nuclear liability insurance from ANI in such form and in such amount as will meet the financial protection requirements of the Atomic Energy Act, and an agreement of indemnification as contemplated by Section 170 of the Atomic Energy Act. In the event that the nuclear liability protection system contemplated by Section 170 of the Atomic Energy Act is repealed or changed, Buyer shall use Commercially Reasonable Efforts to maintain in effect alternate protection against nuclear liability. In addition, Buyer shall provide the financial assurance that it will be able to pay the retrospective premiums for the Facilities to the extent it is liable for the same under this Agreement as prescribed by Section 170 of the Atomic Energy Act. 6.23. No Transport or Storage of Waste. From and after the Closing, Buyer shall not permit any Spent Nuclear Fuel or other Nuclear Materials generated outside of the Palisades Facilities to be transported to the Palisades Site or to be stored at the Palisades Site for any period of time, provided this Section 6.23 shall not apply to Spent Nuclear Fuel or other Nuclear Materials located at the Big Rock ISFSI if Buyer obtains the necessary regulatory approvals to transport and store such Spent Nuclear Fuel and other Nuclear Materials at the Palisades Site. From and after the Closing, Buyer shall not permit any Spent Nuclear Fuel or other Nuclear Material, other than that stored at the Big Rock ISFSI as of the Closing, to be transported to the Big Rock ISFSI Site or to be stored at the Big Rock ISFSI Site for any period of time. 6.24. Title and Survey. (a) Seller will reimburse Buyer for fifty percent (50%) of the premium(s) paid by Buyer for issuance of title insurance policies (including endorsements) pursuant to and in accordance with the Approved Marked Up Title Commitments. Buyer will make arrangements for the issuance of such policies, and Seller shall reasonably cooperate with Buyer in connection therewith. (b) Seller will, at its expense, deliver to Buyer as soon as reasonably practicable but no later than December 31, 2006, revisions of the existing survey for the Palisades Site identified as Sheridan Surveying Company Drawing Number SF16761G, Sheet 1, Rev B, dated 3/23/06 (the "Palisades Survey") and the existing survey for the Big Rock ISFSI Site identified as Ferguson & Chamberlain Associates dated 10/20/2005 job SB-21094c.05 (the "Big Rock ISFSI Survey") each to include necessary detail to constitute an "Urban ALTA/ACSM Land Title Survey" meeting the 2005 Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys as adopted by the American Land Title Association and the National Society of Professional Surveyors (a member organization of the American Congress on Surveying and Mapping), and shall include and incorporate items 1 through 4, 6, 10, 11a and 18 of Table A of such Minimum Standard Detail Requirements. Each of the Palisades Survey and the Big Rock ISFSI Survey will be certified to Buyer and the title insurance company. (c) Buyer and Seller shall at or before Closing, enter into a license agreement, on mutually acceptable terms (including a 99-year term), pursuant to which Buyer shall grant Seller a non-terminable, nonexclusive license to operate, maintain, repair, remove, upgrade, 87 modify, and replace Seller's currently existing radio communications system antenna and related equipment, located on the "Meteorological Tower Site" (as such term is defined in the Palisades Deed) and a right for ingress to and egress from such Meteorological Tower Site. (d) At the Closing, Seller will deliver a quitclaim deed conveying the following easements: (1) easement recorded in Liber 2292, Page 598 Berrien County records and (2) easement recorded in Liber 1009, Page 165 Allegan County records. 6.25. Big Rock Amount. At the Closing, Seller shall pay to Buyer an amount equal to Thirty Million Dollars ($30,000,000) (the "Big Rock Amount"). Buyer expressly acknowledges and agrees that, from and after the Closing Seller shall have no further responsibility or Liability whatsoever in respect of the Big Rock ISFSI, except for its obligations under Section 8.1, if any, and under the Power Purchase Agreement. 6.26. Removal of Trade Names, Trademarks, etc. Seller agrees, at Seller's expense, to remove prior to the Closing any trade names, trademarks, logos and service marks of Consumers Energy or NMC affixed to or appearing on any public signage, buildings, equipment or motorized vehicles and included in the Included Assets. 6.27. Financial Assurances to the NRC. If and to the extent required by the NRC, Buyer shall provide and maintain sufficient financial assurances, whether in the form of a corporate guaranty or other arrangement satisfactory to the NRC, so as to meet its license obligations as to Palisades and the Big Rock ISFSI. ARTICLE 7 CONDITIONS 7.1. Conditions to Obligations of Buyer. The obligations of Buyer to purchase the Included Assets and to consummate the other transactions contemplated by this Agreement shall be subject to the fulfillment at or prior to the Closing of the following conditions (any of which may be waived by Buyer prior to the Closing in whole or in part which waiver shall be in writing and which waiver shall not be considered a waiver of any other provision of this Agreement unless the writing so specifically states): (a) All applicable waiting periods under the HSR Act relating to the consummation of the transactions contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction or other order or decree by any federal or state court or Governmental Authority which restrains or prevents the consummation of the transactions contemplated hereby shall have been issued and remain in effect (each Party 88 agreeing to cooperate in all efforts to have any such injunction, order or decree lifted) and no Law shall have been enacted by any state or federal government or Governmental Authority which prohibits the consummation of the transactions contemplated hereby; (c) Buyer shall have received all of Buyer's Required Regulatory Approvals, in form and substance reasonably satisfactory to Buyer, and such approvals shall be in full force and effect and either (i) shall be final and non-appealable or (ii) if not final and non-appealable, shall not be subject to the possibility of appeal, review or reconsideration which, in the reasonable opinion of Buyer, is likely to be successful; (d) Seller shall have received all of Seller's Required Regulatory Approvals (other than those the failure of which to obtain would not reasonably be expected to result in a Material Adverse Effect or a Buyer Material Adverse Effect), none of such approvals shall contain any conditions that could reasonably be expected to result in a Material Adverse Effect or a Buyer Material Adverse Effect, and such approvals shall be in full force and effect and either (i) shall be final and non-appealable or (ii) if not final and non- appealable, shall not be subject to the possibility of appeal, review or reconsideration which, in the reasonable opinion of Buyer (A) is likely to be successful and (B) if successful, would reasonably be expected to create a Material Adverse Effect or Buyer Material Adverse Effect; (e) Seller shall have received and delivered to Buyer all third party consents required for the transfer or assignment of all Seller's Agreements, Fuel Contracts and, to the extent reasonably necessary to operate the Facilities, the Transferable Permits; (f) Seller shall have performed and complied in all material respects with the covenants and agreements contained in this Agreement which are required to be performed and complied with by Seller at or prior to the Closing; (g) The representations and warranties of Seller set forth in this Agreement that are qualified by materiality shall be true and correct as of the Closing Date, and all other representations and warranties of Seller shall be true and correct in all material respects as of the Closing Date, in each case as though made at and as of the Closing Date (or, in each case, if made as of a specified date, as of such date); (h) Buyer shall have received a certificate from an authorized officer of Seller, dated the Closing Date, to the effect that the conditions set forth in Section 7.1(f) and (g) have been satisfied by Seller; (i) Seller shall have delivered, or caused to be delivered, to Buyer at the Closing, Seller's closing deliveries described in Section 3.6; (j) Seller shall have delivered, or caused to be delivered, the written consent of Michigan Department of Natural Resources (and/or other appropriate State of Michigan agency) to the assignment from Seller to Buyer of the Easement to Construct and Maintain Water Intake Line and Discharge Conduit dated January 17, 1968 and recorded February 19, 1968 in Liber 570, Page 271, Van Buren County Records; 89 (k) No Buyer Material Adverse Effect or Material Adverse Effect shall have occurred and be continuing; (l) The lien of the Mortgage Indenture on the Included Assets shall have been released and any documents necessary to evidence such release shall have been delivered to Buyer; (m) Releases pertaining to that certain Installment Sales Contract and that certain Grant of Project Easements, each dated August 1, 1973, as identified on Schedule 4.3(a), shall have been obtained; (n) The Seller shall have transferred to the Trustee of the Post-Closing Decommissioning Trust Agreement a portion or all of the assets of Seller's Qualified Decommissioning Fund, in accordance with Section 6.12; (o) The Ancillary Agreements shall be in full force and effect as of the Closing; (p) The NPPOSA shall have been terminated; (q) Buyer shall be reasonably satisfied that no materially adverse matters are disclosed by the updates to the Palisades Survey and the Big Rock ISFSI Survey conducted pursuant to Section 6.24(b) that have not been previously expressly shown on the Palisades Survey or the Big Rock ISFSI Survey or expressly identified to Buyer in this Agreement. (r) The Palisades Facilities shall have been operating at an average of not less than ninety-five percent (95%) of its licensed thermal output for a period of fourteen (14) days immediately preceding the Closing Date; (s) Buyer shall have received from Chicago Title Insurance Company, at Seller's sole cost (i) the Palisades Title Commitment, which shall have been down-dated as of the Closing Date without any new or changed exceptions or changes in Schedule A information, reflecting a coverage amount reasonably acceptable to Buyer (not to exceed the Purchase Price) and confirming no conditions to issuance of the title policy except for payment of the policy premiums, except that such Palisades Title Commitment shall be marked up to include (A) the following affirmative coverage endorsements: deletion of standard exceptions; separate tax parcel; survey; contiguity and/or spreader; location; owner's comprehensive; 9.0 environmental; access; creditor's rights; 3.1 zoning; and CC&R and (B) the following revisions to Schedule B, Part II thereof: (1) the deletion of item 5 or the clarification of item 5 that it is applicable only to Taxes that first become due and payable after the Closing; (2) the deletion of each of items 21, 28 and 29; (3) the revision of item 24 to clarify that the referenced mortgage therein encumbers only METC's interest under the Amended and Restated Easement Agreement identified therein; and (4) the limitation of the exception in item 6 to only those portions of the Palisades Site that are specifically identified on the Palisades Survey as updated pursuant to Section 6.24 as having been dedicated or conveyed for public street, road or highway purposes, and (ii) the Big Rock Title Commitment, which shall have been down-dated as of the Closing Date without any new or changed exceptions or changes in Schedule A information, reflecting a coverage amount reasonably acceptable to Buyer (not to exceed the Purchase Price) and confirming no conditions 90 to issuance of the title policy except for payment of the policy premiums, except that such Big Rock Title Commitment shall be marked up to include (A) the following affirmative coverage endorsements: deletion of standard exceptions; separate tax parcel; survey; contiguity and/or spreader; location; owner's comprehensive; 9.0 environmental; access; creditor's rights; 3.1 zoning; and CC&R and (B) the following revisions to Schedule B, Part II thereof: (1) the deletion of item 5 or the clarification of item 5 that it is applicable only to Taxes that first become due and payable after the Closing and (2) the deletion of each of items 7 and 9 (together, the "Approved Marked Up Title Commitments"), and Buyer shall be reasonably satisfied that it will be able to procure two (2) separate ALTA Owner's Title Policies, Form B, one covering the Palisades Site and the other covering the Big Rock ISFSI Site, conforming to the Approved Marked Up Title Commitments. (t) Seller shall have amended its EPCRA Tier II report to include stored amounts of boric acid and Dynacool, in addition to any other chemicals required to be reported in such EPRCA report, and Buyer shall be reasonably satisfied that such EPCRA report is in compliance with applicable Law; (u) Buyer shall have entered into an agreement permitting Buyer the continued use, after the Closing, of the Emergency Operations Facility known as the Allegan Service Center as an alternative off-Site relocation and mustering or assembly facility on terms and conditions reasonably satisfactory to Buyer; (v) Buyer shall have entered into an agreement providing for the purchase of energy for the operation of Palisades for station service, backup and outage power when it is not self supplying such energy upon terms and conditions reasonably acceptable to Buyer, and such agreement shall be in full force and effect; (w) Buyer and Seller shall have entered into an agreement satisfying the applicable NRC Licenses and operating requirements providing energy from the Consumers Energy Ludington Pumped Storage Facility to Buyer at the transmission interconnection point for such facility. With respect to so called "black start" power during periods when Palisades is not operating and energy is not otherwise available, upon terms and conditions reasonably acceptable to Buyer and Seller, and such agreement shall be in full force and effect; (x) Seller shall have repaired in accordance with Good Utility Practices the crane which was damaged in the 2006 refueling outage; and (y) Seller shall have fully paid Babcock & Wilcox Canada, Ltd. and any of its subcontractors all amounts due as of Closing with respect to the design and fabrication of the Palisades replacement reactor head (the "Head"), pursuant to Purchase Order P804313 Rev. 1 and Value Contract No. 30000445 for Reactor Vessel Closure Head Supply (the "Head Contract") (only to the extent that such amounts have not been paid prior to Closing or have not been otherwise already included in the calculation of the Capital Expenditures Shortfall), all work with respect thereto required to be completed at or prior to the Closing shall have been completed in accordance with the specifications of the Head Contract and the requirements of all applicable Governmental Authorities, each party to the Head Contract shall be in compliance with the material terms thereof, and Buyer shall be reasonably satisfied that the Head will be 91 capable of being installed and operated in accordance with the Head Contract, applicable Law and Good Utility Practices. 7.2. Conditions to Obligations of Seller. The obligation of Seller to sell the Included Assets and to consummate the other transactions contemplated by this Agreement shall be subject to the fulfillment at or prior to the Closing of the following conditions (any of which may be waived by Seller prior to the Closing in whole or in part which waiver shall be in writing and which waiver shall not be considered a waiver of any other provision of this Agreement unless the writing so specifically states): (a) All applicable waiting periods under the HSR Act relating to the consummation of the transactions contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction or other order or decree by any federal or state court or Governmental Authority which restrains or prevents the consummation of the transactions contemplated hereby shall have been issued and remain in effect (each Party agreeing to cooperate in all efforts to have any such injunction, order or decree lifted) and no Law shall have been enacted by any state or federal government or Governmental Authority in the United States which prohibits the consummation of the transactions contemplated hereby; (c) Seller shall have received all of the Seller's Required Regulatory Approvals, in form and substance reasonably satisfactory to Seller, and such approvals shall be in full force and effect and either (i) shall be final and non-appealable or (ii) if not final and non-appealable, shall not be subject to the possibility of appeal, review or reconsideration which, in the reasonable opinion of the Seller, is likely to be successful; (d) Buyer shall have received all Buyer's Required Regulatory Approvals (other than those the failure of which to obtain would not reasonably be expected to result in a Material Adverse Effect, a material adverse effect on the business, assets, operations or condition (financial or otherwise) of Seller, or a Buyer Material Adverse Effect), none of such approvals shall contain any conditions that could reasonably be expected to result in a Material Adverse Effect, a material adverse effect on the business, assets, operations or condition (financial or otherwise) of Seller, or a Buyer Material Adverse Effect, and such approvals shall be in full force and effect and either (i) shall be final and non-appealable or (ii) if not final and non-appealable, shall not be subject to the possibility of appeal, review or reconsideration which, in the reasonable opinion of Seller (A) is likely to be successful and (B) if successful, would reasonably be expected to create a Material Adverse Effect, a material adverse effect on the business, assets, operations or condition (financial or otherwise) of Seller or a Buyer Material Adverse Effect; (e) Buyer shall have performed and complied with in all material respects the covenants and agreements contained in this Agreement which are required to be performed and complied with by Buyer at or prior to the Closing; (f) The representations and warranties of Buyer set forth in this Agreement that are qualified by materiality shall be true and correct as of the Closing Date and all other representations and warranties of Buyer shall be true and correct in all material respects as of the 92 Closing Date, in each case as though made at and as of the Closing Date (or, in each case, if made as of a specified date, as of such date); (g) Seller shall have received a certificate from an authorized officer of Buyer, dated the Closing Date, to the effect that the conditions set forth in Sections 7.2(e) and (f) have been satisfied; (h) Buyer shall have delivered, or caused to be delivered, to Seller at the Closing, Buyer's Closing deliveries described in Section 3.7; (i) No Buyer Material Adverse Effect shall have occurred and be continuing; (j) Releases pertaining to that certain Installment Sales Contract and that certain Grant of Project Easements, each dated August 1, 1973, as identified on Schedule y4.3(a), shall have been obtained; and (k) The Ancillary Agreements shall be in full force and effect as of the Closing. ARTICLE 8 INDEMNIFICATION 8.1. Indemnification. (a) Following the Closing, Buyer shall indemnify, defend and hold harmless Seller, its Affiliates, and each of their respective officers, directors, employees, shareholders and agents (each, a "Seller Indemnitee") from and against any and all claims, demands, suits, losses, liabilities, damages, obligations, payments, costs and expenses (including the costs and expenses of any and all actions, suits, proceedings, assessments, judgments, settlements and compromises relating thereto and reasonable attorneys' fees and reasonable disbursements in connection therewith) (each, an "Indemnifiable Loss"), asserted against or suffered by any Seller Indemnitee relating to, resulting from or arising out of (i) any breach by Buyer of the representations and warranties that survive the Closing or any covenants contained in this Agreement, (ii) the Assumed Liabilities and Obligations, (iii) any Third Party Claims against a Seller Indemnitee arising out of or in connection with acts or omissions of Buyer or Buyer's Parent related to the consummation of the transactions contemplated by this Agreement or Buyer's ownership or operation of the Included Assets following the Closing (other than any Third Party Claims that are Excluded Liabilities) or (iv) fraud, intentional misrepresentation or a deliberate or willful breach (without giving effect to any supplement to the schedules) by Buyer of any representation, warranty or covenant under this Agreement or in any certificate, schedule or exhibit pursuant hereto. (b) Following the Closing, Seller shall indemnify, defend and hold harmless Buyer, its Affiliates, and each of their respective officers, directors, members, employees, shareholders and agents (each, a "Buyer Indemnitee") from and against any and all Indemnifiable Losses asserted against or suffered by any Buyer Indemnitee relating to, resulting from or arising out of (i) any breach by Seller of the representations and warranties that survive the Closing or any covenants contained in this Agreement, (ii) the Excluded Liabilities, (iii) any 93 Third Party Claims against a Buyer Indemnitee arising out of or in connection with acts or omissions of Seller related to the consummation of the transactions contemplated by this Agreement or Seller's or NMC's ownership or operation of the Included Assets on or prior to the Closing, including the claim referenced in Schedule 4.18 (other than any Third Party Claims that are Assumed Liabilities and Obligations), (iv) fraud, intentional misrepresentation or a deliberate or willful breach by Seller of any representation, warranty or covenant under this Agreement or in any certificate, schedule or exhibit pursuant hereto or (v) the exercise by Seller of any rights of set-off to which Seller may assert as against Seller's obligation to pay the Pre-1983 Fee, as described in Section 6.14(f), by reason of the Department of Energy's defaults under the Standard Spent Fuel Disposal Contract. (c) In addition to Seller's obligation set forth in Section 8.1(b), Seller shall indemnify, defend and hold harmless any Buyer Indemnitee from Indemnifiable Losses with respect to the Palisades Assets under or related to Environmental Laws that were, prior to, on or after the Closing Date, caused (or allegedly caused) by the Release of Hazardous Materials at, on, in, under, adjacent to or migrating from the Palisades Assets prior to the Closing Date. Seller's obligations to indemnify Buyer pursuant to this Section 8.1(c) shall survive the Closing for a period of three (3) years and any claim for indemnification hereunder shall be brought prior to the third anniversary of the Closing Date, or not at all. If Buyer makes a claim for indemnification pursuant to this Section 8.1(c), Buyer shall be barred from making the same claim for a breach of a representation or warranty pursuant to Section 8.1(b) hereof and likewise, claims made under Section 8.1(b) may not also be made under this Section 8.1(c). In regard to the matters covered by this Section 8.1(c)y, each Party shall at all times act reasonably so as to avoid unnecessarily exposing the other Party to liability or to otherwise unnecessarily cause the other Party to incur costs or expenses. (d) Following the Closing, the expiration or termination of any representation, warranty, covenant or agreement shall not affect the Parties' obligations under this Section 8.1 if the Person entitled to indemnification hereunder (an "Indemnitee") provided the Person required to provide indemnification under this Agreement (the "Indemnifying Party") with proper notice of the claim or event for which indemnification is sought prior to such expiration or termination. (e) The Parties agree to treat all payments relating to indemnifications as adjustments to the Purchase Price to the extent allowed by Law. 8.2. Limitations on Indemnification. (a) No Indemnitee shall be entitled to assert any right to indemnification under Section 8.1(a)(i), 8.1(b)(i), or 8.1(c) until the amount of Indemnifiable Losses actually suffered by such Indemnitee exceeds One Million Dollars ($1,000,000) with respect to any individual claim or Three Million Dollars ($3,000,000) in the aggregate (as applicable, the "Threshold Amount") at which point the Indemnifying Party shall only be liable for those Indemnifiable Losses in excess of the Threshold Amount. (b) After the occurrence of the Closing the rights and remedies of Seller and Buyer under this Article 8 are exclusive and in lieu of any and all other rights and remedies which Seller and Buyer may have under this Agreement or otherwise for monetary relief, with 94 respect to (i) any breach of or failure to perform any covenant, agreement, or representation or warranty set forth in this Agreement or (ii) the Assumed Liabilities and Obligations or the Excluded Liabilities, as the case may be. The indemnification obligations of the Parties set forth in this Article 8 apply only to matters arising out of this Agreement, excluding the Ancillary Agreements. Any Indemnifiable Loss arising under or pursuant to an Ancillary Agreement shall be governed by the indemnification obligations, if any, contained in the Ancillary Agreement under which the Indemnifiable Loss arises. The maximum aggregate exposure for indemnity by any Indemnifying Party hereunder for any and all Indemnifiable Losses under this Agreement (other than arising out of claims for breach of the representations and warranties contained in Sections 4.17 and 5.7, as applicable) shall be Thirty Million Dollars ($30,000,000); provided, that the foregoing limitation shall not prevent recovery under this Article 8 by an Indemnitee of Indemnifiable Losses arising out of Third Party Claims. (c) Notwithstanding the foregoing or anything to the contrary herein, the dollar deductibles and limitations set forth in Sections 8.2(a) and (b) shall not apply with respect to (i) claims arising under Sections 4.1 (Organization), 4.2 (Authority Relative to this Agreement), (No Violation), 4.5 (Title and Related Matters), 4.9 (ERISA; Benefit Plans), 4.14 (NRC Licenses), 4.17 (Qualified Decommissioning Fund), 5.1 (Organization; Qualification), 5.2 (Authority Relative to this Agreement), and Section 6.20 (Decommissioning; Return of Excess Qualified Decommissioning Fund Assets), (ii) claims involving fraud, intentional misrepresentation, or deliberate or willful breach or breaches of confidentiality provisions, and (iii) claims for indemnification under Section 8.1(b)(v). 8.3. Defense of Claims. (a) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any claim, action, or proceeding made or brought by any Person who is not a Party to this Agreement or any Affiliate of a Party to this Agreement (a "Third Party Claim"), including an information document request or a notice of proposed disallowance issued by the IRS relating to a matter covered by Section 5.7, with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnitee shall give such Indemnifying Party reasonably prompt written notice thereof, but in any event such notice shall not be given later than twenty (20) days after the Indemnitee's receipt of notice of such Third Party Claim. Such notice shall describe the nature of the Third Party Claim in reasonable detail and shall indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party will have the right to participate in or, by giving written notice to the Indemnitee, to elect to assume the defense of any Third Party Claim at such Indemnifying Party's expense and by such Indemnifying Party's own counsel, provided that the counsel for the Indemnifying Party who shall conduct the defense of such Third Party Claim shall be reasonably satisfactory to the Indemnitee. The Indemnitee shall cooperate in good faith in such defense at such Indemnitee's own expense. If an Indemnifying Party elects not to assume the defense of any Third Party Claim, the Indemnitee may compromise or settle such Third Party Claim over the objection of the Indemnifying Party, which settlement or compromise shall conclusively establish the Indemnifying Party's Liability pursuant to this Agreement; provided, however, that the Indemnitee provides written notice to the Indemnifying Party of its intent to settle and such notice reasonably describes the terms of such settlement at least ten (10) Business Days prior to entering into any settlement. 95 (b) (1) If, within twenty (20) days after an Indemnitee provides written notice to the Indemnifying Party of any Third Party Claim, the Indemnitee receives written notice from the Indemnifying Party that such Indemnifying Party has elected to assume the defense of such Third Party Claim as provided in Section 8.3(a), the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, however, that if the Indemnifying Party shall fail to take reasonable steps necessary to defend diligently such Third Party Claim within twenty (20) days after receiving notice from the Indemnitee that the Indemnitee believes the Indemnifying Party has failed to take such steps, the Indemnitee may assume its own defense and the Indemnifying Party shall be liable for all reasonable expenses thereof. (2) Without the prior written consent of the Indemnitee, which consent shall not be unreasonably withheld or delayed, the Indemnifying Party shall not enter into any settlement of any Third Party Claim which would lead to Liability or create any financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim without leading to Liability or the creation of a financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to the Indemnitee to that effect. If the Indemnitee fails to consent to such firm offer within twenty (20) days after its receipt of such notice, the Indemnifying Party shall be relieved of its obligations to defend such Third Party Claim and the Indemnitee may contest or defend such Third Party Claim. In such event, the maximum Liability of the Indemnifying Party as to such Third Party Claim will be the amount of such settlement offer. (c) Any claim by an Indemnitee on account of an Indemnifiable Loss which does not result from a Third Party Claim (a "Direct Claim") shall be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event such notice shall not be given later than twenty (20) days after the Indemnitee becomes aware of such Direct Claim, and the Indemnifying Party shall have a period of twenty (20) days within which to respond to such Direct Claim. If the Indemnifying Party does not respond within such twenty (20) day period, the Indemnifying Party shall be deemed to have accepted such claim. If the Indemnifying Party rejects such claim, the Indemnitee will be free to seek enforcement of its right to indemnification under this Agreement. (d) The amount of any Indemnifiable Loss shall be reduced to the extent that the Indemnitee receives any insurance proceeds with respect to an Indemnifiable Loss. If the amount of any Indemnifiable Loss, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery, settlement or payment by, from or against any other entity, the amount of such reduction, less any costs, expenses or premiums incurred in connection therewith (together with interest accrued thereon at the Interest Rate from and including the date of payment thereof to but excluding the date or repayment) shall promptly be repaid by the Indemnitee to the Indemnifying Party. Upon making any indemnity payment, the Indemnifying Party shall, to the extent of such indemnity payment, be subrogated to all rights 96 of the Indemnitee against any third party in respect of the Indemnifiable Loss to which the indemnity payment relates. (e) A failure to give timely notice as provided in this Section 8.3 shall not affect the rights or obligations of any Party hereunder except if, and only to the extent that, as a result of such failure, the Party that was entitled to receive such notice was actually prejudiced as a result of such failure. ARTICLE 9 TERMINATION AND REMEDIES 9.1. Termination. (a) This Agreement may be terminated at any time prior to the Closing by mutual written consent of Seller and Buyer. (b) This Agreement may be terminated by Seller or Buyer, if (i) any Governmental Authority shall have enacted a Law or issued a Governmental Order permanently restraining, enjoining or otherwise prohibiting the transactions contemplated hereby, and in the case of a Governmental Order, it shall have become final and nonappealable; or (ii) the Closing contemplated hereby shall have not occurred on or before the date that is eighteen (18) months following the date of this Agreement (the "Termination Date"); provided, that the right to terminate this Agreement under this Section 9.1(b)(ii) shall not be available to any Party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date and provided, further, that if on the Termination Date the conditions to the Closing set forth in Sections 7.1(c), 7.1(d), 7.2(c) or 7.2(d) shall not have been fulfilled but all other conditions to the Closing shall be fulfilled or shall have been capable of being fulfilled, or shall have been waived, then the Termination Date shall be the date that is twenty-four (24) months following the Effective Date. (c) This Agreement may be terminated by Buyer prior to the Closing if any of Seller's Required Regulatory Approvals or Buyer's Required Regulatory Approvals, the receipt of which is a condition to the obligation of Buyer to consummate the Closing as set forth in Sections 7.1(c) and 7.1(d), shall have been denied in a final, non-appealable Governmental Order or shall have been granted subject to, or containing terms or conditions that prevents the satisfaction of one or more of Buyer's conditions to Closing as set forth in Sections 7.1(c) and 7.1(d), as applicable. (d) This Agreement may be terminated by Seller prior to the Closing if any of the Seller's Required Regulatory Approvals or Buyer's Regulatory Approvals, the receipt of which are a condition to the obligation of Seller to consummate the Closing as set forth in Sections 7.2(c) and 7.2(d), shall have been denied in a final, non-appealable Governmental Order or shall have been granted subject to, or containing terms or conditions that prevents the satisfaction of one or more of Seller's conditions to Closing as set forth in Sections 7.2(c) and 7.2(d), as applicable. (e) This Agreement may be terminated by Buyer prior to the Closing if there has been a breach by Seller of any applicable covenant, representation or warranty contained in 97 this Agreement constituting a Material Adverse Effect, such breach has not been waived by Buyer, and such breach is not cured by the earlier of the Termination Date or thirty (30) days after receipt by Seller (or Buyer in the case of notice by Seller pursuant to Section 6.9) of written notice specifying particularly such breach (provided that in the event Seller is attempting to cure the breach in good faith, then Buyer may not terminate pursuant to this provision unless the breach is not cured by the Termination Date). (f) This Agreement may be terminated by Seller prior to the Closing if there has been a material breach by Buyer of any covenant, representation or warranty contained in this Agreement, such material breach has not been waived by Seller and such material breach is not cured by the earlier of the Termination Date or thirty (30) days after receipt by Buyer (or by Seller in the case of notice by Buyer pursuant to Section 6.9) of written notice specifying particularly such breach (provided that in the event Buyer or Buyer's Parent, as the case may be, is attempting to cure the breach in good faith, then Seller may not terminate pursuant to this provision unless the breach is not cured by the Termination Date). (g) This Agreement may be terminated by Buyer or Seller in accordance with the provisions of Sections 6.11(b) or (c). (h) This Agreement may be terminated by Buyer prior to the Closing if any "extraordinary nuclear occurrence" or "nuclear incident" or "precautionary evacuation" (as such terms are defined in the Atomic Energy Act), other than the nuclear incident at Three Mile Island in 1979, occurs at either Site or at any other licensed nuclear reactor sited in the United States. 9.2. Procedure and Effect of No Default Termination. In the event of termination of this Agreement by Seller or Buyer pursuant to Section 9.1, written notice thereof shall promptly be given by the terminating Party to the other Party, and this Agreement shall thereupon terminate. In the event a Party terminates this Agreement pursuant to Section 9.1, except as otherwise provided in Section 9.3, such termination shall be the sole and exclusive remedy of the Parties with respect to breaches of any agreement, covenant, representation or warranty. Following any such termination, Buyer and Seller will continue to be bound by the obligations set forth in Sections 6.2(b) and 6.5. If this Agreement is terminated as provided herein, all filings, applications and other submissions made to any Governmental Authority shall, to the extent practicable, be withdrawn from the Governmental Authority to which they were made. 9.3. Remedies. (a) Notwithstanding anything herein to the contrary, if this Agreement is terminated pursuant to Section 9.1(e) or 9.1(f), the terminating Party may pursue any rights or remedies available at Law or in equity. If either Party elects to pursue singularly any remedy available to it under this Section 9.3, then such Party may at any time thereafter continue to pursue or cease pursuing that remedy and simultaneously elect to pursue any other remedy available to it under this Section 9.3. (b) Without limiting the generality of this Section 9.3, each of the Parties acknowledges and agrees that the other Party would be damaged irreparably in the event any of 98 the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached prior to the Closing. Accordingly, each of the Parties agrees that the other Party shall be entitled to an injunction or injunctions (preliminary, special and/or permanent) to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof, in addition to any other remedy to which they may be entitled, at law or in equity. ARTICLE 10 MISCELLANEOUS PROVISIONS 10.1. Limitation of Liability; Waiver of Certain Damages. Notwithstanding anything to the contrary herein, except in the case of a Third Party Claim, or a Direct Claim that relates to a Third Party Claim, no Party or Indemnitee shall be entitled to recover from any other Party (including an Indemnifying Party) any liabilities, damages, obligations, payments, losses, costs or expenses any amount in excess of the actual compensatory damages, court costs and reasonable attorney's and other advisor fees suffered by such Party or Indemnitee. Except for damages related to the other Party's breach of obligations of confidentiality, Buyer, on behalf of itself and the Buyer Indemnitees, and Seller, on behalf of itself and the Seller Indemnitees, hereby waive any right to recover punitive, incidental, special, exemplary and consequential damages arising in connection with or with respect to this Agreement, including losses or damages caused by reason of unavailability of Palisades, plant shutdowns or service interruptions, loss of use, profits or revenue, inventory or use charges, cost of purchased or replacement power, interest charges or cost of capital; provided, however, that for sake of clarity the Parties acknowledge and agree that punitive, incidental, special, exemplary or consequential damages that are an element of a Third Party Claim or a Direct Claim that relates to a Third Party Claim, shall constitute Indemnifiable Losses hereunder and as such are direct damages as between the Parties. 10.2. Amendment and Modification. Subject to applicable Law, this Agreement may be amended, modified or supplemented only by written agreement of Seller and Buyer. 10.3. Waiver of Compliance; Consents. Except as otherwise provided in this Agreement, any failure of any of the Parties to comply with any obligation, covenant, agreement or condition herein may be waived, in whole or in part, by the Party entitled to the benefits thereof only by a written instrument signed by the Party granting such waiver, but such waiver of such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent failure to comply therewith. 10.4. Survival of Representations, Warranties, Covenants and Obligations. (a) The representations and warranties contained in this Agreement shall survive the Closing for a period of eighteen (18) months from the Closing Date except that (i) all representations and warranties set forth in Section 4.7 (Environmental Matters) shall survive the 99 Closing for a period of three (3) years from the Closing Date, (ii) all representations and warranties set forth in Sections 4.9 (ERISA; Benefit Plans), 4.14 (NRC Licenses), and any claim with respect to fraud, intentional misrepresentation or a deliberate or willful breach by Seller or Buyer shall survive the Closing until the expiration of the applicable statutory period of limitation plus any extensions or waivers thereof and (iii) all representations and warranties set forth in Sections 4.1 (Organization), 4.2 (Authority Relative to this Agreement), 4.5(a) and (b) (Title and Related Matters), 4.17 (Qualified Decommissioning Fund) (except with respect to 4.17(a)(ii), (iv), (v), and (vi), and 4.17(d)(ii) and 4.17(f)), 5.1 (Organization; Qualification), 5.2 (Authority Relative to this Agreement), 5.7 (Transfer of Assets of Qualified Decommissioning Fund) and 6.7 (Brokerage Fees and Commissions) hereof shall survive the Closing indefinitely. Each Party shall be entitled to rely upon the representations and warranties of the other Party set forth herein, notwithstanding any investigation or audit conducted prior to or following the Closing or the decision of any Party to complete the Closing. (b) The covenants and obligations of the Parties set forth in this Agreement, including the indemnification obligations of the Parties under Article 8 hereof, shall (unless otherwise specifically set forth herein) survive the Closing in accordance with their terms, and the Parties shall be entitled to the full performance thereof by the other Parties hereto. 10.5. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission, or mailed by overnight courier or registered or certified mail (return receipt requested), postage prepaid, to the recipient Party at its address (or at such other address or facsimile number for a Party as shall be specified by like notice; provided, however, that notices of a change of address shall be effective only upon receipt thereof): (a) If to Seller, to: Consumers Energy Company One Energy Plaza Jackson, MI 49201 Attention: Robert A. Fenech Senior Vice President Nuclear, Fossil & Hydro Operations Facsimile: (517) 788-8936 with copies to: Consumers Energy Company One Energy Plaza Jackson, MI 49201 Attention: General Counsel Facsimile: (517) 788-0768 100 and LeBoeuf, Lamb, Greene & MacRae LLP 125 West 55th Street New York, New York 10019-5389 Attention: John D. Draghi, Esq. Facsimile: (212) 649-0466 (b) if to Buyer, to: Entergy Nuclear Palisades, LLC c/o Entergy Nuclear Northeast 440 Hamilton Avenue White Plains, NY 10601 Attention: Chief Executive Officer Facsimile: (914) 272-3205 with a copy to: Entergy Corporation 630 Loyola Avenue New Orleans, LA 70113 Attention: General Counsel Facsimile: (504) 576-4150 and with a copy to: Entergy Nuclear, Inc. 1340 Echelon Parkway Jackson, MS 39313 Attention: General Counsel Facsimile: (601) 368-5694 10.6. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any Party hereto, including by operation of Law, without the prior written consent of each other Party, such consent not to be unreasonably withheld. Any assignment in contravention of the foregoing sentence shall be null and void and without legal effect on the rights and obligations of the Parties hereunder. Notwithstanding the foregoing, but subject to all applicable legal requirements, (i) Buyer or its permitted assignee may assign, transfer, pledge or otherwise dispose of (absolutely or as security) all or any portion of its rights and interests hereunder to a trustee, lending institution or other party for the purposes of leasing, financing or refinancing the Included Assets, (ii) Buyer or its permitted assignee may assign, transfer, pledge or otherwise dispose of (absolutely or as security) all or any portion of its rights and interests hereunder to an Affiliate of Buyer and (iii) Buyer may assign this Agreement and all or any portion of its rights, 101 interests or obligations hereunder to a future purchaser, direct or indirect, of all or substantially all of the Palisades Assets or the Big Rock ISFSI Assets; provided, however, that no such assignment shall relieve or discharge Buyer from any of its obligations hereunder nor shall any such assignment be made without Seller's prior written consent if it would reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement or increase the costs (to Seller) of the consummation of the transactions contemplated by this Agreement. Each Party agrees, at the assigning Party's expense, to execute and deliver such documents as may be reasonably necessary to accomplish any such assignment, transfer, pledge or other disposition of rights and interests hereunder so long as the non-assigning Party's rights under this Agreement are not thereby altered, amended, diminished or otherwise impaired. In the event Buyer assigns this agreement pursuant to this Section 10.6, such assignee shall be defined as "Buyer" for all purposes hereunder thereafter. 10.7. No Third Party Beneficiaries. This Agreement shall not (except as specifically provided herein) confer upon any other Person except the Parties hereto any rights, interests, obligations or remedies hereunder, including as third party beneficiaries. In furtherance of the foregoing, no provision of this Agreement shall create any third party beneficiary rights in any employee or former employee of Seller or NMC (including any beneficiary or dependent thereof) in respect of continued employment or resumed employment, and no provision of this Agreement shall create any rights in any such Persons in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan or arrangement except as expressly provided for thereunder. 10.8. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Michigan (without giving effect to the choice of law principles thereof) as to all matters, including matters of validity, construction, effect, performance and remedies. THE PARTIES HERETO AGREE THAT VENUE IN ANY AND ALL ACTIONS AND PROCEEDINGS BETWEEN THE PARTIES RELATED TO THE SUBJECT MATTER OF THIS AGREEMENT SHALL BE IN THE STATE COURTS OF MICHIGAN AND FEDERAL COURTS FOR THE WESTERN DISTRICT OF MICHIGAN, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION FOR SUCH PURPOSE, AND THE PARTIES HERETO IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING. SERVICE OF PROCESS MAY BE MADE IN ANY MANNER RECOGNIZED BY SUCH COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 102 10.9. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.10. Schedules and Exhibits. Except as otherwise provided in this Agreement, all Exhibits and Schedules referred to herein are intended to be and hereby are specifically made a part of this Agreement. Any fact or item disclosed on any Schedule to this Agreement shall be deemed disclosed on all other Schedules to this Agreement to which such fact or item may reasonably apply so long as such disclosure is in sufficient detail to enable a Party to identify the facts or items to which it applies. Any fact or item disclosed on any Schedule hereto shall not by reason only of such inclusion be deemed to be material and shall not be employed as a point of reference in determining any standard of materiality under this Agreement. 10.11. Entire Agreement. This Agreement, the Confidentiality Agreement and the Ancillary Agreements, including the Exhibits, Schedules, documents, certificates and instruments referred to herein or therein, and any other documents that specifically reference this Section 10.11, embody the entire agreement and understanding of the Parties hereto in respect of the transactions contemplated by this Agreement and shall supersede all previous oral and written and all contemporaneous oral negotiations, commitments and understandings between the Parties, including all letters, memoranda or other documents or communications, whether oral, written or electronic, submitted or made by (a) Buyer or its agents or representatives to Seller, Concentric Energy Advisors Inc. or their respective agents or representatives, or (b) Seller, Concentric Energy Advisors Inc. or their respective agents or representatives to Buyer or any of its agents or representatives, in connection with the sale process that occurred prior to the execution of this Agreement or otherwise in connection with the negotiation and execution of this Agreement. No communications by or on behalf of Seller, including responses to any questions or inquiries, whether orally, in writing or electronically, and no information provided in any data room or any copies of any information from any data room provided to Buyer or its agents or representatives or any other information shall be deemed to (i) constitute a representation, warranty, covenant, undertaking or agreement of Seller or (ii) be part of this Agreement. 10.12. Acknowledgment; Independent Due Diligence. Each Party acknowledges that the other Party has not made any representation or warranty, express or implied, as to the accuracy or completeness of any information regarding the transactions contemplated by this Agreement and the Ancillary Agreements which is not included in this Agreement or the Ancillary Agreements and the schedules thereto. Without limiting the generality of the foregoing, no representation or warranty is made with respect to any information contained in the Confidential Offering Memorandum relating to the Facilities, dated January, 2006, or any supplement or amendment thereto provided by Seller, such information having been provided for the convenience of Buyer in order to assist Buyer in 103 framing its due diligence efforts. Each Party further acknowledges that: (a) such Party, either alone or together with any individuals or entities that such Party has retained to advise it with respect to the transactions contemplated by this Agreement, has substantial knowledge and experience in transactions of this type and in the business to which the Facilities relate and is therefore capable of evaluating the risks and merits of undertaking such transactions; (b) such Party has relied on its own independent investigation, and has not relied on any information or representations furnished by the other Party or any representative or agent of the other Party (except as specifically set forth in this Agreement and the Ancillary Agreements), in determining to enter into this Agreement and the Ancillary Agreements; (c) neither Party nor any of its representatives or agents has given any investment, legal or other advice or rendered any opinion as to whether the transactions contemplated by this Agreement and the Ancillary Agreements are prudent, and no Party is relying on any representation or warranty by the other Party or any representative or agent of the other Party except as set forth in this Agreement and the Ancillary Agreements; (d) Buyer has conducted extensive due diligence, including a review of the documents provided by or on behalf of Seller; and (e) Buyer and its attorneys, accountants and advisors have had the opportunity to visit the Facilities and each Party has had the opportunity to ask questions and receive answers concerning the Facilities and the terms and conditions of this Agreement and the Ancillary Agreements. All such questions have been answered to Buyer's or Seller's, as the case may be, complete satisfaction. 10.13. Bulk Sales Laws. Buyer acknowledges that, notwithstanding anything in this Agreement to the contrary, Seller will not comply with the provision of the bulk sales laws of any jurisdiction in connection with the transactions contemplated by this Agreement. Subject to Section 8.1, Buyer hereby waives compliance by Seller with the provisions of the bulk sales laws of all applicable jurisdictions. 10.14. No Joint Venture. Nothing in this Agreement creates or is intended to create an association, trust, partnership, joint venture or other entity or similar legal relationship among the Parties, or impose a trust, partnership or fiduciary duty, obligation, or liability on or with respect to the Parties. Except as expressly provided herein, neither Party is or shall act as or be the agent or representative of the other Party. 10.15. Change in Law. If and to the extent that any Laws or regulations that govern any aspect of this Agreement shall change, so as to make any aspect of this transaction unlawful, then the Parties agree to make such modifications to this Agreement as may be reasonably necessary for this Agreement to accommodate any such legal or regulatory changes, without materially changing the overall benefits or consideration expected hereunder by any Party. 10.16. Severability. Any term or provision of this Agreement that is held invalid or unenforceable in any situation shall not affect the validity or enforceability of the remaining terms and provisions 104 hereof or the validity or enforceability of the offending term or provision in any other situation, provided, however, that the remaining terms and provisions of this Agreement may be enforced only to the extent that such enforcement in the absence of any invalid terms and provisions would not result in (a) deprivation of a material aspect of a Party's original bargain upon execution of this Agreement or any of the Ancillary Agreements, (b) unjust enrichment of a Party, or (c) any other manifestly unfair or materially inequitable result. [Signature Page Follows] 105 IN WITNESS WHEREOF, the Parties have caused this Agreement to be signed by their respective duly authorized officers as of the date first above written. CONSUMERS ENERGY COMPANY By: /s/ Robert A. Fenech ------------------------------------ Name: Robert A. Fenech Title: Senior Vice President Nuclear, Fossil & Hydro Operations ENTERGY NUCLEAR PALISADES, LLC By: /s/ Gary J. Taylor ------------------------------------ Name: Gary J. Taylor Title: President Asset Sale Agreement - Signature Page EX-10.(B) 3 k06781exv10wxby.txt PALISADES NUCLEAR POWER PLANT POWER PURCHASE AGREEMENT EXHIBIT (10)(b) PALISADES NUCLEAR POWER PLANT POWER PURCHASE AGREEMENT BETWEEN ENTERGY NUCLEAR PALISADES, LLC AND CONSUMERS ENERGY COMPANY DATED AS OF JULY 11, 2006 POWER PURCHASE AGREEMENT TABLE OF CONTENTS ARTICLE I: DEFINITIONS.................................................... 1 1.1. Defined Terms................................................... 1 1.2. Rules of Interpretation......................................... 8 ARTICLE II: PURCHASE OF CAPACITY, ENERGY, AND ANCILLARY SERVICES.......... 10 2.1. Capacity Sale and Purchase...................................... 10 2.2. Energy Sale and Purchase........................................ 10 2.3. Ancillary Services.............................................. 10 2.4. Replacement Energy and Replacement Capacity..................... 11 2.5. Delivery Point.................................................. 13 2.6. Entitlement Due to Uprate....................................... 14 2.7. Capacity Accreditation.......................................... 14 2.8. Reactive Power.................................................. 15 2.9. Station Power Service........................................... 15 ARTICLE III: PAYMENTS..................................................... 15 3.1. Purchase Payments............................................... 15 3.2. Peak Adjustment Payment......................................... 16 ARTICLE IV: MAINTENANCE AND OPERATION..................................... 16 4.1. Scheduled Maintenance........................................... 16 4.2. Derate Notices.................................................. 18 4.3. Other Operations Obligations.................................... 18 ARTICLE V: METERING, BILLING AND PAYMENT.................................. 19 5.1. Metering........................................................ 19 5.2. Billing and Payment............................................. 21 5.3. Scheduling...................................................... 22 ARTICLE VI: FORCE MAJEURE................................................. 23 6.1. Conditions of Excuse from Performance........................... 23 6.2. No Termination; Extension of Term............................... 23 6.3. Adjustment Payments............................................. 24 ARTICLE VII: EVENTS OF DEFAULT; REMEDIES.................................. 24 7.1. List of Default Events.......................................... 24 7.2. Seller's Security............................................... 25 7.3. Buyer's Security................................................ 26 7.4. No Consequential Damages........................................ 27 ARTICLE VIII: REPRESENTATIONS AND WARRANTIES.............................. 27 8.1. Representations and Warranties of Buyer......................... 27 8.2. Representations and Warranties of Seller........................ 28
i ARTICLE IX: INDEMNITY AND LIMITATION OF LIABILITY......................... 29 9.1. Title and Risk of Loss.......................................... 29 9.2. Indemnification................................................. 29 9.3. No Partnership.................................................. 30 9.4. Responsibility for Employees.................................... 30 ARTICLE X: TERM........................................................... 30 10.1. Term............................................................ 30 10.2. Termination..................................................... 30 10.3. Effect of Termination........................................... 31 ARTICLE XI: RECORDS....................................................... 31 11.1. Inspection of Records........................................... 31 ARTICLE XII: ADMINISTRATIVE COMMITTEE..................................... 31 12.1. Purpose......................................................... 31 12.2. Membership...................................................... 32 12.3. Meetings........................................................ 32 12.4. Functions....................................................... 32 12.5. Expenses........................................................ 32 ARTICLE XIII: NOTICES..................................................... 32 13.1. Notices in Writing.............................................. 32 13.2. Date of Notification............................................ 33 13.3. Oral Notice in Emergency........................................ 33 ARTICLE XIV: CONFIDENTIALITY.............................................. 33 14.1. Non-Disclosure to Third Parties................................. 33 14.2. Disclosure Permitted............................................ 34 14.3. Survival of Confidentiality..................................... 34 ARTICLE XV: INSURANCE..................................................... 34 15.1. Coverage and Amounts of Seller and Buyer........................ 34 15.2. Coverage for Full Term.......................................... 35 ARTICLE XVI: ASSIGNMENT................................................... 35 16.1. Binding Effect.................................................. 35 16.2. General......................................................... 36 16.3. Assignment to an Affiliate...................................... 36 16.4. Assignment to Lenders........................................... 36 ARTICLE XVII: MISCELLANEOUS............................................... 36 17.1. Dispute Resolution.............................................. 36 17.2. Recording Telephone Conversations............................... 37 17.3. Compliance with Laws............................................ 37 17.4. Taxes and Other Charges......................................... 38 17.5. Future Attributes............................................... 38
ii 17.6. Financial Transmission Rights................................... 38 17.7. Governing Law; Venue............................................ 39 17.8. Entire Agreement; Amendment..................................... 39 17.9. No Implied Waiver............................................... 39 17.10. Severability.................................................... 40 17.11. No Exclusivity/Dedication of Assets............................. 40 17.12. Expenses........................................................ 40 17.13. Counterparts.................................................... 40 17.14. Survival........................................................ 40 17.15. Third-Party Beneficiary......................................... 41 17.16. Mobile-Sierra................................................... 41 17.17. Forward Contract................................................ 41
Exhibits Exhibit A Capacity and Energy Charges Exhibit B Buyer's Capacity Amount Exhibit C Capacity and Energy Charge Shaping Factors Exhibit D Diagram of Billing Meters Exhibit E Form of Seller's Guaranty Exhibit F Form of Buyer's Guaranty Exhibit G Peak Adjustment Payment Exhibit H Scheduling Procedures iii POWER PURCHASE AGREEMENT This POWER PURCHASE AGREEMENT is made and entered into as of July 11, 2006, by and between ENTERGY NUCLEAR PALISADES, LLC, a Delaware limited liability company ("Seller"), and CONSUMERS ENERGY COMPANY, a Michigan corporation ("Buyer") (hereinafter the parties hereto are sometimes referred to collectively as the "Parties," or individually as a "Party"). WITNESSETH: WHEREAS, Buyer is a public utility which operates a system for generation and distribution of electric power in the State of Michigan; and WHEREAS, Buyer intends to transfer to Seller all of its rights, title, and interests in and to the Palisades Nuclear Power Plant, an approximately 798 MW (net) nuclear-powered electric generating facility and related assets located in South Haven, Michigan, NRC Operating License No. DPR-20 (the "Facility"); and WHEREAS, in order to continue serving its wholesale and retail customers following transfer of Buyer's interests in the Facility to Seller, Buyer desires to purchase, and Seller desires to sell, Capacity, Energy, and all associated Ancillary Services, on a unit contingent basis, on the terms, and subject to the conditions, set forth below. NOW THEREFORE, in consideration of the mutual agreements contained herein, the Parties agree as follows: ARTICLE I: DEFINITIONS 1.1. DEFINED TERMS As used in this Agreement, the following terms shall have the following meanings: 1. "ACCREDITED CAPACITY" shall mean Capacity or Replacement Capacity that (a) meets the resource adequacy requirements in Module E of the MISO Tariff, as amended or superseded ("Module E"), and (b) is measured in accordance with the "Criteria and Method For the Uniform Rating of Generating Equipment" set forth in ECAR 4; provided, however, that if either requirement in (a) or (b) is inapplicable, or if both are inapplicable, then Accredited Capacity shall mean Capacity or Replacement Capacity that meets the applicable requirements for Capacity (the "Effective Capacity Requirements") of any Governing Authority having jurisdiction over Buyer, including any Capacity from the Facility that may be deemed available under the Effective Capacity Requirements even if the Facility is not operating. 2. "ADMINISTRATIVE COMMITTEE" shall have the meaning set forth in Article XII. 3. "AFFILIATE" shall mean, with respect to any Person, any other Person (other than an individual) that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. For this purpose, "control" means the direct or indirect ownership of fifty percent (50%) or more of the outstanding capital stock or other equity interests having ordinary voting power. 4. "AGREEMENT" shall mean this Power Purchase Agreement entered into by Seller and Buyer, including all Exhibits and any and all subsequent modifications or amendments hereto made in accordance herewith. 5. "ALTERNATE DELIVERY POINT" shall have the meaning set forth in Section 2.5(b). 6. "ANCILLARY SERVICES" shall mean those services during the Term that are necessary to support the transmission of electric capacity and energy, and support the generation or transmission of Energy from the Facility while maintaining reliable operation of the transmission system, associated with or otherwise corresponding to the Capacity of the Facility and/or output of Energy at such time, which Ancillary Services shall include but not be limited to Reactive Power, regulation, and frequency response service. 7. "ASSET SALE AGREEMENT" shall mean that certain Asset Sale Agreement between Buyer and Seller, dated as of the date hereof. 8. "AUTHORIZATION" shall mean any license, permit, approval, consent, filing, waiver, exemption, variance, clearance, entitlement, allowance, franchise, or other authorization, whether corporate, governmental or otherwise. 9. "BILLING CYCLE" shall mean each calendar month during the Term and any partial calendar month at the beginning or end of the Term. 10. "BILLING METERS" means the bi-directional metering devices designated on Exhibit D as meters numbered one through four. 11. "BUSINESS DAY" shall mean any day other than Saturday, Sunday, or any NERC holiday. 12. "BUYER" shall have the meaning set forth in the preamble hereto. 13. "BUYER'S CAPACITY AMOUNT" shall mean, for any given time, the applicable amount calculated in accordance with Exhibit B. The amount specified in the column entitled "Buyer's Capacity Amount" in Exhibit B shall equal the product of (a) the Capacity rating of the Facility, which shall be set forth in the column entitled "Capacity of the Facility" in Exhibit B, and determined in accordance with the applicable requirements for Capacity of ECAR 4 (or with the Effective Capacity Requirements, if applicable), and (b) the Buyer's Entitlement, which shall be set forth in the column entitled "Buyer's Entitlement" in Exhibit B, and determined in accordance with Section 2.6. The Capacity of the Facility, and the associated amounts in the column in Exhibit B entitled "Capacity of the Facility," shall be revised during the Term, upon written notice from Seller to Buyer providing the results of any net capability testing conducted of the Facility, whether or not conducted as part of an Uprate, in accordance with ECAR 4 (or with the Effective Capacity Requirements, if applicable). 2 14. "BUYER'S GUARANTOR" shall have the meaning set forth in Section 7.3. 15. "BUYER'S GUARANTY" shall have the meaning set forth in Section 7.3. 16. "BUYER'S ENTITLEMENT" shall mean the percentage of Capacity, Net Energy Output and Ancillary Services allocated to Buyer pursuant to this Agreement, which as of the Effective Date is 100%, as may subsequently be reduced pursuant to Section 2.6. 17. "CALENDAR YEAR" shall mean a twelve-month period beginning January 1 and ending December 31. 18. "CAPACITY" shall mean, on or as of any date of determination, a power generation unit's capability to generate a specific amount of electrical energy at a given point in time. 19. "CAPACITY PAYMENT" shall have the meaning set forth in Section 3.1(a). 20. "CLAIMS" shall mean all third party claims or actions, threatened or filed and, whether groundless, false, fraudulent or otherwise, that directly or indirectly relate to the subject matter of an indemnity, and the resulting losses, damages, expenses, reasonable attorneys' fees and court costs. 21. "CPNODE" shall have the meaning ascribed to such term by MISO in the applicable MISO Tariff or related documents, as such relevant meaning or relevant term may be modified from time to time. 22. "DEFAULT INTEREST RATE" shall mean, with respect to all obligations to pay sums due under this Agreement, other than cash collateral held as security, the Interest Rate plus 200 basis points. 23. "DELIVERED ENERGY" shall mean, for any period of time, the sum of Buyer's Entitlement of Net Energy Output plus Replacement Energy. 24. "DELIVERY POINT" shall have the meaning set forth in Section 2.5. 25. "DERATE" shall mean an event or condition which causes the Buyer's Entitlement of Net Energy Output to be less than ninety-five percent (95%) of the associated Buyer's Capacity Amount. 26. "DERATE NOTICE" shall have the meaning set forth in Section 4.2. 27. "DNR" shall mean a Designated Network Resource as defined under applicable MISO Tariffs and related documents, as amended or superseded. The term DNR shall apply to both the Facility and to the resource selected by Seller, and accepted by MISO, to provide Replacement Capacity for Buyer, in accordance with the terms and conditions of this Agreement. 28. "DOWNGRADE EVENT" shall mean, with respect to the Seller's Guarantor or the Buyer's Guarantor, any period of time when such party's unsecured, senior long-term debt 3 obligations (not supported by third-party credit enhancements) are rated below Baa3 by Moody's Investment Services, Inc. (or its successor), and rated below BBB- by Standard & Poor's Rating Group (or its successor). 29. "ECAR 4" shall mean ECAR Document No. 4, "Criteria and Method for the Uniform Rating of Generating Equipment," which is an Organizational Standard of ReliabilityFirst Corporation, the successor organization to the East Central Area Coordination Agreement organization, as such document may be amended, superseded or adopted in whole or in part by ReliabilityFirst Corporation. 30. "EFFECTIVE DATE" shall mean the Closing Date, as defined in the Asset Sale Agreement. 31. "ENERGY" shall mean electric energy expressed in MWh. 32. "ENERGY PAYMENT" shall have the meaning set forth in Section 3.1(b). 33. "EST" shall mean Eastern Standard Time. 34. "FACILITY" shall have the meaning set forth in the second recital of this Agreement. 35. "FERC" shall mean the Federal Energy Regulatory Commission or any successor thereto. 36. "FINANCIAL BILATERAL TRANSACTION" shall have the meaning ascribed to such term by MISO in the applicable MISO Tariff or related documents, as such relevant meaning or relevant term may be modified from time to time. 37. "FORCE MAJEURE" shall mean an event or circumstance which prevents one Party from performing some or all of its obligations hereunder that (a) is not within the control of the Party relying thereon, and (b) could not have been prevented or avoided by such Party through the exercise of reasonable diligence. Subject to the foregoing, Force Majeure may include, without limitation, an act of God, war, insurrection, riot, terrorism or shutdowns or reductions in Facility output or capabilities required, caused by, or related to, directives, orders or requirements of any Governing Authority; provided, however, that the following acts, events or causes shall in no event constitute an event of Force Majeure: (i) any lack of profitability to a Party or any losses incurred by a Party or any other financial consideration of a Party; (ii) unavailability of funds or financing; (iii) an event caused by conditions of national or local economics or markets; and (iv) any failure of equipment which is not itself directly caused by an event which would otherwise independently constitute a Force Majeure. 38. "GENERATION OFFER" shall have the meaning ascribed to such term by MISO in the applicable MISO Tariff or related documents, as such relevant meaning or relevant term may be modified from time to time. 39. "GOOD UTILITY PRACTICES" shall mean any applicable practices, methods, and acts engaged in or approved by a significant portion of (a) as to Seller, the nuclear power electric generating industry, or (b) as to Buyer, the electric utility industry, during the relevant 4 time period, or the practices, methods, and acts which, in the exercise of reasonable judgment by a prudent nuclear operator (or prudent utility operator, if applicable to Buyer) in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety, expedition, and the requirements of any Governing Authority having jurisdiction. Without limitation of the foregoing, "Good Utility Practices" shall include the applicable operating policies, standards, criteria, and/or guidelines of NERC, MISO, METC, NRC, RFC and any other Governing Authority. "Good Utility Practices" is not intended to be limited to the optimum practice, method, or act to the exclusion of all others, but rather to the acceptable practices, methods, or acts generally accepted in (a) as to Seller, the nuclear power electric generating industry, or (b) as to Buyer, the electric utility industry. 40. "GOVERNING AUTHORITY" shall mean the federal government of the United States, and any state, county or local government, and any regulatory department, body, political subdivision, commission, bureau, administration, agency, instrumentality, ministry, court, judicial or administrative body, taxing authority, or other authority of any of the foregoing (including, without limitation, any corporation or other entity owned or controlled by any of the foregoing), MISO, METC, NERC, RFC, NRC, and any other regional reliability council, the Transmission Provider and any other regional transmission organization, in each case having jurisdiction over either or both of the Parties, the Facility, or the Transmission Provider's transmission system, whether acting under express or delegated authority. 41. "INTERCONNECTION AGREEMENT" shall mean, with respect to the Facility, the interconnection agreement by and among Seller, MISO and METC, and any other agreement by and among Seller, MISO and METC, governing the interconnection of the Facility to the MISO or METC system and transmission of Energy from the Facility into the MISO or METC system, as amended or superseded. 42. "INTERCONNECTION POINT" shall mean, with respect to the Facility, the Point(s) of Interconnection described in the Interconnection Agreement, unless the Parties specifically agree otherwise in writing. 43. "INTEREST RATE" shall mean, the one-month LIBOR rate as published in The Wall Street Journal for the then current month, or in a comparable publication. 44. "LAW" shall mean any law, statute, rule, regulation, or ordinance issued or promulgated by a Governing Authority. 45. "LETTER(S) OF CREDIT" means one or more irrevocable, transferable standby Letters of Credit issued by a U.S. commercial bank or a foreign bank with a U.S. branch with such bank having a credit rating of at least A- from S&P or A3 from Moody's, in a form acceptable to the Party in whose favor the Letter of Credit is issued. Costs of a Letter of Credit shall be borne by the applicant for such Letter of Credit. 46. "LMP" shall mean the Locational Marginal Price at the relevant CPNode for the relevant 5 hour(s) and day(s), as posted by MISO. 47. "MAINTENANCE SCHEDULE" shall have the meaning set forth in Section 4.1(a). 48. "MERCHANT OPERATIONS CENTER" shall mean that operations center responsible for monitoring, coordinating and scheduling the outages and dispatch of generation facilities. 49. "METERING PARTY" shall have the meaning set forth in Section 5.1(a). 50. "METC" shall mean the Michigan Electric Transmission Company, or any successor entity. 51. "MISO" shall mean the Midwest Independent Transmission System Operator, Inc., or any successor entity. 52. "MISO TARIFF" shall mean the "Open Access Transmission and Energy Market Tariff for the Midwest Independent Transmission System Operator, Inc.," as amended or superseded. 53. "MPSC" shall have the meaning set forth in Section 10.l. 54. "MWH" shall mean megawatt hours. 55. "NERC" shall mean the North American Electric Reliability Council, or any successor entity. 56. "NET ENERGY OUTPUT" shall mean, for any hour during a Billing Cycle and with respect to the Facility, (a) if the Facility is operating, total Energy output of the Facility as measured at the Delivery Point, less Station Power Service Load, which amounts shall be calculated at the applicable Billing Meters, and provided that Net Energy Output can in no event be less than zero, or (b) if the Facility is not operating, zero. In accordance with the foregoing, if the Facility is operating, Net Energy Output is equal to the sum of the Billing Meter data for "in" flows less the sum of the Billing Meter data for "out" flows; where "in" flows are those flows having a direction designated as being from the Facility to the transmission system and "out" flows are those flows having a direction designated as being from the transmission system to the Facility. The absolute value of the data from each Billing Meter shall be used to calculate Net Energy Output. 57. "NRC" shall mean the Nuclear Regulatory Commission, or any successor entity. 58. "OFF-PEAK" shall mean all hours that are not On-Peak hours. 59. "ON-PEAK" shall mean hour ending 0700 EST through hour ending 2200 EST, Monday through Friday, excluding NERC holidays. 60. "OPERATING DAY" shall have the meaning ascribed to such term by MISO in the applicable MISO Tariff or related documents, as such relevant meaning or relevant term may be modified from time to time. 6 61. "PARTY" shall have the meaning set forth in the preamble hereto. 62. "PEAK ADJUSTMENT PAYMENT" shall have the meaning set forth in Section 3.2. 63. "PERSON" shall mean any legal or natural person, including any individual, corporation, partnership, limited liability company, joint stock company, association, joint venture, trust, Governing Authority or international body or agency, or other entity. 64. "REACTIVE POWER" shall mean the capability of the Facility when operating to produce or absorb reactive power. 65. "REGULATORY EVENT" shall have the meaning set forth in Section 17.10. 66. "REPLACEMENT CAPACITY" shall mean, at any time, Accredited Capacity supplied to Buyer by Seller from any DNR other than the Facility to fulfill, in whole or in part, Seller's obligation to supply Accredited Capacity under this Agreement. Replacement Capacity shall not exceed the Buyer's Capacity Amount. In addition, Replacement Capacity shall (a) not be committed for sale to any third party, and (b) be available at all times to serve Buyer's Capacity requirements. 67. "REPLACEMENT ENERGY" shall mean, at any time, Energy supplied to Buyer by Seller from any generation resource other than the Facility to fulfill, in part or in whole, Seller's obligation to deliver Energy which, when combined with Buyer's Entitlement of Net Energy Output, shall not exceed the Buyer's Capacity Amount applicable to Buyer at such time under this Agreement. 68. "RFC" shall mean the ReliabilityFirst Corporation, or any successor entity. 69. "SCADA" shall mean supervisory, control and data acquisition technology and equipment. 70. "SCHEDULED" or "SCHEDULING" means the actions of Seller, Buyer and/or their designated representatives, of notifying, requesting and confirming to each other and any third party the quantity and type of Energy to be delivered on any Operating Day (a) submitted to MISO by Seller as Seller's Generation Offer from the Facility for a relevant Operating Day during the Term pursuant to this Agreement, or (b) submitted to MISO by Seller and accepted by Buyer as a Financial Bilateral Transaction for a relevant Operating Day during the Term pursuant to this Agreement. 71. "SCHEDULED MAINTENANCE OUTAGE" shall have the meaning set forth in Section 4.1(a). 72. "SELLER" shall have the meaning set forth in the preamble hereto. 73. "SELLER'S GUARANTOR" shall have the meaning set forth in Section 7.2. 74. "SELLER'S GUARANTY" shall have the meaning set forth in Section 7.2. 75. "STATION POWER SERVICE LOAD" shall mean, for the Facility and for any hour during a 7 Billing Cycle, the sum of the following items: (a) the station start-up transformer load for that hour; (b) the safeguard transformer load for that hour; and (c) the main transformer load for that hour. 76. "SUMMER MAINTENANCE OUTAGE" shall have the meaning set forth in Section 4.1(b)(i). 77. "TARGET CAPACITY FACTOR" shall mean 0.9500. 78. "TAX" shall mean all taxes, charges, fees, levies, penalties or other assessments imposed by any Governing Authority, including income, gross receipts, single business, excise, real or personal property, sales, transfer, customs, duties, franchise, payroll, withholding, social security, receipts, license, stamp, occupation, employment, or other taxes, including any interest, penalties or additions attributable thereto, and any payments to any state, local, provincial or foreign taxing authorities in lieu of any such taxes, charges, fees, levies or assessments. 79. "TERM" shall mean the period from and after the Closing as defined in the Asset Sale Agreement to and including the date and time on which this Agreement is terminated in accordance with the terms hereof. 80. "TERMINATION DATE" shall have the meaning set forth in Section 10.1. 81. "TRANSMISSION OWNER" shall mean METC. 82. "TRANSMISSION PROVIDER" shall mean the MISO. 83. "UPRATE" shall mean the increase in the maximum power level at which the Facility may operate (a) under its NRC license as such license may be amended after the date hereof and/or (b) any increase in the power level at which the Facility may operate as a result of the replacement or modification of the Facility's moisture-separator reheaters. 1.2. RULES OF INTERPRETATION (a) Unless otherwise required by the context in which any term appears: (i) Capitalized terms used in this Agreement shall have the meanings specified in this Article. (ii) The singular shall include the plural, the plural shall include the singular, and the masculine shall include the feminine and neuter. (iii) References to "Articles," "Sections," or "Exhibits" shall be to articles, sections, or exhibits of this Agreement, and references to "Paragraphs" or "Clauses" shall be to separate paragraphs or clauses of the section or subsection in which the reference occurs. (iv) The words "herein," "hereof" and "hereunder" shall refer to this Agreement as a whole and not to any particular section or subsection of 8 this Agreement; and the words "include," "includes" or "including" shall mean "including, but not limited to." (v) The term "day" shall mean a calendar day, commencing at 12:00 a.m. (EST). The term "week" shall mean any seven consecutive day period, and the term "month" shall mean a calendar month; provided that when a period measured in months commences on a date other than the first day of a month, the period shall run from the date on which it starts to the corresponding date in the next month and, as appropriate, to succeeding months thereafter. Whenever an event is to be performed or a payment is to be made by a particular date and the date in question falls on a day which is not a Business Day, the event shall be performed, or the payment shall be made, on the next succeeding Business Day; provided, however, that all calculations shall be made regardless of whether any given day is a Business Day and whether or not any given period ends on a Business Day. (vi) All references to a particular entity shall include such entity's permitted successors and permitted assigns unless otherwise specifically provided herein. (vii) All references herein to any Law or to any contract or other agreement shall be to such Law, contract or other agreement as amended, supplemented or modified from time to time unless otherwise specifically provided herein. (b) The titles of the articles and sections herein have been inserted as a matter of convenience of reference only, and shall not control or affect the meaning or construction of any of the terms or provisions hereof. (c) This Agreement was negotiated and prepared by both Parties with advice of counsel to the extent deemed necessary by each Party; the Parties have agreed to the wording of this Agreement; and none of the provisions hereof shall be construed against one Party on the ground that such Party is the author of this Agreement or any part hereof. (d) The Exhibits hereto are incorporated in and are intended to be a part of this Agreement; provided, however, that in the event of a conflict between the terms of any Exhibit and the terms of the remainder of this Agreement, the terms of the remainder of this Agreement shall take precedence. 9 ARTICLE II: PURCHASE OF CAPACITY, ENERGY, AND ANCILLARY SERVICES 2.1. CAPACITY SALE AND PURCHASE Subject to the terms and conditions of this Agreement, Seller agrees to sell and supply to Buyer, and Buyer agrees to accept and purchase from Seller, Buyer's Entitlement of all Accredited Capacity that Seller has available from the Facility for the duration of the Term. Seller agrees to sell and supply, and Buyer agrees to accept and purchase from Seller, all Accredited Capacity associated with Replacement Capacity that Seller supplies to Buyer pursuant to the terms of this Agreement. Buyer's obligation to pay for Accredited Capacity sold and supplied by Seller to Buyer for any period of time shall be based on the aggregate amount of Delivered Energy for that period of time. 2.2. ENERGY SALE AND PURCHASE Subject to the terms and conditions of this Agreement, for the duration of the Term, Seller shall sell and deliver to Buyer at the Delivery Point, and Buyer shall accept and purchase, Buyer's Entitlement of the Net Energy Output of the Facility. Buyer also agrees to accept and purchase all Replacement Energy that Seller delivers to Buyer pursuant to the terms of this Agreement. The amount of all Energy sold and delivered by Seller and accepted and purchased by Buyer pursuant to this Section 2.2, for any period of time, shall be the aggregate amount of Delivered Energy for such period of time. 2.3. ANCILLARY SERVICES (a) The sale of Capacity and Energy hereunder from the Facility to Buyer shall include the Ancillary Services associated with Buyer's Entitlement of such Capacity and Energy from the Facility. Seller agrees to provide and/or execute any documents or agreements necessary to transfer to Buyer any revenue in excess of revenues from the sale of Energy and Capacity under this Agreement, and any other benefits and rights, received by Seller in providing such Ancillary Services. (b) To the extent that Seller's unexcused failure to deliver Ancillary Services to Buyer results in any increased cost or penalty incurred by Buyer, Seller shall reimburse Buyer for any such increased cost or penalty. The amount of such cost or penalty to be reimbursed shall not exceed an amount equal to the increased costs or penalties actually incurred by Buyer. In the event that during the Term there exists a market for the purchase and sale of Ancillary Services, then (i) if Seller fails to provide an Ancillary Service required to be delivered hereunder from the Facility, Seller shall use commercially reasonable efforts to provide Buyer with a replacement for such Ancillary Service and (ii) if Seller is unsuccessful in satisfying its obligation under clause (i), Seller shall reimburse Buyer for the market-clearing price for such undelivered Ancillary Service to the extent such market-clearing price exceeds those amounts already due from Seller 10 pursuant to this Section 2.3(b). 2.4. REPLACEMENT ENERGY AND REPLACEMENT CAPACITY Subject to the provisions of this Agreement, Seller may provide Buyer with Replacement Energy and Replacement Capacity and/or Accredited Capacity from the Facility as set forth below in this Section 2.4 during a Derate with a duration of more than one (1) day, including a Derate caused by a Scheduled Maintenance Outage, a Summer Maintenance Outage, or any other scheduled outage of the Facility. If Seller supplies Replacement Capacity and/or Accredited Capacity from the Facility without also simultaneously delivering Replacement Energy, Seller shall be deemed as not having supplied Replacement Capacity and as not having delivered Replacement Energy. If Seller delivers Replacement Energy without also simultaneously supplying Replacement Capacity and/or Accredited Capacity from the Facility, Seller shall be deemed as not having supplied Replacement Capacity and as not having delivered Replacement Energy. Seller may provide Replacement Energy from a generation resource that differs from the DNR selected by Seller to supply Replacement Capacity, if any. (a) Notices to Supply Replacement Capacity and Deliver Replacement Energy If the event or condition constituting the Derate is an event or condition other than a Scheduled Maintenance Outage, Summer Maintenance Outage, or any other scheduled outage of the Facility, Seller shall notify Buyer's Merchant Operations Center of Seller's election in accordance with Section 2.4(b) below to provide or not to provide Replacement Capacity (to the extent not supplying Accredited Capacity from the Facility) and Replacement Energy no later than the second Business Day following the day that the Derate commenced. If the event or condition constituting the Derate is a Scheduled Maintenance Outage, a Summer Maintenance Outage, or any other scheduled outage of the Facility, Seller shall notify Buyer's Merchant Operations Center of Seller's election in accordance with Section 2.4(b) below to provide or not to provide Replacement Capacity (to the extent not supplying Accredited Capacity from the Facility) and Replacement Energy no later than two (2) Business Days prior to the scheduled commencement of such Scheduled Maintenance Outage, Summer Maintenance Outage, or other scheduled outage of the Facility. (b) Seller's Replacement Capacity and Replacement Energy Options Seller shall have the option of electing to provide: (i) Replacement Capacity (to the extent not supplying Accredited Capacity from the Facility) and Replacement Energy on a weekly basis, (ii) Replacement Capacity (to the extent not supplying Accredited Capacity from the Facility) and Replacement Energy for the expected duration of the Derate, or (iii) no Replacement Capacity and Replacement Energy for the expected duration of the Derate; provided, however, that with respect to a Derate other than a Scheduled Maintenance Outage, a Summer Maintenance Outage, or another scheduled outage of the Facility, Replacement Capacity (to the extent not supplying Accredited Capacity from the Facility) and Replacement 11 Energy, if provided, must be provided for the remaining duration of the Derate commencing with the date that Buyer's Merchant Operations Center is notified in accordance with Section 2.4(a) above. Notwithstanding anything else in this Agreement to the contrary, if a Derate occurs in the month of July or August and is expected to have a duration in excess of one (1) week during any part of that two-month period, then Seller shall not have option (i) above with respect to Replacement Capacity and Replacement Energy but will have options (ii) and (iii) above. Notwithstanding the foregoing, Seller's only option with respect to a Summer Maintenance Outage is to provide Replacement Capacity (to the extent not supplying Accredited Capacity from the Facility) and Replacement Energy on a continuous basis for the duration of such an outage equal to the Buyer's Capacity Amount. (c) Replacement Energy Scheduling Any Replacement Energy Scheduled hereunder shall be Scheduled in accordance with Section 5.3, subject to the following: (i) Seller shall provide notice to Buyer of the proposed source and Delivery Point (or Alternate Delivery Point, as the case may be) of the Replacement Energy by the required time for notices to be provided to Buyer pursuant to Section 2.4(a) above; and, (ii) Replacement Energy may only be Scheduled and delivered on a continuous basis in either (A) a single fixed quantity or (B) a quantity varied to reflect expected changes in the Buyer's Entitlement of Net Energy Output of the Facility (e.g., changes in Facility output or ramp rates or expected resolution of outages) such that the aggregate of such Replacement Energy and Buyer's Entitlement of Net Energy Output of the Facility will result in a single, fixed quantity. (d) Failure to Schedule/Deliver If Seller fails to deliver or cause to be delivered all or part of the Replacement Energy that is Scheduled in accordance with Section 2.4(c) above, or fails to Schedule Replacement Energy in accordance with Section 2.4(c) above after providing the requisite notice under Section 2.4(a), and such failure is not excused under the terms of this Agreement, then Seller shall pay to Buyer, within ten (10) Business Days of invoice receipt therefore, an amount equal to the positive difference, if any, between (i) the cost incurred by Buyer acting in a commercially reasonable manner to replace the Replacement Energy not delivered or Scheduled by Seller, including the cost incurred by Buyer in purchasing Energy to replace, at the Delivery Point, the Replacement Energy not delivered or Scheduled by Seller in either a bilateral transaction or the market price at the Delivery Point, plus additional transmission charges, if any, reasonably incurred by Buyer for the delivery of the Energy to the Delivery Point, and (ii) the cost (using the Energy Charge) that Buyer would have incurred under this Agreement had the 12 Replacement Energy been delivered or Scheduled. Any invoice submitted by Buyer to Seller pursuant to this Section 2.4(d) shall include a written statement explaining in reasonable detail the calculation of the amount due from Seller. If Buyer fails to Schedule, receive or cause to be received all or part of the Replacement Energy that is Scheduled by Seller in accordance with Section 2.4 herein, and such failure is not excused under the terms of this Agreement, then Buyer shall pay to Seller, within ten (10) Business Days of invoice receipt therefore, an amount equal to the negative difference, if any, between (i) the amount received by Seller acting in a commercially reasonable manner in the reselling at the Delivery Point any Replacement Energy not received by Buyer, including the amount received by Seller in reselling any Replacement Energy, at the Delivery Point, not received by Buyer in either a bilateral transaction or the market price at the Delivery Point, less additional transmission charges, if any, and (ii) the amount (using the Energy Charge) that Seller would have received under this Agreement had the Replacement Energy been received by Buyer. Any invoice submitted by Seller to Buyer pursuant to this Section 2.4(d) shall include a written statement explaining in reasonable detail the calculation of the amount due from Buyer. (e) Failure to Supply Seller shall have the option to supply Replacement Capacity to Buyer in accordance with this Agreement, provided that the combined amount of Capacity supplied from the Facility and the Replacement Capacity is equal to or less than the Buyer's Capacity Amount. If Seller fails to supply Replacement Capacity (to the extent it is not supplying Accredited Capacity from the Facility) after providing the requisite notice under Section 2.4(a), and such failure is not excused under the terms of this Agreement, then Seller shall pay Buyer, within ten (10) Business Days of invoice receipt therefore, an amount equal to the positive difference, if any, between (i) the cost incurred by Buyer acting in a commercially reasonable manner to replace the Replacement Capacity not supplied by Seller, including the cost incurred by Buyer in purchasing Capacity to replace the Replacement Capacity not supplied by Seller in either a bilateral transaction or the market price at the Delivery Point, and (ii) the cost (using the Capacity Charge) that Buyer would have incurred under this Agreement had the Replacement Capacity been supplied. Any invoice submitted by Buyer to Seller pursuant to this Section 2.4(e) shall include a written statement explaining in reasonable detail the calculation of the amount due from Seller. (f) When supplying Replacement Energy and Replacement Capacity, Seller shall not be required to supply Ancillary Services with respect thereto. 2.5. DELIVERY POINT (a) If the Facility is the generation source of Energy to be delivered to Buyer hereunder, then the "Delivery Point" for such Energy is the CPNode that 13 corresponds to the Interconnection Point for the main transformer. (b) If the Facility is not the generation source of Energy to be delivered to Buyer hereunder (i.e., if Replacement Energy is being supplied), then the "Delivery Point" for the Replacement Energy shall be, pursuant to the Seller's choice, any of: (i) the CPNode that corresponds to the Interconnection Point for the main transformer, (ii) any other CPNode located within the METC Sub-Control Area, or (iii) the CPNode that corresponds to the Buyer's Load Zone as defined by MISO ((ii) or (iii) being the "Alternate Delivery Point"). (c) In the event that Seller chooses to deliver Replacement Energy to an Alternate Delivery Point permitted by Section 2.5(b) above, Seller shall reimburse Buyer for any additional costs (net of any savings) incurred by Buyer (relative to that which would have been incurred by Buyer if such delivery had been made to the CPNode that corresponds to the Interconnection Point) as a result of the delivery of such Replacement Energy, including, but not limited to, LMP differentials, transmission costs, imbalance penalties or charges, scheduling penalties or fees, redispatch costs, cash out charges, congestion management fees, Ancillary Service costs associated with the incremental transmission, line losses and similar costs, regulation and frequency response charges, voltage support charges or any similar penalties, fees or charges assessed by Transmission Provider for failure to satisfy the Transmission Provider's balance, nomination and/or scheduling requirements. 2.6. ENTITLEMENT DUE TO UPRATE In the event of an Uprate, Seller shall be entitled to sell, and Buyer shall have no right to, all additional Capacity, Energy and Ancillary Services attributed to the Uprate. In the event of an Uprate, Seller will arrange for a net capability test (the "Uprate Capability Test") in accordance with ECAR 4 (or with the Effective Capacity Requirements, if applicable) to be conducted, after the Uprate is completed, tested and operational as determined by Seller, to calculate the actual net increase in the Capacity of the Facility attributable to the Uprate. Once the Uprate Capability Test is completed, the Buyer's Entitlement and the associated percentages in the column in Exhibit B entitled "Buyer's Entitlement" shall be revised, upon written notice from Seller to Buyer, to equal the quotient, stated as a percentage, resulting from (a) the Capacity of the Facility amount from Exhibit B (without taking into account the effect of the Uprate) corresponding to the month in which the Uprate is completed, tested and operational as determined by Seller, divided by (b) the Capacity rating of the Facility resulting from the Uprate Capability Test. Buyer shall be entitled under this Agreement to the Buyer's Entitlement of all Capacity made available, or capable of being made available, from the Facility (except for Capacity from the Facility attributable to an Uprate), and Seller shall not sell or commit to sell such Capacity to any party other than Buyer. 2.7. CAPACITY ACCREDITATION Seller shall, at its cost and expense, (a) on an annual basis (or more frequently as Seller may be directed by any Governing Authority), perform a Capacity test of the Facility, in 14 accordance with ECAR 4 and Module E, and (b) take all other actions reasonably required to cause the Capacity of the Facility and the Replacement Capacity to be Accredited Capacity, including the satisfaction of all applicable requirements to establish and maintain the DNR status (as defined under applicable MISO Tariffs) of the Facility or the source of the Replacement Capacity for Buyer. 2.8. REACTIVE POWER (a) Seller agrees that it shall not have any rights to the production or absorption of the Reactive Power capabilities of the Facility existing as of the time of closing of the transactions contemplated by the Asset Sale Agreement (which capabilities are identified in the Interconnection Agreement), and that Seller shall not operate the Facility to produce real power at a level or in a manner that compromises its ability to operate the Facility to produce or absorb Reactive Power to maintain the output voltage or power factor at the Interconnection Point as specified in the Interconnection Agreement or, if the Interconnection Agreement is not applicable, any other applicable agreement governing Seller's obligation to provide Reactive Power from the Facility. In addition, Seller shall maintain the Reactive Power capability of the Facility at the levels set forth in the Interconnection Agreement as the same may be amended by the parties thereto. Notwithstanding the foregoing, in no event shall Seller be required by Buyer to reduce its real power output below the Buyer's Capacity Amount for the purpose of producing Reactive Power. (b) Notwithstanding Section 2.8(a), Seller may alter the Facility's ability to absorb or produce Reactive Power or otherwise change the amount or nature of Reactive Power if such alteration is approved by the applicable Governing Authority. 2.9. STATION POWER SERVICE During any period in which the Facility is operating, Seller shall be entitled to satisfy the Station Power Service Load using Energy generated by the Facility. Seller shall be solely responsible for obtaining, at its cost, Energy to serve the Station Power Service Load, including any transmission charges (if applicable) associated with such Energy, during any period of time in which the Facility is not operating, or is not generating sufficient Energy to meet the Station Power Service Load. In the event that any fees, penalties, or transmission charges are assessed against Buyer by any Governing Authority in connection with Seller's consumption of Energy to serve the Station Power Service Load or any Energy obtained by Seller to serve the Station Power Service Load, Seller shall reimburse Buyer for such fees, penalties, or transmission charges or Energy. ARTICLE III: PAYMENTS 3.1. PURCHASE PAYMENTS The amounts to be paid to the Seller by the Buyer for purchases of Capacity, Energy and Ancillary Services under this Agreement shall be determined as follows: 15 (a) Capacity Payment. With respect to each Billing Cycle, Buyer shall make a payment to Seller equal to the product of: (i) the applicable "Capacity Charge" set forth in Exhibit A; (ii) the applicable Capacity Charge Shaping Factor set forth in Exhibit C; and (iii) the number of MWhs of Delivered Energy for the Billing Cycle (each, a "Capacity Payment"). (b) Energy Payment. With respect to each Billing Cycle, Buyer shall make a payment to Seller equal to the product of: (i) the applicable "Energy Charge" set forth in Exhibit A; (ii) the applicable Energy Charge Shaping Factor set forth in Exhibit C; and (iii) the number of MWhs of Delivered Energy for the Billing Cycle (each, an "Energy Payment"). (c) Ancillary Services. The Capacity Payment and the Energy Payment include payment for any and all Ancillary Services received by Buyer, and no additional payment in respect thereof shall be due at any time. Without limiting the generality of the foregoing, Seller specifically agrees that it shall not be entitled to any payment for Reactive Power under this Agreement, notwithstanding its obligation to operate the Facility in accordance with Section 2.8. 3.2. PEAK ADJUSTMENT PAYMENT If applicable, Seller shall make a payment to Buyer as determined in accordance with Exhibit G (each, a "Peak Adjustment Payment"). ARTICLE IV: MAINTENANCE AND OPERATION 4.1. SCHEDULED MAINTENANCE (a) Scheduling Procedure Seller shall submit to Buyer a schedule of maintenance of the Facility (each, a "Maintenance Schedule" and each item thereon a "Scheduled Maintenance Outage") for each Calendar Year during the Term no later than twelve (12) months before the beginning of such year (or no later than three (3) months prior to the deadline for submittal of any such schedule to the Transmission Provider or any other applicable Governing Authority, if earlier); except that within thirty (30) days following the Effective Date, Seller shall submit to Buyer a Maintenance Schedule for the Calendar Year in which the Effective Date occurs and for the following Calendar Year. Each Maintenance Schedule shall meet the requirements set forth in Section 4.1(b) and shall be deemed confidential information and shall be treated accordingly as provided in Article XIV of this Agreement; provided, however, that Buyer shall have the right, consistent with Section 14.2(a), to submit the Maintenance Schedule to the MPSC. Seller shall also submit to Buyer any schedule of maintenance provided to the Transmission Provider, any Governing Authority or other entity. (b) Limitations on Scheduled Maintenance Outages 16 (i) If Seller plans a Scheduled Maintenance Outage during the period from June 1st through August 31st (a "Summer Maintenance Outage"), Seller must comply with the notice and Scheduling provisions of Section 2.4 and the following terms and conditions: (A) Seller shall supply Replacement Capacity (if and to the extent Accredited Capacity from the Facility is not provided), and Schedule and deliver Replacement Energy, on a continuous basis to the Delivery Point (or Alternate Delivery Point) for each hour of such Summer Maintenance Outage in an amount equal to the Buyer's Capacity Amount; and (B) If Seller fails to deliver or cause to be delivered, or fails to Schedule, all or part of the Replacement Energy required by subsection (i)(A) above, and such failure is not excused under the terms of this Agreement, then Seller shall pay to Buyer, within ten (10) Business Days of invoice receipt therefore, an amount equal to the positive difference, if any, between (1) the cost incurred by Buyer acting in a commercially reasonable manner to replace the Replacement Energy not delivered or Scheduled by Seller, including the cost incurred by Buyer in purchasing Energy to replace, at the Delivery Point, the Replacement Energy not delivered or Scheduled by Seller in either a bilateral transaction or the market price at the Delivery Point, plus additional transmission charges, if any, reasonably incurred by Buyer for the delivery of the Energy to the Delivery Point, and (2) the cost (using the Energy Charge) that Buyer would have incurred under this Agreement had the Replacement Energy been delivered or Scheduled. Any invoice submitted by Buyer to Seller pursuant to this subsection (i)(B) shall include a written statement explaining in reasonable detail the calculation of the amount due from Seller. (C) If Buyer fails to Schedule, receive or cause to be received all or part of the Replacement Energy that is Scheduled by Seller in accordance with subsection (i)(A) above and such failure is not excused under the terms of this Agreement, then Buyer shall pay to Seller, within ten (10) Business Days of invoice receipt therefore, an amount equal to the negative difference, if any, between (1) the amount received by Seller acting in a commercially reasonable manner in the reselling at the Delivery Point any Replacement Energy not received by Buyer, including the amount received by Seller in reselling any Replacement Energy, at the Delivery Point, not received by Buyer in either a bilateral transaction or the market price at the Delivery Point, less additional transmission charges, if any, and (2) the amount (using the Energy Charge) that Seller would have received under this Agreement had the Replacement Energy been received by Buyer. Any invoice submitted by Seller 17 to Buyer pursuant to this subsection (i)(C) shall include a written statement explaining in reasonable detail the calculation of the amount due from Buyer. (D) If Seller fails to supply Replacement Capacity in accordance with subsection (i)(A) above and such failure is not excused under the terms of this Agreement, then Seller shall pay Buyer, within ten (10) Business Days of invoice receipt therefore, an amount equal to the positive difference, if any, between (1) the cost incurred by Buyer to replace the Replacement Capacity not supplied by Seller, including the cost incurred by Buyer in purchasing Capacity to replace the Replacement Capacity or the market price paid by Buyer for Replacement Capacity not supplied by Seller, and (2) the cost (using the Capacity Charge) that Buyer would have incurred under this Agreement had the Replacement Capacity been supplied. Any invoice submitted by Buyer to Seller pursuant to this subsection (i)(D) shall include a written statement explaining in reasonable detail the calculation of the amount due from Seller. (ii) The conditions set forth in Section 4.1(b)(i) shall not apply to (x) the Scheduled Maintenance Outage which includes the Facility's reactor head replacement, (y) the Scheduled Maintenance Outage, if any, during which the Facility's steam generator is replaced, or (z) any unexpected maintenance outage (i.e., a maintenance outage which is scheduled in less than three months). 4.2. DERATE NOTICES In the event of any Derate, other than a Scheduled Maintenance Outage, any Summer Maintenance Outage, or any other scheduled outage of the Facility, Seller must notify Buyer's Merchant Operations Center telephonically of such Derate as soon as practicable after Seller becomes aware of the necessity or occurrence thereof (each, a "Derate Notice"), with written confirmation within 24 hours. During any ongoing Derate, Seller shall provide daily or more frequent updates to Buyer's Merchant Operations Center of the nature and expected duration of such Derate. During the course of development of a Derate, Seller shall provide frequent updates as to the magnitude and timing of actual and expected output changes of the Facility and such other information as may assist Buyer in assessing the reliability of output from the Facility. 4.3. OTHER OPERATIONS OBLIGATIONS (a) Permits, Licenses and Approvals; Compliance with Laws Seller shall, at its expense, acquire and maintain in effect throughout the Term of this Agreement all permits, licenses, approvals and other Authorizations of any Governing Authority required for the lawful operation and maintenance of the Facility. 18 (b) Information Requirements Seller shall provide Buyer with the following real-time telemetered data (scanned no less frequently than once every four seconds) for the duration of the Term: (i) net output (megawatts and megaVARs), (ii) status (i.e., open or closed) of the applicable breaker, (iii) operating limits, and (iv) such additional information as may be required from time to time by the Transmission Provider or any Governing Authority, or Buyer's control area operator, or by Good Utility Practices. Seller shall provide Buyer with copies of any scheduling notices or requests submitted to the Transmission Provider, concurrently with the submission thereof. In addition, Seller shall provide Buyer with any other information Buyer may reasonably request regarding the operation of the Facility. Seller shall advise Buyer and provide information regarding events, ongoing work or Facility status which may create a risk of Derates. In no event shall the provisions of this Section 4.3(b) require Seller to provide Buyer with any information that Seller believes in good faith, based on established precedent or reasonable inquiry, violates the rules or regulations on transfer of information promulgated by any Governing Authority or Transmission Provider. (c) SCADA Data Seller shall provide and make available to Buyer, on a real-time basis, all data generated by the SCADA system at the Facility, including, without limitation, all four-second meter data. (d) Quality of Energy All Energy delivered hereunder shall be three-phase, 60 Hertz (plus or minus variations as may be required or allowed by the Transmission Provider), alternating current, at a voltage acceptable to the Transmission Provider, or shall otherwise comply with such other specifications of the Transmission Provider, regional reliability council or other Governing Authority responsible for the safety and reliability of the electric grid with authority over the Delivery Point (or Alternate Delivery Point, if applicable) as may be in effect at the time of delivery. (e) Compliance with Interconnection Agreement To the extent the Interconnection Agreement requires delivery to Buyer of information and data substantially similar to that referred to in Sections 4.3(b) and (c), the information and data required by the Interconnection Agreement shall be delivered to Buyer in lieu of that required under Sections 4.3(b) and (c). ARTICLE V: METERING, BILLING AND PAYMENT 5.1. METERING (a) The Billing Meters shall at all times during the Term meet the requirements set by 19 the Transmission Provider and all applicable Governing Authorities. Seller shall arrange with Transmission Owner for Transmission Owner to own, operate, test, maintain, and replace the Billing Meters at the main transformer (Meters #2 and #3 on Exhibit D). Transmission Owner shall be the metering party ("Metering Party") as to such Billing Meters. As between Seller and Buyer following the Effective Date, Seller shall bear all reasonable, documented costs associated with the operation, testing, maintenance, or replacement of the Billing Meters at the main transformer. Seller shall use reasonable efforts to cause the Transmission Owner to provide metering quantities, in analog and/or digital form, to Buyer upon Buyer's request. (b) Buyer shall own, operate, test, maintain, and replace the Billing Meters at the start-up transformer and the safeguard transformer (Meters #1 and #4 on Exhibit D) in accordance with Good Utility Practices. Buyer shall be the Metering Party as to such Billing Meters. Following the Effective Date, Seller shall bear all reasonable, documented costs associated with the operation, testing, maintenance, or replacement of the Billing Meters at the start-up transformer or the standby transformer. Buyer shall provide metering quantities, in analog and/or digital form, to Seller upon Seller's request. (c) The Transmission Owner's and Buyer's Billing Meters, which are shown on Exhibit D, shall be used for measurements under this Agreement and shall be sufficient to permit an accurate determination of the quantity and time of delivery of Energy delivered to Buyer. Buyer shall calibrate, and Seller shall use reasonable efforts following the Effective Date to cause the Transmission Owner to calibrate, their respective Billing Meters at least annually, and otherwise in accordance with applicable Governing Authority standards. Seller or Seller's representative shall have the right to be present during any calibration of the Billing Meters owned by Buyer, and Buyer shall provide reasonable notice to Seller of any such calibration. Seller agrees, and shall use reasonable efforts to cause the Transmission Owner to agree in writing, that upon reasonable notice, Transmission Owner (and Seller) shall provide Buyer access to the Billing Meters owned by Buyer and Transmission Owner during normal business hours for the purpose of reading, inspecting, calibrating, and testing such equipment, or witnessing the reading, inspecting, calibrating, and testing of such equipment by another party. (d) Check Meters. Seller, at its option and expense, may install and operate on its premises and on its side of the Interconnection Points, one or more check meters to check the Billing Meters owned by Buyer. Seller is responsible for any separate arrangements to install check meters with respect to the Billing Meters owned by Transmission Owner. All such check meters shall be for check purposes only and shall not be used for the measurement of Energy flows for purposes of this Agreement, except as provided in Section 5.1(e) below. The check meters shall be subject at all reasonable times to inspection and examination by Transmission Provider, Buyer or their designees. The installation, operation and maintenance thereof shall be performed entirely by 20 Seller in accordance with Good Utility Practice. (e) Testing of Metering Equipment. Seller and Buyer agree, and Seller shall use reasonable efforts to cause the Transmission Owner to agree in writing to the following: the Metering Party shall inspect and test its Billing Meters upon installation and at least once every two (2) years thereafter. If requested to do so by a Party, the Metering Party shall, at the requesting Party's expense, inspect and test Billing Meters more frequently than once every two (2) years. The Metering Party shall give reasonable notice to the other Party of the time when any inspection or test shall take place, and the other Party may have representatives present at the test or inspection. In addition, Seller shall have the right to inspect Buyer's Billing Meters from time to time at its discretion. If at any time a Billing Meter is found to be inaccurate or defective, it shall be adjusted, repaired or replaced at Seller's expense, in order to provide accurate metering, unless the inaccuracy or defect is due to the Metering Party's failure to maintain, then the Metering Party shall pay. If a Billing Meter fails to register, or if the measurement made by a Billing Meter during a test varies by more than one-half of one percent (0.5%) from the measurement made by the standard meter used in the test, the Metering Party shall adjust the measurements by correcting all measurements for the period during which the Billing Meter was in error by using Seller's check meters, if installed and if, when tested, varied less than the Billing Meter. If no such check meters are installed, the Parties shall use the best available data for the period in question. If no other data are available, or if the period cannot be reasonably ascertained, the adjustment shall be for the period immediately preceding the test of the Billing Meter equal to one-half the time from the date of the previous test of the Billing Meter. (f) Seller and Buyer agree, and Seller shall use reasonable efforts to cause the Transmission Owner to agree in writing, to the following: at Seller's expense, the metered data shall be telemetered by the Metering Party to one or more locations, designated by Transmission Owner and one or more locations designated by Buyer. 5.2. BILLING AND PAYMENT (a) Seller shall send a billing statement to Buyer on or before the tenth (10th) day after the end of each Billing Cycle. If any net amount is due to Seller pursuant to any such billing statement, Buyer shall pay such amount to Seller by the later of (i) ten (10) Business Days after receipt of such billing statement, or (ii) the 20th day of the month in which the billing statement was received. If any net amount is due to Buyer pursuant to any such billing statement, Seller shall pay such amount to Buyer by the later of (i) ten (10) Business Days after receipt of such billing statement, or (ii) the 20th day of the month in which the billing statement was received. The billing statement shall show the kilowatt-hours of Delivered Energy for such Billing Cycle; the amounts due Seller for that Billing Cycle in respect of (i) the Capacity Payment and the Energy Payment, and (ii) any other amounts due to Seller hereunder; the amounts due Buyer for that Billing Cycle in 21 respect of (iii) the Peak Adjustment Payment, and (iv) any other amounts due to Buyer hereunder; and the data reasonably pertinent to the calculation of the payments due to Seller or Buyer. If meter readings cannot be made during such Billing Cycle (or any portion thereof), the Buyer shall estimate deliveries to it for such period, tender payment accordingly, and make an adjustment for actual purchases in the next Billing Cycle's statement. For purposes of billing for Replacement Capacity and Replacement Energy, the Capacity of the resources providing Replacement Capacity and Replacement Energy shall be determined in accordance with Module E of the MISO Tariff, such determination to be submitted by Seller and Buyer and the Schedule(s) submitted in accordance with Section 2.4 to determine the amount of Replacement Capacity and Replacement Energy supplied and delivered to Buyer. Any amounts not paid by the due date shall be deemed delinquent and shall accrue interest at the Default Interest Rate, such interest to be calculated from and including the due date to but excluding the date the delinquent amount is paid in full. (b) In the event of a dispute as to the amount of any bill, the disputing Party shall notify the other Party of the amount in dispute and Buyer or Seller, as applicable, shall pay to the other Party the undisputed portion of the bill on or prior to the due date therefor, as identified in Section 5.2(a). Buyer or Seller, as applicable, shall pay, with an interest charge computed at the Default Interest Rate, from and including the date payment was due to but excluding the date payment is made, any portion of the disputed amount ultimately found to be proper. In the event of a refund, Buyer or Seller, as applicable, shall pay, with an interest charge computed at the Default Interest Rate, from and including the date the disputed payment was made to but excluding the date the refund payment is made, any refund amount ultimately found to be due to the other Party. (c) Neither the Buyer nor Seller shall have the right to challenge any billing statement rendered or received hereunder after a period of two (2) years from the date such statement was rendered. In the event that any such billing statement depends in whole or in part upon estimated data, this two (2) year limitation period shall be deemed to begin on the first day of the Billing Cycle in which such estimated data is adjusted to actual. 5.3. SCHEDULING Seller shall submit its Generation Offers and Financial Bilateral Transactions in accordance with applicable MISO rules and procedures, as the same may be amended or superseded, and consistent with offering the Facility in the MISO day-ahead market for dispatch as a must-run generation unit. The current version of such rules and procedures are attached hereto as Exhibit H. 22 ARTICLE VI: FORCE MAJEURE 6.1. CONDITIONS OF EXCUSE FROM PERFORMANCE If and to the extent resulting from a Force Majeure a Party hereto is rendered unable to perform any of its obligations under this Agreement (other than obligations of such Party to pay money when such money is due), that Party shall be excused, except as specifically provided elsewhere in this Agreement, from whatever performance is prevented by the Force Majeure to the extent so prevented, provided that: (a) The Party claiming excuse gives the other Party prompt written notice describing how the event qualifies as a Force Majeure; (b) The permitted suspension of performance is of no greater scope and of no longer duration than is required by the Force Majeure; provided, however, that performance under this Agreement shall only be excused for longer than one (1) year by reason of any particular Force Majeure if Seller first complies with subsection (e) below; (c) No obligations of a Party hereto under this Agreement which arose and accrued before the Force Majeure are excused as a result of the Force Majeure; (d) A Party's performance may be excused due to Force Majeure only for so long as such Party claiming Force Majeure is exercising commercially reasonable efforts consistent with Good Utility Practices to eliminate or ameliorate the Force Majeure condition; and (e) Seller shall, within sixty (60) days of the occurrence of a Force Majeure affecting Seller's performance under this Agreement that Seller reasonably anticipates will last more than twelve (12) months after the commencement thereof, deliver to Buyer a detailed plan for the remedy of the Force Majeure condition, which plan shall include: (i) a detailed specification of Seller's proposal (including a timetable) to remedy the Force Majeure condition and restore the Facility to maximum attainable operating status, and (ii) Seller's decision as to whether it will commence supplying and delivering Replacement Capacity and Replacement Energy after the sixth (6th) month of the Force Majeure if the Force Majeure condition has not been remedied; provided, however, that, if Seller decides to provide Replacement Capacity and Replacement Energy after the sixth (6th) month of the Force Majeure, Seller must provide both Replacement Capacity and Replacement Energy on a continuous basis until the event that previously constituted the Force Majeure has been remedied. 6.2. NO TERMINATION; EXTENSION OF TERM In no event shall a condition of Force Majeure be grounds for termination of this Agreement, or extend the Term of this Agreement. 23 6.3. ADJUSTMENT PAYMENTS No Peak Adjustment Payment shall be calculated or accrue in favor of Buyer while performance of the Seller is excused pursuant to Section 6.1. ARTICLE VII: EVENTS OF DEFAULT; REMEDIES 7.1. LIST OF DEFAULT EVENTS Except as otherwise provided in this Agreement and subject to the limitations contained in this Section 7.1, Section 7.2 and Section 7.3, a Party shall be entitled to pursue any remedies available to it under generally applicable Laws or under this Agreement upon the occurrence of any of the following events (except as to the event described in Section 7.1(f), for which only Seller shall be entitled to pursue any remedies available to it under generally applicable Laws or under this Agreement): (a) The failure of the other Party to make any undisputed payment due hereunder and such failure shall continue for ten (10) Business Days after written notice demanding such payment is received; (b) In the event the other Party shall cease doing business as a going concern, shall generally not pay its debts as they become due or admit in writing its inability to pay its debts as they become due, shall file a voluntary petition in bankruptcy or shall be adjudicated as bankrupt or insolvent, or shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy code or any other present or future applicable Law, or shall seek or consent to or acquiesce in the appointment of any trustee, receiver, custodian or liquidator of said Party or of all or any substantial part of its properties, or shall make an assignment for the benefit of creditors, or said Party shall take any corporate action to authorize or that is in contemplation of the actions set forth above in this Section 7.1(b); (c) In the event that within thirty (30) days after the commencement of any proceeding against either Party seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy code or any other statute or Law, such proceeding shall not have been dismissed, or if, within thirty (30) days after the appointment without the consent or acquiescence of said Party of any trustee, receiver, custodian or liquidator of said Party or of all or any substantial part of its properties, such appointment shall not have been vacated or stayed on appeal or otherwise, or if, within thirty (30) days after the expiration of any such stay, such appointment shall not have been vacated; (d) Any of the other Party's representations and warranties contained in Article VIII hereof was false or misleading in any material respect when made, unless the fact, circumstance or condition that is the subject of such representation or warranty is 24 made true within thirty (30) days after the defaulting Party has received notice thereof from the non-defaulting Party; (e) A default in performance by a Party of any agreement, undertaking, covenant or other obligation contained in Section 7.2 and Section 7.3, and such default shall continue for ten (10) Business Days after written notice demanding such performance is received; (f) The failure of either Party to provide the other Party's employees, agents, and other representatives reasonable access to test or examine the other Party's Billing Meters after receiving notice to do so by the applicable Party as required under this Agreement; (g) A material default in performance or observance of any other agreement, undertaking, covenant or other material obligation contained in this Agreement by a Party unless, within thirty (30) days after written notice from the non-defaulting Party specifying the nature of such material default, the defaulting Party cures such default or, if such cure cannot reasonably be completed within thirty (30) days and if the defaulting Party within such thirty (30) day period commences, and thereafter proceeds with all due diligence, to cure such default, said period shall be extended for such further period as shall be necessary for the defaulting Party to cure such default with all due diligence, provided that the extended cure period shall not exceed ninety (90) days from the date of the original notice; or (h) Seller or Buyer shall permanently or persistently fail to perform under the terms of this Agreement, such persistent failure continues for a period of thirty (30) days following notice to Seller or Buyer (as appropriate) of such persistent failure and such failure is not due to Force Majeure. If an event of default under Sections 7.1(a), (b), (c) or (e) occurs, the other Party (the "Non-Defaulting Party") shall have (in addition to any remedies available to under generally applicable Laws or under this Agreement) the right (i) to terminate this Agreement and/or (ii) to suspend performance hereunder including without limitation the delivery of Energy; provided, however, that with respect to the circumstances described in Sections 7.1(a) and 7.1(e), Seller's right to suspend performance hereunder, including without limitation the delivery of Energy (but not the right to terminate this Agreement) shall become effective upon the expiration of five (5) Business Days after (iii) written notice demanding payment is received under Section 7.1.(a), or (iv) written notice demanding performance is received under Section 7.1(e), as applicable. 7.2. SELLER'S SECURITY (a) Seller shall provide on the Effective Date, and maintain thereafter throughout the remainder of the Term, security for compliance with its payment obligations under this Agreement, which shall consist of (1) a cash deposit in the amount of $30,000,000, which deposit shall earn interest at the Interest Rate, (2) a corporate guaranty (the "Seller's Guaranty") in the form attached hereto as Exhibit E, from Entergy Corporation, or its Affiliate or successor ("Seller's Guarantor") whose 25 unsecured, senior long-term debt obligations (not supported by third-party credit enhancements) are rated Baa3 or better by Moody's Investment Services, Inc. (or its successor), or BBB- or better by Standard & Poor's Rating Group (or its successor) in the amount of $30,000,000, or (3) a Letter or Letters of Credit in the amount of $30,000,000. (b) A default specified in Section 7.1(a) may not be cured by drawing, or permitting a draw on, the cash deposit, Seller's Guaranty or Letter of Credit, unless the cash deposit, Seller's Guaranty or Letter of Credit is immediately replenished up to the required amount of the cash deposit, Seller's Guaranty or Letter of Credit under Section 7.2(a). (c) If at any time there shall occur a Downgrade Event with respect to Seller's Guarantor or if the rating of the Letter of Credit issuing bank falls below the minimum acceptable level as set forth in the definition of Letter of Credit, then Buyer may require Seller to replace the Seller's Guaranty or Letter of Credit with a Letter of Credit acceptable to the beneficiary in the amount of $30,000,000, and shall be subject to all terms and conditions of this Agreement applicable to a Letter of Credit. In the event Seller shall fail to provide such security within ten (10) Business Days of receipt of written notice, then a breach of this Agreement shall be deemed to have occurred; provided, however, that Seller's obligation to provide a Letter of Credit due to a Downgrade Event with respect to Seller's Guarantor shall be suspended if the unsecured, senior long-term debt obligations (not supported by third-party credit enhancements) of the Seller's Guarantor are restored to a rating of Baa3 or better by Moody's Investment Services, Inc. (or its successor), or BBB- or better by Standard & Poor's Rating Group (or its successor). 7.3. BUYER'S SECURITY (a) Buyer shall provide on the Effective Date, and maintain thereafter throughout the remainder of the Term, security for compliance with its payment obligations under this Agreement, which shall consist of (1) a cash deposit in the amount of $30,000,000, which deposit shall earn interest at the Interest Rate, (2) a corporate guaranty (the "Buyer's Guaranty") in the form attached hereto as Exhibit F, from CMS Energy Corporation, or its Affiliate or successor ("Buyer's Guarantor") whose unsecured, senior long-term debt obligations (not supported by third-party credit enhancements) are rated Baa3 or better by Moody's Investment Services, Inc. (or its successor), or BBB- or better by Standard & Poor's Rating Group (or its successor) in the amount of $30,000,000, or (3) a Letter or Letters of Credit in the amount of $30,000,000. (b) A default specified in Section 7.1(a) may not be cured by drawing, or permitting a draw on, the cash deposit, Buyer's Guaranty or Letter of Credit, unless the cash deposit, Buyer's Guaranty or Letter of Credit is immediately replenished up to the required amount of the cash deposit, Buyer's Guaranty or Letter of Credit under Section 7.3(a). 26 (c) If at any time there shall occur a Downgrade Event with respect to Buyer's Guarantor or if the rating of the Letter of Credit issuing bank falls below the minimum acceptable level as set forth in the definition of Letter of Credit, then Seller may require Buyer to replace the Buyer's Guaranty or Letter of Credit with a Letter of Credit acceptable to the beneficiary in the amount of $30,000,000, and shall be subject to all terms and conditions of this Agreement applicable to a Letter of Credit. In the event Buyer shall fail to provide such security within ten (10) Business Days of receipt of written notice, then a breach of this Agreement shall be deemed to have occurred; provided, however, that Buyer's obligation to provide a Letter of Credit due to a Downgrade Event with respect to Buyer's Guarantor shall be suspended if the unsecured, senior long-term debt obligations (not supported by third-party credit enhancements) of the Buyer's Guarantor are restored to a rating of Baa3 or better by Moody's Investment Services, Inc. (or its successor), or BBB- or better by Standard & Poor's Rating Group (or its successor). 7.4. NO CONSEQUENTIAL DAMAGES In actions arising under Section 7.1 of this Agreement, and in all other claims arising under this Agreement by either Party against the other Party, neither Seller nor the Buyer shall be liable to the other for indirect, special, incidental, or consequential damages, except as to the indemnification obligations of the Parties under Article IX for the indirect, special, or consequential damages of third parties. ARTICLE VIII: REPRESENTATIONS AND WARRANTIES 8.1. REPRESENTATIONS AND WARRANTIES OF BUYER Buyer makes the following representations and warranties to Seller, each of which is true and correct as of the Effective Date: (a) Buyer is a corporation duly organized and in active status under the Laws of the State of Michigan. (b) Buyer has all corporate power and authority to enter into and perform this Agreement and to carry out the transactions contemplated herein. (c) Buyer's execution, delivery and performance of this Agreement have been duly authorized by, and are in accordance with, its articles of incorporation and by-laws; this Agreement has been duly executed and delivered for it by the signatory so authorized; and this Agreement constitutes its legal, valid, and binding obligation, enforceable against it in accordance with the terms hereof. (d) Buyer's execution, delivery and performance of this Agreement (i) will not result in a breach or violation of, or constitute a default under, any Authorization, or any contract, lease or other agreement or instrument to which it is a party, or by which it or its properties may be bound or affected; and (ii) does not require any 27 Authorization, or the consent, authorization or notification of any other Person, or any other action by or with respect to any other Person (except for Authorizations and consents or authorizations of other Persons already obtained, notifications already delivered, or other actions already taken). (e) No suit, action or arbitration, or legal, administrative or other proceeding is pending or has been threatened against Buyer that would affect the validity or enforceability of this Agreement or the ability of Buyer to perform its obligations hereunder in any material respect, or that would, if adversely determined, have a material adverse effect on the business or financial condition of Buyer. There are no bankruptcy, insolvency, reorganization, receivership or other arrangement proceedings pending against or being contemplated by Buyer, or, to Buyer's knowledge, threatened against it. (f) Buyer is not in breach of, in default under, or in violation of, any applicable Law, or the provisions of any Authorization, or in breach of, in default under, or in violation of, any provision of any promissory note, indenture or any evidence of indebtedness or security therefor, lease, contract, or other agreement by which it is bound, except for any such breaches, defaults or violations which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business or financial condition of Buyer or its ability to perform its obligations hereunder. 8.2. REPRESENTATIONS AND WARRANTIES OF SELLER Seller makes the following representations and warranties to Buyer, each of which is true as of the Effective Date: (a) Seller is a limited liability company duly organized and in good standing under the Laws of the State of Delaware and qualified to do business in the State of Michigan. (b) Seller has all limited liability company power and authority to enter into and perform this Agreement and to carry out the transactions contemplated herein. (c) Seller's execution, delivery and performance of this Agreement have been duly authorized by, and are in accordance with, its certificate of formation and operating agreement; this Agreement has been duly executed and delivered for it by the signatory so authorized; and this Agreement constitutes Seller's legal, valid and binding obligation, enforceable against it in accordance with the terms hereof. (d) Seller's execution, delivery and performance of this Agreement (i) will not result in a breach or violation of, or constitute a default under, any Authorization, or any contract, lease or other agreement or instrument to which it is a party, or by which it or its properties may be bound or affected; and (ii) does not require any Authorization, or the consent, authorization or notification of any other Person, or any other action by or with respect to any other Person (except for Authorizations and consents or authorizations of other Persons already obtained, notifications 28 already delivered, or other actions already taken). (e) No suit, action or arbitration, or legal, administrative or other proceeding is pending or has been threatened against Seller that would affect the validity or enforceability of this Agreement or the ability of Seller to perform its obligations hereunder in any material respect, or that would, if adversely determined, have a material adverse effect on the business or financial condition of Seller. There are no bankruptcy, insolvency, reorganization, receivership or other arrangement proceedings pending against or being contemplated by Seller, or, to Seller's knowledge, threatened against it. (f) Seller is not in breach of, in default under, or in violation of, any applicable Law, or the provisions of any Authorization, or in breach of, in default under, or in violation of, any provision of any promissory note, indenture or any evidence of indebtedness or security therefor, lease, contract, or other agreement by which it is bound, except for any such breaches, defaults or violations which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the business or financial condition of Seller or its ability to perform its obligations hereunder. ARTICLE IX: INDEMNITY AND LIMITATION OF LIABILITY 9.1. TITLE AND RISK OF LOSS Title to and risk of loss related to the Capacity, Energy or Ancillary Services shall transfer from Seller to Buyer at the Delivery Point (or Alternate Delivery Point, if applicable). Seller warrants that it will deliver to Buyer the Capacity, Energy and Ancillary Services free and clear of all liens, security interests, claims and encumbrances or any interest therein or thereto by any Person arising prior to the Delivery Point (or Alternate Delivery Point, if applicable). 9.2. INDEMNIFICATION (a) Each Party shall indemnify, defend and hold harmless the other Party from and against any Claims related to, or arising under, this Agreement and arising from or out of any event, circumstance, act or incident first occurring or existing during the period when control and title to Energy, Capacity and Ancillary Services is vested in such Party as provided in Section 9.1. Each Party shall indemnify, defend and hold harmless the other Party against any charges imposed by Governing Authority for which such Party is responsible. (b) Notwithstanding any language to the contrary in this Agreement, neither Party shall have liability to the other Party with respect to provision of advice, consultation, proposals or recommendations by the first Party's personnel or representatives to the second Party whether occasioned by comments or requests of or by the second Party or by the negligent acts or omissions of employees or representatives of the first Party or otherwise, and the second Party shall 29 indemnify the first Party and hold harmless the first Party from and against losses, damages, costs or liabilities arising therefrom. (c) Each Party shall promptly notify the other Party of the assertion of any Claim against which such other Party may be required to provide indemnity hereunder and shall give such other Party an opportunity to defend such Claim. These indemnification provisions are for the protection of the Parties hereto only and shall not establish, of themselves, any liability to third parties. 9.3. NO PARTNERSHIP The Parties do not by this Agreement effect a joint undertaking and do not intend to create any joint or several obligations to third parties. Neither this Agreement nor any transaction hereunder, shall be construed to create a new entity, such as a partnership or a joint venture, or constitute an agency or employment relationship. Neither Party shall be under the control of or be deemed to control the other Party, and no Party shall have the right or power to bind any other Party. 9.4. RESPONSIBILITY FOR EMPLOYEES The Parties agree that, as between themselves, each Party shall be responsible for the acts and omissions of, and any claims by and compensation to, its employees and agents, irrespective of any limitation on the amount or type of damages, compensation or benefits payable by or for such Party under workers' or workmen's compensation acts, disability benefit acts or other employee benefit acts; provided, however, that the foregoing is not intended to create third-party beneficiary rights in any Person not a Party to this Agreement. Each Party shall indemnify the other Party from and against all liabilities, Claims, damages, suits, fines or judgments, including reasonable attorneys' fees and defense fees, disbursements and expenses, for injury or death to third persons and damage to or destruction of property of third persons, to the extent caused by such Party's employees or agents. ARTICLE X: TERM 10.1. TERM Subject to the terms and conditions of this Agreement, including the final approval of the Michigan Public Service Commission ("MPSC"), this Agreement shall commence on the Effective Date and, unless terminated earlier as expressly provided herein, shall continue in effect until 11:59:59 p.m. (EST) on the Fifteenth (15th) anniversary of the Effective Date (the "Termination Date"). 10.2. TERMINATION If the NRC does not grant the application for renewal of Operating License No. DPR-20 for the Facility for an additional twenty years as set forth in NRC Docket No. 50-255, the Termination Date shall be March 24, 2011 and neither Party shall have any further 30 obligations hereunder except for those obligations which survive such termination. Promptly following Seller's determination that operation of the Facility has become materially and economically adverse such that continued operation of the Facility is no longer feasible, prudent and/or sustainable, Seller shall provide twelve (12) months' written notice to Buyer (or longer notice if commercially feasible under the circumstances) that Seller will permanently retire the Facility at the expiration of that notice period (unless twelve (12) months' notice is not commercially feasible under the circumstances, in which case Seller shall provide such notice as is commercially feasible under the circumstances). This Agreement will terminate at the time specified in such notice which will become the Termination Date, and neither Party shall have any further obligations hereunder except for those obligations which survive such termination. 10.3. EFFECT OF TERMINATION Termination of this Agreement shall not terminate the rights or duties of either Party hereunder with respect to any obligations due to be performed on or before the effective date of termination. Without limitation of the foregoing, Article IX, Article XI and Article XIV shall survive the termination of this Agreement. ARTICLE XI: RECORDS 11.1. INSPECTION OF RECORDS Buyer and Seller shall maintain, to the extent applicable, for a period of not less than seven (7) years from the date of preparation thereof complete and accurate records of: (a) all measurements by Billing Meters of Delivered Energy pursuant to this Agreement, (b) real and reactive power production for each hour, changes in operating status, scheduled outages and any unusual conditions found during inspections, and (c) all other data and information necessary to calculate payments as provided in this Agreement, including invoices, receipts, charts, printouts, and other materials and documents. Subject to limitations imposed by applicable Law, Seller or Buyer, or their respective representatives shall be permitted to inspect such records upon request during normal business hours and copies of such records shall be provided, if requested, at the requesting Party's expense, within thirty (30) days of such request. ARTICLE XII: ADMINISTRATIVE COMMITTEE 12.1. PURPOSE From time to time various administrative and technical matters may arise in connection with the terms and conditions of this Agreement which will require the cooperation and consultation of the Parties and the exchange of information. As a means of providing for such cooperation, consultation and exchange, an Administrative Committee is hereby established with the functions described in Section 12.4. However, the Administrative Committee shall not (a) have the authority to amend this Agreement, or (b) diminish in 31 any manner the authority or responsibility of either Party as set forth in the various sections of this Agreement. 12.2. MEMBERSHIP The Administrative Committee shall have two (2) members. Within sixty (60) days after execution of this Agreement, each Party shall designate its representative on the Administrative Committee and shall promptly give written notice thereof to the other Party. Thereafter, each Party shall promptly give written notice to the other Party of any change in the designation of its representative on the Administrative Committee. All actions taken by the Administrative Committee must be approved by both members. 12.3. MEETINGS Meetings as are reasonably required may be called by either member with as much advance notice as is practicable. Meetings may be attended by other representatives of the Parties. 12.4. FUNCTIONS The Administrative Committee shall have the following functions: 1. Provide liaison between the Parties at the management level and exchange information with respect to significant matters arising under this Agreement. 2. Appoint ad hoc committees, the members of which need not be members of the Administrative Committee, as necessary to perform detailed work and conduct studies regarding matters requiring investigation. 3. Review, discuss and attempt to resolve disputes arising under this Agreement; provided, nothing herein shall limit the provisions of Section 17.1. 4. Provide liaison between the Parties concerning the status of and operation of the Facility. 12.5. EXPENSES Each Party shall be responsible for the salary and out-of-pocket expenses of its representative and its other attendees. All other expenses incurred in connection with the performance by the Administrative Committee of its functions shall be allocated and paid as determined by the Administrative Committee. ARTICLE XIII: NOTICES 13.1. NOTICES IN WRITING All notices or other communications which are required or permitted under this Agreement shall be effective if they are in writing and delivered personally or by certified mail (postage prepaid and return receipt requested), reputable overnight delivery service, 32 or telecopy or other confirmable form of electronic delivery, to the following address (except as to notices which are required by this Agreement to be delivered to a Party's Administrative Committee representative or to Buyer's Merchant Operations Center, which shall be delivered to such Party's Administrative Committee representative or the Buyer's Merchant Operations Center, as the case may be): (a) if to Seller: c/o Entergy Northeast 440 Hamilton Avenue White Plains, NY 10601 With a copy to: c/o ENTERGY 100 First Stamford Place Stamford, CT 06902 (b) if to the Buyer: Consumers Energy Company 1945 W. Parnall Road Jackson, MI 49201 Attention: William E. Garrity (c) or to such other person or address as the addressee may have specified in a notice duly given to the sender as provided herein. 13.2. DATE OF NOTIFICATION All notices or communications duly delivered or mailed and postmarked to a Party hereto as provided in Section 13.1 shall be effective as of the date of receipt. 13.3. ORAL NOTICE IN EMERGENCY Notwithstanding the provisions of Section 13.1, any notice required hereunder with respect to an occurrence or event requiring immediate attention may be made orally, by telephone or otherwise, provided such notice shall be confirmed in writing promptly thereafter. Each Party shall make any such oral notice directly to the Administrative Committee representative of the other Party. ARTICLE XIV: CONFIDENTIALITY 14.1. NON-DISCLOSURE TO THIRD PARTIES Except in any proceeding to approve or enforce this Agreement, Seller and Buyer will not disclose to any third person (including any of Seller's personnel engaged in electricity market related activity, but excluding each Party's employees, lenders, counsel, accountants or advisors who have a need to know such information and have agreed to keep such items confidential) without the prior written consent of the other Party which shall not be unreasonably withheld: (a) the terms or conditions of this Agreement or any other agreement between the Parties required hereby or referred to herein; or (b) any confidential or proprietary information or data, whether oral or written, received from the 33 other Party. 14.2. DISCLOSURE PERMITTED Notwithstanding Section 14.1, Seller or Buyer may disclose: (a) such information as may be required by any applicable Law, regulation, or governmental order, including a requirement, regulation or order of the MPSC; (b) such information as may reasonably be required by any operator of the Facility, or by independent accountants, attorneys, credit rating agency representatives, other professional consultants, or prospective lenders or investors, subject to reasonable procedures and other safeguards to protect the confidentiality of the information disclosed; (c) any information which is or becomes publicly known, other than by breach of this Agreement by the receiving Party; (d) information which becomes available to the receiving Party hereunder without restriction from a third party; (e) information which is at any time developed by the receiving Party independently of any disclosures hereunder; or (f) such information regarding the terms of this Agreement as such Party deems necessary to enable it to comply with the Securities Exchange Act of 1934, as amended, or the rules, regulations and forms of the Securities and Exchange Commission issued thereunder, the rules of the New York Stock Exchange, or the rules, regulations or orders of the FERC. In addition, the Buyer or Seller may use the confidential information in connection with their respective dealings with Governing Authorities of competent jurisdiction. In connection with any such use, the Buyer or Seller, as applicable, agrees to request confidential treatment of the information. 14.3. SURVIVAL OF CONFIDENTIALITY The provisions of this Article XIV shall survive the Termination Date (or any earlier termination of this Agreement) for a period of five (5) years. ARTICLE XV: INSURANCE 15.1. COVERAGE AND AMOUNTS OF SELLER AND BUYER. During the Term, Seller and Buyer shall procure, pay premiums for and maintain in full force and effect the insurance coverages described below. (a) Worker's Compensation Insurance as required by the Laws of the State of Michigan, and employer's liability insurance with limits established by state or federal Law, if applicable. This policy is to be endorsed to include a Waiver of Subrogation in favor of the Buyer or Seller, as the case may be. (b) Commercial General Liability Insurance, including coverage for: (i) premises/operations, (ii) independent contractor, (iii) products and completed operations, (iv) broad form contractual liability, (v) broad form property damage, (vi) explosion, collapse and underground damage exclusion deletion, and (vii) personal injury, all with limits of not less than $25,000,000 each occurrence and in the aggregate. Such coverage can be made up of a combination of primary (or 34 in lieu thereof, self-insurance of no more than $10,000,000) and excess coverage policies. (c) Comprehensive Vehicle Liability Insurance, covering all vehicles and automobiles whether owned, leased, or rented when used by such Party in connection with performance of this Agreement and including coverage for bodily injury and property damage in an amount not less than $1,000,000 per accident. (d) Notwithstanding the foregoing, Seller or Buyer may self-insure to meet the minimum insurance requirements of Sections 15.1(a) through 15.1(c) to the extent it maintains a self-insurance program; provided that Seller's or Buyer's, as the case may be (or the Seller's Guarantor or Buyer's Guarantor, as the case may be) senior secured debt meets the rating specified in Section 7.2(a)(2) or 7.3(a)(2) and that its self-insurance program meets minimum insurance requirements under Sections 15.1(a) through 15.1(c). For any period of time that Seller or Buyer, as the case may be (or Seller's Guarantor or Buyer's Guarantor, as the case may be) senior secured debt is unrated, the Party shall comply with the insurance requirements applicable to it under Sections 15.1(a) through 15.1(c). In the event that a Party is permitted to self-insure pursuant to this Section 15.1(d), it shall notify the other Party that it meets the minimum insurance requirement in a manner consistent with that specified in this Article XV. (e) On the Effective Date, and thereafter from time to time at the request of a Party, the other Party shall provide certificates of insurance from insurance companies having a Best rating of A minus or better confirming that the insurance coverages required herein are maintained. Such certificates shall provide that the other Party be given thirty (30) days' prior written notice by the insurer, or its authorized representative, of any cancellation and ten (10) days' prior written notice due to cancellation for non-payment of premiums in any required coverage provided by such insurer as evidenced by the certificates. In addition, each Party agrees to provide notice to the other Party of any material change in the insurance coverages or policies required hereby. 15.2. COVERAGE FOR FULL TERM All required coverages shall remain in full force and effect during the Term. Buyer's and Seller's liability under this Agreement shall not be limited to or by the insurance coverage required in this Article XV. ARTICLE XVI: ASSIGNMENT 16.1. BINDING EFFECT This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assignees. 35 16.2. GENERAL Except as provided in this Article XVI, neither Party shall assign or otherwise convey any of its right, title, or interest under this Agreement without the prior written consent of the other Party hereto (which consent shall not be unreasonably withheld or delayed). Seller shall not be permitted to assign this Agreement to any Person unless such Person also acquires all or substantially all of Seller's interest in the Facility. Any assignment or delegation made without required consent shall be null and void. 16.3. ASSIGNMENT TO AN AFFILIATE Notwithstanding Section 16.2, each Party shall have the right to assign all or a portion of its rights or obligations under this Agreement to an Affiliate without the consent of the other Party, and such Affiliate to which this Agreement has been assigned shall have the right to further assign the Agreement back to assigning Party without the consent of the other Party; provided, however that (a) the assigning Party shall provide written notice of such assignment to the other Party and the assuming Affiliate agrees in writing to assume all obligations under this Agreement, (b) the assignee can document its financial strength is no worse than that of the assignor, or the assignee will provide credit support from an entity with financial strength no worse than that of the assignor, and (c) any security requirements then in effect pursuant to Article VII remain effective following the assignment, or are replaced with equivalent security to the reasonable satisfaction of the non-assigning Party. In the event of an assignment to an Affiliate pursuant to this section, the Parties agree that the assignor is not released from any and all further obligations under this Agreement. 16.4. ASSIGNMENT TO LENDERS Seller shall have the right to assign all or a portion of its rights or obligations under this Agreement to any lender providing financing for Seller's acquisition of the Facility as collateral security for obligations under the financing documents entered into with such lenders provided that: (a) Seller first provides Buyer with written notice of not less than sixty (60) days of such collateral assignment; and (b) Buyer consents to the form of collateral assignment and related documentation. ARTICLE XVII: MISCELLANEOUS 17.1. DISPUTE RESOLUTION If a dispute arises between the Parties relating to this Agreement except with respect to the matters set forth in Sections 7.1(a), (b), (c) or (e), the following procedure shall be followed except that either Party may seek injunctive relief from a court where appropriate in order to maintain the status quo while this procedure is being followed. (a) The Parties shall promptly hold a meeting, attended by persons with decision-making authority regarding the dispute, to attempt in good faith to negotiate a 36 resolution of the dispute; provided, however, that no such meeting shall be deemed to vitiate or reduce the obligations or liabilities of the Parties hereunder or be deemed a waiver of a Party hereof of any remedies to which such Party would otherwise be entitled hereunder. (b) If, within thirty (30) days following such meeting, the Parties have not succeeded in negotiating a resolution of the dispute, they agree to submit the dispute to binding arbitration in accordance with the Center for Public Resources Rules for Non-Administered Arbitration of Business Disputes, by a neutral arbitrator to be mutually selected by the Parties. The cost of the arbitrator shall be borne by the Parties, and the Parties shall equally bear the costs of such arbitration. If the Parties are unable to agree upon an arbitrator within thirty (30) days, the Parties may then petition the Circuit Court of Jackson County, Michigan to appoint the arbitrator. (c) In the event the Circuit Court appoints an arbitrator, arbitration shall take place in a mutually acceptable location in the State of Michigan. Otherwise the location for arbitration shall be mutually agreed to by the Parties. In either case the substantive and procedural law of the State of Michigan shall apply to the proceedings. Equitable remedies shall be available in any arbitration. Punitive damages shall not be awarded. The written decision of the arbitrator shall be binding on the Parties and the Parties hereby agree to execute all necessary documents, including releases and subrogation agreements as necessary in order to conclude the matter upon the arbitrator rendering a final award. This Section is subject to the Federal Arbitration Act, 9 USCA Section 1 et seq. and judgment upon the award, if any, may be entered by any court having jurisdiction thereof. 17.2. RECORDING TELEPHONE CONVERSATIONS Each Party agrees that the other Party or its representatives may record any or all telephone conversations between representatives of the two Parties pursuant to or relating to this Agreement and will advise the other Party that the conversation is being recorded. Seller is hereby advised that telephone conversations with Buyer's personnel relating to Articles II, IV and V are routinely recorded. Each Party further agrees that such recorded telephone conversations shall not be deemed inadmissible in any arbitration proceeding or court of law by virtue of the recorded nature of the conversations or any authority or lack of authority to make such recording. Each Party hereby waives any objection to the introduction of such recorded telephone conversations as evidence in any arbitration proceeding or court of law to the extent such objections are based on the recorded nature of such conversations or the authority or lack of authority to make such recording. 17.3. COMPLIANCE WITH LAWS Each Party shall at all times conform to all applicable Laws. Each Party shall give all required notices, shall procure and maintain all necessary Authorizations, governmental permits, licenses and inspections necessary for its performance of this Agreement, and shall pay all charges and fees in connection therewith. 37 17.4. TAXES AND OTHER CHARGES (a) Seller's Taxes. Seller is liable for and shall pay, or cause to be paid, or reimburse Buyer if Buyer has paid, all Taxes applicable to any transaction arising out of this Agreement prior to the Delivery Point on the sale of Energy, Capacity or Ancillary Services to Buyer. Seller shall indemnify, defend and hold harmless Buyer from any Claims for such Taxes applicable prior to the Delivery Point. (b) Buyer's Taxes. Buyer is liable for and shall pay, or cause to be paid, or reimburse Seller if Seller has paid, all Taxes applicable to any transaction arising out of this Agreement at or after the Delivery Point on the purchase by Buyer of Energy, Capacity or Ancillary Services. Buyer shall indemnify, defend and hold harmless Seller from any Claims for such Taxes applicable at or after the Delivery Point. (c) Certificate of Tax Exemption. Either Party, upon written request of the other, shall provide a certificate of exemption or other reasonably satisfactory evidence of exemption if either Party is exempt from Taxes. 17.5. FUTURE ATTRIBUTES In the event that, at any time during the Term, a change in Law occurs that causes capability of the Facility as in existence on the date hereof to become a tradable attribute (e.g., emission credit, renewable energy credit, environmental credit, "Green" credit, etc.) or otherwise to have a market value, Buyer shall be entitled to one hundred percent (100%) of such tradable attribute and the benefits of such attribute until the tenth (10th) anniversary of the Effective Date and thereafter fifty percent (50%) until the Termination Date (with the other fifty percent (50%) belonging to Seller), and the Parties shall in good faith negotiate to reflect such allocation to Buyer at no additional cost to Buyer. Seller agrees to execute a separate agreement to transfer to Buyer any revenue, or any other benefit received by Seller for Buyer's tradable attributes and to execute all documents and agreements and take all steps necessary to permit Buyer to market Buyer's tradable attributes. Seller shall be entitled to all attributes and benefits arising from an Uprate. 17.6. FINANCIAL TRANSMISSION RIGHTS Buyer shall be entitled to all financial transmission rights or other rights and benefits with the Transmission Provider associated with the Capacity, Energy and Ancillary Services being purchased hereunder. Seller shall cooperate in good faith with Buyer to ensure that such financial transmission rights and other rights and benefits are assigned and transferred to Buyer at no additional cost to Buyer. 38 17.7. GOVERNING LAW; VENUE This Agreement shall be governed by and construed in accordance with the law of the State of Michigan (without giving effect to conflict of law principles) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies. THE PARTIES HERETO AGREE THAT VENUE IN ANY AND ALL ACTIONS AND PROCEEDINGS RELATED TO THE SUBJECT MATTER OF THIS AGREEMENT SHALL BE IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MICHIGAN. THE FOREGOING COURT SHALL HAVE EXCLUSIVE JURISDICTION FOR SUCH PURPOSES, AND THE PARTIES HERETO IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF SUCH COURT AND IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING. SERVICE OF PROCESS MAY BE MADE IN ANY MANNER RECOGNIZED BY SUCH COURT. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 17.8. ENTIRE AGREEMENT; AMENDMENT This Agreement constitutes the entire agreement between the Parties pertaining to the subject matter of this Agreement, and supersedes and terminates any letters of intent and all prior and contemporaneous agreements, understandings, negotiations and discussions with the Parties, whether oral or written, regarding said subject matter, and there are no warranties, representations or other agreements between the Parties in connection with the subject matter of this Agreement, except as specifically set forth in this Agreement. NEITHER PARTY TO THIS AGREEMENT MAKES ANY REPRESENTATION, WARRANTY OR INDEMNITY, EXPRESS OR IMPLIED, TO THE OTHER PARTY TO THIS AGREEMENT EXCEPT FOR THE REPRESENTATIONS, WARRANTIES AND INDEMNITIES EXPRESSLY SET FORTH IN THIS AGREEMENT. No amendment, supplement, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the Party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision of this Agreement, whether or not similar, nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 17.9. NO IMPLIED WAIVER The failure or delay of any Party hereto to enforce at any time any of the provisions of this Agreement, or to require at any time performance of the other Party hereto of any of the provisions hereof, shall neither be construed to be a waiver of such provisions nor affect the validity of this Agreement or any part hereof or the right of such Party thereafter to enforce each and every such provision. 39 17.10. SEVERABILITY Any provision of this Agreement declared or rendered unlawful by any Governing Authority or deemed unlawful because of a statutory change (individually or collectively, such events referred to as a "Regulatory Event") will not otherwise affect the remaining lawful obligations that arise under this Agreement; provided, however, that if a Regulatory Event occurs, the Parties shall use their best efforts to reform this Agreement in order to give effect to the original intention of the Parties. Additionally, in the event any Governing Authority imposes on Seller, the Facility or any Energy, Capacity or Ancillary Services delivered to Buyer by Seller pursuant to this Agreement any Tax or other payment obligation related to the ownership or operation of the Facility and not otherwise generally imposed on electric generation facilities under the jurisdiction of such Governing Authority, or energy, capacity or ancillary services produced thereby, then in such case the Energy Payment applicable to a Billing Cycle shall be increased to reflect fifty percent (50%) of such Tax or other payment obligation to the extent paid by Seller in such Billing Cycle. The Energy Payment applicable to a Billing Cycle shall be increased to reflect one-twelfth of 50% of any incremental real property Taxes paid with respect to any spent nuclear fuel storage facility located in Charlevoix County, Michigan owned by Seller, to the extent such Taxes with respect to such facility exceed $50,000 in the year of the Effective Date, or in subsequent years, $50,000 plus 4% per year. 17.11. NO EXCLUSIVITY/DEDICATION OF ASSETS This Agreement is not intended to be an exclusive arrangement between Buyer and Seller. No undertaking by a Party hereto to the other Party hereto under any provision of this Agreement shall constitute the dedication of that Party's assets or any portion thereof to the other Party or to the public. 17.12. EXPENSES Each Party shall pay the fees and expenses of its respective counsel, accountants, brokers, consultants, investment bankers and other experts incident to the negotiation and preparation of this Agreement. 17.13. COUNTERPARTS This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 17.14. SURVIVAL The applicable provisions of this Agreement shall continue in effect after the termination of this Agreement, to the extent necessary to provide for final billing and adjustment, and to make other appropriate settlements hereunder. Those provisions hereof that by their express terms are intended to survive this Agreement shall so survive for the periods indicated. 40 17.15. THIRD-PARTY BENEFICIARY Nothing expressed or referenced in this Agreement shall be construed to give any Person other than the Parties hereto any legal or equitable right, remedy or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and the provisions and conditions hereof are for the sole and exclusive benefit of the Parties hereto, and their permitted successors and permitted assigns. 17.16. MOBILE-SIERRA It is the intent of the Parties that the rates and all other terms and conditions of the services provided hereunder shall not be subject to change under Sections 205 or 206 of the Federal Power Act of 1935, as amended, 16 U.S.C. Section 791 et seq. (or any successor legislation), without the consent of both Parties. Each of the Parties hereto agrees not to unilaterally file with the FERC a change in the rates, terms or conditions of this Agreement. Moreover, absent agreement of all Parties to a proposed change, the standard of review for changes to any rate, term or condition of this Agreement proposed by a non-Party or the FERC or any other Governing Authority acting sua sponte shall be the "public interest" standard of review set forth in United Gas Pipe Line Co. v. Mobile Gas Services Corp., 350 U.S. 332 (1956) and Federal Power Commission v. Sierra Pacific Power Co., 350 U.S. 348 (1956). To the extent that the FERC adopts specific language that parties must incorporate into agreements in order to bind FERC, third parties and themselves to a public interest standard of review, the Parties hereby incorporate such language herein by reference. 17.17. FORWARD CONTRACT The Parties acknowledge and agree that this Agreement, the transactions contemplated hereby, and any security instrument that may be provided by either Party under Article VII shall each, and together, constitute one and the same "forward contract" within the meaning of the United Stated Bankruptcy Code (the "Code"), and Seller, Seller's Guarantor, Buyer, and the Buyer's Guarantor shall each constitute a "forward contract merchant" under the Code. 41 IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be executed on its behalf by its duly authorized officer as of the date first set forth above. ENTERGY NUCLEAR PALISADES, LLC By: /s/ Gary J. Taylor ------------------------------------ Gary J. Taylor President CONSUMERS ENERGY COMPANY By: /s/ Robert A. Fenech ------------------------------------ Robert A. Fenech Senior Vice President Nuclear, Fossil & Hydro Operations 42 EXHIBIT A CAPACITY AND ENERGY CHARGES(1)
CAPACITY ENERGY CHARGE (IN TOTAL YEAR CHARGE (IN $/MWH) $/MWH) (IN $/MWH) - ---- ----------------- ----------------- ---------- 2007 [to be inserted] [to be inserted] $43.50 2008 [to be inserted] [to be inserted] $44.00 2009 [to be inserted] [to be inserted] $44.50 2010 [to be inserted] [to be inserted] $45.75 2011 [to be inserted] [to be inserted] $47.00 2012 [to be inserted] [to be inserted] $48.25 2013 [to be inserted] [to be inserted] $49.00 2014 [to be inserted] [to be inserted] $50.00 2015 [to be inserted] [to be inserted] $51.00 2016 [to be inserted] [to be inserted] $52.50 2017 [to be inserted] [to be inserted] $54.00 2018 [to be inserted] [to be inserted] $55.50 2019 [to be inserted] [to be inserted] $57.00 2020 [to be inserted] [to be inserted] $58.50 2021 [to be inserted] [to be inserted] $60.00 2022 [to be inserted] [to be inserted] $61.50 2023 [to be inserted] [to be inserted] $63.00
For each month during the Term, the Capacity Charge and the Energy Charge set forth above shall be adjusted by multiplying the amount of such charge by the applicable Shaping Factor for such month as set forth on Exhibit C hereto. - ---------- (1) Within three weeks of the execution of this Agreement, Buyer shall provide a notice to Seller that shall allocate the Total value for each year in the above table as between the Capacity Charge and the Energy Charge, and this Exhibit A shall be modified accordingly. EXHIBIT B BUYER'S CAPACITY AMOUNT For any given month during the Term, the Buyer's Capacity Amount shall be as set forth in the table below:
COLUMN A COLUMN B COLUMN C COLUMN D MONTH CAPACITY OF THE FACILITY BUYER'S ENTITLEMENT BUYER'S CAPACITY AMOUNT - -------- ------------------------ ------------------- ----------------------- January 813 MW 100% 813 MW February 811 MW 100% 811 MW March 809 MW 100% 809 MW April 801 MW 100% 801 MW May 794 MW 100% 794 MW June 786 MW 100% 786 MW July 781 MW 100% 781 MW August 778 MW 100% 778 MW September 783 MW 100% 783 MW October 800 MW 100% 800 MW November 809 MW 100% 809 MW December 810 MW 100% 810 MW
Column A - Depicts the month of the year. Column B - Will be updated over the Term of this Agreement to reflect the Capacity of the Facility, as determined in accordance with ECAR 4 (or with the Effective Capacity Requirements, if applicable). Column C - Indicates the Buyer's Entitlement of the output of the Facility. This value will be updated only after an Uprate (as defined in 1.1 (83)). The Buyer's Entitlement shall be determined in accordance with Section 2.6 as follows (both values shall be determined or measured for the same month): Capacity of the Facility before the Uprate Capability Test ------------------------------------------------------------------------- Capacity of the Facility resulting from the Uprate Capability Test Column D - Shall be the product of Column B and Column C, as those values may be revised over the Term of this Agreement. EXHIBIT C CAPACITY AND ENERGY CHARGE SHAPING FACTORS
MONTH ON-PEAK HOURS OFF-PEAK HOURS - ----- ------------- -------------- January 1.350 0.8275 February 1.200 0.6750 March 1.140 0.6750 April 1.140 0.6750 May 1.200 0.6750 June 1.400 0.8250 July 1.500 0.9500 August 1.500 0.9500 September 1.400 0.8275 October 1.140 0.6750 November 1.140 0.6750 December 1.200 0.6750
EXHIBIT G PEAK ADJUSTMENT PAYMENT During the months of July and August for each Calendar Year of the Term (the "Peak Period"), Seller must achieve a specified capacity factor for the Facility as set forth in this Exhibit G. If Seller fails to achieve such a capacity factor for the specified period, Seller shall be responsible for a payment to Buyer (the "Peak Adjustment Payment") calculated in accordance with the following formula: (TEM - DEM) x $20/MWh where TEM = Targeted Energy for the month, which shall be the product of: (i) the applicable Buyer's Capacity Amount for the month; (ii) the number of hours in the month; and (iii) the Target Capacity Factor. DEM = Delivered Energy for the month. If the resulting product of the above formula is positive, then such positive amount shall equal the Peak Adjustment Payment for the month in question and Seller shall pay that Peak Adjustment Payment in accordance with this Exhibit G. If the resulting product is zero or negative, then Seller shall owe no Peak Adjustment Payment to Buyer for the month. For purposes of calculating the TEM and DEM, the determination of the applicable number of hours in a month and the Delivered Energy for a month shall exclude (a) hours within an Summer Maintenance Outage that occurs in that month and Energy delivered during those outage hours, and (b) hours for which a damages amount has been paid by, or is due from, Seller pursuant to Section 2.4(d) or Section 4.1(b). If it is determined that Seller owes Buyer a Peak Adjustment Payment for a particular month, Buyer shall have the right to either (a) demand payment of that Peak Adjustment Payment in writing, in which case Seller shall make such payment to Buyer within five (5) Business Days after the written demand for payment is received, or (b) reduce the payments otherwise due to Seller under this Agreement for the Billing Cycle that includes the month in question by the amount of the Peak Adjustment Payment. EX-10.(C) 4 k06781exv10wxcy.txt STOCK PURCHASE AGREEMENT EXHIBIT (10)(c) STOCK PURCHASE AGREEMENT DATED AS OF JULY 24, 2006 BY AND AMONG CONSUMERS ENERGY COMPANY, CMS MIDLAND, INC., CMS MIDLAND HOLDINGS COMPANY AND MCV POWER PARTNERS, INC. TABLE OF CONTENTS
Section Page - ------- ---- ARTICLE I SALE AND PURCHASE OF SHARES 1.1 Sale and Purchase of CMS Holdings Shares....................... 1 1.2 Purchase Price................................................. 2 1.3 Closing........................................................ 2 1.4 Closing Deliveries............................................. 2 1.5 Purchase Agreement Fee......................................... 2 1.6 Pre-Closing Restructuring...................................... 3 ARTICLE II WARRANTIES OF SELLER 2.1 Organization and Qualification................................. 3 2.2 Capitalization; Right and Title to Interests................... 3 2.3 Authority; Non-Contravention; Statutory Approvals.............. 3 2.4 Litigation..................................................... 4 2.5 Absence of Defaults............................................ 4 2.6 Composite PPA, etc............................................. 5 ARTICLE III WARRANTIES OF THE COMPANIES 3.1 Organization and Qualification; Authority; Non-Contravention; Statutory Approvals............................................ 5 3.2 Capitalization................................................. 6 3.3 Financial Statements........................................... 7 3.4 Absence of Certain Changes or Events........................... 8 3.5 Tax Matters.................................................... 8 3.6 Litigation..................................................... 10 3.7 Compliance with Laws........................................... 11 3.8 Employee Benefits.............................................. 11 3.9 Permits........................................................ 13 3.10 Tangible Property.............................................. 13 3.11 Contracts...................................................... 14 3.12 Environmental Matters.......................................... 16 3.13 Labor Matters.................................................. 17 3.14 Intellectual Property.......................................... 17 3.15 Affiliate Contracts............................................ 17 3.16 Insurance...................................................... 18 3.17 Brokers and Finders............................................ 18 3.18 Absence of Certain Matters and Notices......................... 18
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Section Page - ------- ---- ARTICLE IV WARRANTIES OF PURCHASER 4.1 Organization and Qualification................................. 18 4.2 Authority; Non-Contravention; Statutory Approvals.............. 18 4.3 Financing...................................................... 19 4.4 Litigation..................................................... 20 4.5 Investment Intention; Sufficient Investment Experience; Independent Investigation...................................... 20 4.6 Brokers and Finders............................................ 20 4.7 Qualified for Permits.......................................... 20 4.8 No Knowledge of Seller or Company Breach....................... 21 4.9 Environmental Review........................................... 21 ARTICLE V COVENANTS 5.1 Conduct of Business............................................ 21 5.2 Regulatory Approvals........................................... 23 5.3 Required Consents.............................................. 23 5.4 Access......................................................... 23 5.5 Publicity...................................................... 24 5.6 Fees and Expenses.............................................. 24 5.7 Indemnification of Directors and Officers...................... 25 5.8 Termination of Affiliate Contracts............................. 26 5.9 Further Assurances............................................. 26 5.10 Supplements to Company Disclosure Schedules.................... 26 5.11 Change of Name................................................. 27 5.12 Financing...................................................... 27 5.13 Termination of Tax Sharing Agreements.......................... 28 5.14 Tax Matters.................................................... 28 5.15 Unwind Agreement............................................... 32 5.16 Books and Records.............................................. 32 5.17 FIRPTA Certificate............................................. 33 ARTICLE VI CONDITIONS TO CLOSING 6.1 Conditions to the Obligations of the Parties................... 33 6.2 Conditions to the Obligation of Purchaser...................... 33 6.3 Conditions to the Obligation of Seller......................... 34 ARTICLE VII TERMINATION 7.1 Termination.................................................... 35 7.2 Effect of Termination.......................................... 36
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Section Page - ------- ---- ARTICLE VIII LIMITS OF LIABILITY 8.1 Non-Survival of Warranties, Covenants and Agreements........... 36 8.2 Seller Indemnity............................................... 38 8.3 Purchaser Indemnity............................................ 38 8.4 Claim Process.................................................. 38 8.5 Limitations on Claims.......................................... 40 8.6 Characterization of Payments for Damages....................... 42 ARTICLE IX DEFINITIONS AND INTERPRETATION 9.1 Defined Terms.................................................. 42 9.2 Definitions.................................................... 44 9.3 Interpretation................................................. 50 ARTICLE X GENERAL PROVISIONS 10.1 Notices........................................................ 50 10.2 Binding Effect................................................. 52 10.3 Assignment; Successors; Third-Party Beneficiaries.............. 52 10.4 Amendment; Waivers; etc........................................ 53 10.5 Entire Agreement............................................... 53 10.6 Severability................................................... 53 10.7 Counterparts................................................... 54 10.8 Governing Law.................................................. 54 10.9 Jurisdiction................................................... 54 10.10 Limitation on Damages.......................................... 54 10.11 Enforcement.................................................... 54 10.12 No Right of Set-Off............................................ 54
iii SCHEDULES Schedule 1.6 Pre-Closing Restructuring Schedule 2.3(b) Seller Required Consents Schedule 2.3(c) Seller Required Statutory Approvals Schedule 2.6 Composite PPA Schedule 3.1(a) Organization and Qualification Schedule 3.1(c) Company Required Consents Schedule 3.1(d) Company Required Statutory Approvals Schedule 3.2(a) Partnership and Owner Participant Schedule 3.2(c) Agreements regarding Shares and Equity Interests Schedule 3.4(a) Absence of Certain Changes or Events Schedule 3.5 Tax Matters Schedule 3.6 Litigation Schedule 3.7(a) Compliance with Laws Schedule 3.8(a) Employee Benefits - A Schedule 3.8(f) Employee Benefits - B Schedule 3.9(a) Permits Schedule 3.10 Tangible Property Schedule 3.11(a) Contracts - A Schedule 3.11(b)(i) Contracts - B Schedule 3.11(b)(ii) Contracts - C Schedule 3.12 Environmental Matters Schedule 3.13(a) Labor Matters - A Schedule 3.13(b) Labor Matters - B Schedule 3.15 Affiliate Contracts Schedule 3.16 Insurance Schedule 4.2(b) Purchaser Required Consents Schedule 4.2(c) Purchaser Required Statutory Approvals Schedule 4.3 Financing Arrangements Schedule 4.4 Purchaser Litigation Schedule 5.1 Conduct of Business Schedule 5.4 Access iv SCHEDULES Schedule 5.8 Termination of Affiliate Contracts Schedule 6.1(a) Statutory Approvals Schedule 6.2(e) Resignations of Certain Officers & Directors Schedule 9.2(a) Knowledge Groups Schedule 9.2(b) Purchaser Knowledge Group Schedule 9.2(c) Unwind Agreement EXHIBITS Exhibit A SEPA Payment Agreement Exhibit B Disclosure Letter Exhibit C Instrument of Assignment v STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of July 24, 2006, is entered into by and among Consumers Energy Company (formerly known as Consumers Power Company), a Michigan corporation ("Seller"), CMS Midland, Inc., a Michigan corporation ("CMS Midland"), CMS Midland Holdings Company, a Michigan corporation ("CMS Holdings"; each of CMS Midland and CMS Holdings is also referred to herein as a "Company" and, collectively, the "Companies"), and MCV Power Partners, Inc., a Delaware corporation ("Purchaser"). Each of Purchaser, the Companies and Seller are sometimes referred to individually herein as a "Party" and collectively as the "Parties". Certain other terms are defined throughout this Agreement and in Section 9.2 hereof. WITNESSETH: WHEREAS Seller owns all the issued and outstanding Equity Interests in (i) CMS Midland and (ii) CMS Holdings; WHEREAS CMS Holdings is a limited partner holding a 46.3818658% equity interest in First Midland Limited Partnership, a Delaware limited partnership (the "Owner Participant"), which entered into the Trust Agreement and certain documents related thereto in respect of the sale and leaseback of a 75.46053% undivided ownership interest in the MCV Facility; WHEREAS pursuant to the Amended and Restated Lease Agreement dated as of June 1, 1990, as amended, between the Lessor and Midland Cogeneration Venture Limited Partnership, a Michigan limited partnership (the "Partnership"), as lessee, the Lessor leases such undivided ownership interest in the MCV Facility to the Partnership; WHEREAS CMS Midland is a general partner holding a 49% (+/- 0.001%) equity interest in the Partnership as set forth in the MCV Partnership Agreement; WHEREAS prior the Closing, Seller shall effect the transactions contemplated in Schedule 1.6 of the Disclosure Letter; and WHEREAS Purchaser desires to purchase from Seller, and Seller desires to sell to Purchaser, all the CMS Holdings Shares (and indirectly the Equity Interest in CMS Midland), upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants and warranties made in this Agreement and of the mutual benefits to be derived therefrom, the Parties agree as follows: ARTICLE I SALE AND PURCHASE OF SHARES 1.1 Sale and Purchase of CMS Holdings Shares. Upon the terms and subject to the conditions of this Agreement, at the Closing, Purchaser shall purchase from Seller, and Seller shall sell to Purchaser, good and valid title free and clear of any Liens except those created by Purchaser arising out of ownership of the Shares by Purchaser, all the CMS Holdings Shares (the "Transaction"). 1.2 Purchase Price. The consideration to be paid by Purchaser in respect of the purchase of CMS Holdings Shares (and indirectly the Equity Interest in CMS Midland) shall be an amount in cash equal to Sixty Million Five Hundred Thousand DOLLARS ($60,500,000) (the "Purchase Price"). 1.3 Closing. The closing of the Transaction (the "Closing") shall take place at the offices of Sidley Austin LLP, 787 Seventh Avenue, New York, New York, at 10:00 a.m., local time, as soon as practicable, but in any event not later than the second (2nd) Business Day immediately following the date on which the last of the conditions contained in Article VI is fulfilled or waived (except for those conditions which by their nature can only be fulfilled at the Closing, but subject to the fulfillment or waiver of such conditions), or at such other place, time and date (the "Closing Date") as the Parties may agree. 1.4 Closing Deliveries. At the Closing: (a) Seller shall deliver to Purchaser one or more stock certificates evidencing the CMS Holdings Shares, duly endorsed in blank or accompanied by powers duly executed in blank in proper form for transfer. (b) Purchaser shall pay, or cause to be paid, to Seller an amount in cash equal to the Purchase Price, for the CMS Holdings Shares so delivered by Seller, by wire transfer of immediately available funds to the bank account or accounts designated by Seller prior to the Closing and application of amounts previously delivered to Seller pursuant to Section 1.5. (c) Seller shall deliver to Purchaser the SEPA Payment Agreement executed by Purchaser substantially in the form of Exhibit A hereto (the "SEPA Payment Agreement"). (d) Each Party shall deliver the certificates, agreements, instruments and other documents required to be delivered by it pursuant to Article VI hereof. 1.5 Purchase Agreement Fee. Simultaneously with the execution of this Agreement and in consideration of the time expended and expense incurred by Seller and the Companies in negotiating and executing this Agreement, Purchaser shall pay to Seller an amount in cash equal to five percent (5%) of the Purchase Price (such amount, plus any interest deemed earned thereon from (and including) the date hereof to (but excluding) the Closing Date or date of earlier termination of this Agreement being referred to as the "Purchase Agreement Fee"), in each case by wire transfer of immediately available funds to the bank account or accounts that have been designated by Seller. The Purchase Agreement Fee will be deemed to earn interest at the Specified Rate. Notwithstanding any provision to the contrary contained herein, the Purchase Agreement Fee shall be nonrefundable by Seller except in the event that this Agreement is duly and validly terminated in accordance with Section 7.1(b) or Section 7.1(c) hereof or Purchaser duly and validly terminates this Agreement in accordance with Section 7.1(d) hereof, in which event Seller shall pay to Purchaser, no later than ten (10) Business Days following the effective date of such termination, an amount equal to the Purchase Agreement Fee received by it pursuant to this Section 1.5 hereof by wire transfer of immediately available funds 2 to the bank account or accounts designated by Purchaser. The Purchase Agreement Fee received by Seller shall be credited against (x) the Purchase Price payable to Seller at the Closing in accordance with Section 1.4 hereof or (y) if this Agreement is terminated (other than pursuant to Section 7.1(b) or 7.1(d) hereof), the Damages, if any owed by Purchaser to Seller arising out of breach of this Agreement by Purchaser. The Purchase Agreement Fee shall not be deemed to be a liquidated damages payment for any breach by Purchaser of this Agreement. 1.6 Pre-Closing Restructuring. Prior to Closing, Seller shall effect or cause to be effected the transactions contemplated in Schedule 1.6 of the Disclosure Letter. Such transactions are intended to be a "reorganization" under Section 368(a) of the Code, and the Parties agree to prepare, or cause to be prepared, their respective Tax Returns in a manner consistent with such intent. ARTICLE II WARRANTIES OF SELLER Except as disclosed in the Disclosure Letter attached hereto as Exhibit B (the "Disclosure Letter"), Seller warrants, as to itself only, to Purchaser as follows in this Article II: 2.1 Organization and Qualification. Seller is a corporation duly formed and validly existing under the laws of Michigan, and has full corporate power and authority to own, lease and operate its assets and properties and to conduct its business as presently conducted, except where the failure to have such power and authority would not reasonably be expected to have, individually or in the aggregate, a Seller Material Adverse Effect. 2.2 Capitalization; Right and Title to Interests. As of the date hereof, the authorized capital stock of (i) CMS Midland consists of 100,000 shares of common stock, of which 110 shares are issued and outstanding ("CMS Midland Shares"), and (ii) CMS Holdings consists of 60,000 shares of common stock, of which 10 shares are issued and outstanding (the "CMS Holdings Shares" and, together with the CMS Midland Shares, the "Shares"). As of the date hereof, CMS Midland Shares constitutes all of the issued and outstanding Equity Interests in CMS Midland. As of the date hereof, CMS Holdings Shares constitutes all of the issued and outstanding Equity Interests in CMS Holdings. Seller is the record and beneficial holder of and has good and valid title to CMS Holdings Shares and, as of the date hereof, the CMS Midland Shares. Seller holds, and upon completion of the transactions referred to and as contemplated herein, Purchaser shall have acquired from Seller, good and valid title to the CMS Holdings Shares free and clear of any and all Liens. 2.3 Authority; Non-Contravention; Statutory Approvals. (a) Authority. Seller has full corporate power and authority to enter into this Agreement and, subject to receipt of the Seller Required Statutory Approvals, to consummate the transactions contemplated hereby. The execution, delivery and performance by Seller of this Agreement and the consummation by Seller of the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action on the part of Seller, and no other corporate proceedings or approvals on the part of Seller are necessary to authorize this 3 Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Seller and, assuming the due authorization, execution and delivery hereof by each other Party, constitutes the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as limited by Laws affecting the enforcement of creditors' rights generally or by general equitable principles. (b) Non-Contravention. The execution and delivery of this Agreement by Seller does not, and the consummation of the transactions contemplated hereby will not, result in any violation or breach of or default (with or without notice or lapse of time or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation under (any such violation, breach, default, right of termination, cancellation or acceleration is referred to herein as a "Violation"), or result in the creation of any Lien upon any of the properties or assets of Seller pursuant to any provision of (i) subject to obtaining the third-party Consents set forth in Schedule 2.3(b) of the Disclosure Letter (the "Seller Required Consents"), the Organizational Documents of Seller; (ii) subject to obtaining the Seller Required Consents, any lease, mortgage, indenture, note, bond, deed of trust, or other instrument or agreement of any kind to which it is a party or by which it may be bound; or (iii) subject to obtaining the Seller Required Statutory Approvals, any Law, Permit or Governmental Order applicable to it other than in the case of clauses (i), (ii) and (iii) any such Violation or Lien which would not reasonably be expected to have, individually or in the aggregate, a Seller Material Adverse Effect or a Company Material Adverse Effect. (c) Statutory Approvals. Except for the filings or approvals (i) set forth in Schedule 2.3(c) of the Disclosure Letter (the "Seller Required Statutory Approvals") and (ii) as may be required due to the regulatory or other status of Purchaser, no Consent of any Governmental Entity is required to be made or obtained by Seller in connection with the execution and delivery of this Agreement or the consummation by Seller of the transactions contemplated hereby, except those which the failure to obtain or make would not reasonably be expected to have, individually or in the aggregate, a Seller Material Adverse Effect or a Company Material Adverse Effect. 2.4 Litigation. There is no action, claim, suit or proceeding at law or in equity pending or, to the Knowledge of Seller, threatened against Seller that, if adversely determined, would reasonably be expected to have, individually or in the aggregate, a Seller Material Adverse Effect. Subject to obtaining the Seller Required Statutory Approvals, there are no Governmental Orders of or by any Governmental Entity applicable to Seller except for such that would not reasonably be expected to have, individually or in the aggregate, a Seller Material Adverse Effect or a Company Material Adverse Effect. 2.5 Absence of Defaults. To the Knowledge of Seller, Seller is not in breach or default under any Affiliate Contract to which Seller is a party, which breach or default has not been waived, and, to the Knowledge of Seller, no other party to any such Affiliate Contract to which Seller is a party is in breach or default, except in each case, for any breach or default that would not reasonably be expected to have, individually or in the aggregate, a Seller Material Adverse Effect or a Company Material Adverse Effect. 4 2.6 Composite PPA, etc. Attached as Exhibit B to the Consumers Consent is a true, correct and complete conformed composite copy of the Power Purchase Agreement dated as of July 17, 1986, as amended, between Seller and MCV as in effect on June 1, 1990 (the "Composite PPA"). Other than as reflected in the Composite PPA or as may have been effected by the Consumers Consent, the RCA, the RDA, the parties' course of dealing under Section 7(c) of the PPA and the matters listed on Schedule 2.6 of the Disclosure Letter, there are no written amendments, modifications, additions, deletions or other changes to the Composite PPA. Prior to and after the Commercial Operation Date (as defined in the Composite PPA), Seller and the Partnership have entered into various agreements or undertakings including the Composite PPA and its amendments related to charges for capacity and energy purchased from the Partnership and delivered or made available to Seller (the "C&E Agreements"). The C&E Agreements taken collectively constitute a settlement or resolution of claims relating to the purchase of energy and capacity purported to be covered thereby for all periods from the Commerical Operation Date through and including September 15, 2007 and do not act to suspend or otherwise delay or toll Seller's rights to seek recovery from the Partnership with respect to such energy and capacity purchases. ARTICLE III WARRANTIES OF THE COMPANIES Except as disclosed in the Disclosure Letter and except for any actions permitted by Section 5.1 of this Agreement, each of the Companies warrants to Purchaser as follows in this Article III: 3.1 Organization and Qualification; Authority; Non-Contravention; Statutory Approvals. (a) Organization and Qualification. Each of the Companies, the Partnership and the Owner Participant is duly formed, validly existing and in good standing (to the extent such concepts are recognized under applicable Law) under the laws of the jurisdiction of its formation, has, as applicable, full corporate, partnership, limited liability company or similar power and authority to own, lease and operate its assets and properties and to conduct its business as presently conducted and is duly qualified to do business and is in good standing (to the extent such concepts are recognized under applicable Law) as a foreign corporation, partnership or limited liability company, as applicable, in all jurisdictions in which such qualification is necessary under applicable Law as a result of the conduct of its business or the ownership of its properties, except for those jurisdictions where failure to have such power and authority or to be so qualified or in good standing would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. Except as set forth on Schedule 3.1(a) of the Disclosure Letter, neither the Companies nor, to the Knowledge of CMS Midland, the Partnership has been qualified to do business in any jurisdiction as a foreign corporation, partnership or limited liability company, as the case may be. True and complete copies of the Organizational Documents of each Company, the Partnership and the Owner Participant have been made available to the Purchaser. 5 (b) Authority. Each of the Companies has full entity power and authority to enter into this Agreement and, subject to receipt of the Seller Required Statutory Approvals, to consummate the transactions contemplated hereby. The execution, delivery and performance by each of the Companies of this Agreement and the consummation by each of the Companies of the transactions contemplated hereby have been duly and validly authorized by all requisite entity action on the part of each of Companies, and no other corporate proceedings or approvals on the part of the Companies are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of the Companies and, assuming the due authorization, execution and delivery hereof by each other Party, constitutes the legal, valid and binding obligation of each of the Companies, enforceable against each of the Companies in accordance with its terms, except as limited by Laws affecting the enforcement of creditors' rights generally or by general equitable principles. (c) Non-Contravention. The execution and delivery of this Agreement by each of the Companies does not, and the consummation of the transactions contemplated hereby will not, result in any Violation or result in the creation of any Lien upon any of the properties or assets of each of the Companies or, to the Knowledge of CMS Midland, the Partnership, and to the Knowledge of CMS Holdings, the Owner Participant and the Lessor, pursuant to any provision of (i) subject to obtaining the third-party Consents set forth in Schedule 3.1(c) of the Disclosure Letter (the "Company Required Consents"), the Organizational Documents of the Company, the Partnership, the Owner Participant or the Lessor, as applicable; (ii) subject to obtaining the Company Required Consents, any lease, mortgage, indenture, note, bond, deed of trust, or other instrument or agreement of any kind to which the Company, the Partnership, the Owner Participant or the Lessor, as applicable, is a party or by which any of the Company, the Partnership, the Owner Participant or the Lessor, as applicable, may be bound; or (iii) subject to obtaining the Seller Required Statutory Approvals and the Company Required Statutory Approvals, any Law, Permit or Governmental Order applicable to each of the Companies, the Partnership, the Owner Participant or the Lessor, as applicable, other than in the case of clauses (i), (ii) and (iii) any such Violation or Lien which would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. (d) Statutory Approvals. Except for the filings or approvals (i) set forth in Schedule 3.1(d) of the Disclosure Letter (the "Company Required Statutory Approvals") and (ii) as may be required due to the regulatory or corporate status of Purchaser, no Consent of any Governmental Entity is required to be made or obtained by each of the Companies or, to the Knowledge of CMS Midland, the Partnership, and to the Knowledge of CMS Holdings, the Owner Participant and the Lessor, in connection with the execution and delivery of this Agreement or the consummation by each of the Companies of the transactions contemplated hereby, except those which the failure to obtain or make would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. 3.2 Capitalization. (a) Partnership and Owner Participant. Schedule 3.2(a) of the Disclosure Letter sets forth for each of the Partnership and the Owner Participant as of the date hereof and as of the Closing Date: (i) its jurisdiction of formation; (ii) its authorized Equity Interests; (iii) the number of its issued and outstanding Equity Interests; and (iv) the Equity Interests that are 6 owned by the applicable Company. The Equity Interests of the Partnership that are owned by CMS Midland and the Equity Interests of the Owner Participant that are owned by CMS Holdings, as applicable, as set forth on Schedule 3.2(a) of the Disclosure Letter, are owned free and clear of all Liens, other than Permitted Liens and other than as set forth in Schedule 3.2(a) of the Disclosure Letter. All the issued and outstanding Equity Interests in each of the Partnership and the Owner Participant that are owned, directly or indirectly, by a Company, as applicable, have been duly authorized and are validly issued and fully paid. (b) No Other Equity Interests. As of the date hereof, CMS Midland does not own, directly or indirectly, any Equity Interests in any Person other than the Partnership and, as of the Closing Date, CMS Midland will not own, directly or indirectly, any Equity Interests in any Person other than the Partnership, Alanna Holdings Corporation and Alanna Corporation. As of the date hereof, CMS Holdings does not own, directly or indirectly, any Equity Interests in any Person other than the Owner Participant and, as of the Closing Date, CMS Holdings will not own, directly or indirectly, any Equity Interests in any Person other than the Owner Participant, CMS Midland, Alanna Holdings Corporation and Alanna Corporation. (c) Agreements with Respect to Shares and Equity Interests of the Companies, the Partnership and the Owner Participant. Except (i) as set forth in Schedule 3.2(c) of the Disclosure Letter, (ii) as provided for in the Organizational Documents of the applicable Company, the Partnership or the Owner Participant, as applicable, and (iii) as contemplated by Schedule 1.6 of the Disclosure Letter, there are no: (A) subscriptions, options, warrants, calls, conversion, exchange, purchase right or other written contracts, rights, agreements or commitments of any kind obligating, directly or indirectly, a Company, or, to the Knowledge of CMS Midland, the Partnership or, to the Knowledge of CMS Holdings, the Owner Participant, as applicable, to issue, transfer, sell or otherwise dispose of, or cause to be issued, transferred, sold or otherwise disposed of, any Equity Interests of a Company, the Partnership or the Owner Participant, as applicable, or any securities convertible into or exchangeable for any such Equity Interests; or (B) agreements, partnership agreements, voting trusts, proxies or other agreements, instruments or understandings to which a Company or, to the Knowledge of CMS Midland, the Partnership or, to the Knowledge of CMS Holdings, the Owner Participant, as applicable, is a party, or by which a Company or, to the Knowledge of CMS Midland, the Partnership or, to the Knowledge of CMS Holdings, the Owner Participant, as applicable, is bound, relating to the voting of any shares of the Equity Interests of a Company, the Partnership or the Owner Participant, as applicable. 3.3 Financial Statements. (a) Each of the Companies has provided to Purchaser copies of its respective unaudited balance sheet as of December 31, 2005 and unaudited statement of operations for the year ended December 31, 2005 (each a "Company Financial Statement" and collectively, the "Companies Financial Statements"). Each Company Financial Statement, as applicable, fairly presents in all material respects the consolidated assets and liabilities of such Company, as the case may be, as of December 31, 2005 and the results of such Company's operations, as the case may be, for the period indicated (except for normal and recurring year-end adjustments and for the absence of notes). 7 (b) To the Knowledge of CMS Midland, the audited consolidated balance sheet of the Partnership as of December 31, 2005 and the audited consolidated statements of operations, statements of partners' equity and comprehensive income (loss) and statements of cash flows of the Partnership for the year ended December 31, 2005 (including the notes thereto) included in the Partnership's Form 10-K for the fiscal year ended December 31, 2005 filed with the U.S. Securities and Exchange Commission fairly present in all material respects the consolidated assets and liabilities of the Partnership as of December 31, 2005 and the results of its operations and cash flows for the year ended December 31, 2005. (c) To the Knowledge of CMS Holdings, the audited statement of assets, liabilities and capital of the Owner Participant as of December 31, 2004 and the audited statement of revenues and expenses, statement of cash flows and statement of changes in partners' deficit for the year ended December 31, 2004 (including the notes thereto) fairly present in all material respects the assets, liabilities and capital of the Owner Participant as of December 31, 2004 and its revenues and expenses, changes in partners' deficit and cash flows for the year ended December 31, 2004. 3.4 Absence of Certain Changes or Events. (a) Since December 31, 2005 through the date hereof, except as set forth in Schedule 3.4(a) of the Disclosure Letter, other than in connection with the transactions contemplated by this Agreement, none of the Companies, or, to the Knowledge of CMS Midland, the Partnership or, to the Knowledge of CMS Holdings, the Owner Participant, has taken any of the actions set forth in Sections 5.1(b) through 5.1(o), that, if taken after the execution and delivery of this Agreement, would require the consent of Purchaser pursuant to Section 5.1. (b) Since December 31, 2005, there has not been any change, event, condition, circumstance, occurrence or development which has had, or would reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. (c) Since December 31, 2005, none of the Companies or, to the Knowledge of CMS Midland, the Partnership or, to the Knowledge of CMS Holdings, the Owner Participant has incurred any Liability that has had, or would reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. 3.5 Tax Matters. Except as set forth in Schedule 3.5 of the Disclosure Letter, to the Knowledge of the applicable Company: (a) each of the Companies and, to the Knowledge of CMS Midland, the Partnership and, to the Knowledge of CMS Holdings, the Owner Participant has (A) filed (or there has been filed on its behalf) with the appropriate Governmental Entity all Material Tax Returns required to have been filed by it, (B) duly paid in full or made provision in accordance with GAAP (or there has been paid or provision has been made on its behalf) for the payment of all Taxes shown as due or payable on such Tax Returns and (C) included in such Tax Returns all required disclosure of positions taken therein that could give rise to a substantial underpayment penalty under Section 6662 of the Internal Revenue Code of 1986, as amended (the "Code"), or any similar provision of state, local or other Tax law; 8 (b) no Material audits or other administrative proceedings or court proceedings are, as of the date hereof, pending with regard to any Taxes or Tax Returns of each of the Companies and, to the Knowledge of CMS Midland, the Partnership and, to the Knowledge of CMS Holdings, the Owner Participant and none of the Companies and, to the Knowledge of CMS Midland, the Partnership or, to the Knowledge of CMS Holdings, the Owner Participant has been informed in writing or orally of the planned commencement of any such audit or administrative proceedings; (c) neither the Companies nor to the Knowledge of CMS Midland with respect to the Partnership or to the Knowledge of CMS Holdings with respect to the Owner Participant has waived the applicable statute of limitations for the assessment or collection of any Material Taxes; (d) there are no Liens on any assets of any of the Companies or, to the Knowledge of CMS Midland, the Partnership or, to the Knowledge of CMS Holdings, the Owner Participant in connection with the failure to pay any Material Tax, except to the extent of statutory Liens existing for any Taxes accruing but not yet due and payable or which are being contested in good faith by appropriate proceedings and for which adequate reserves have been established; (e) each of the Companies has made available to Purchaser complete and accurate copies of all material income Tax Returns of such Company (or pro forma Tax Returns if such Company was included in a consolidated or combined Tax Return), for the years 2002, 2003, 2004, as filed or subsequently amended; (f) all material Taxes which (i) to the Knowledge of CMS Midland, the Partnership, (ii) to the Knowledge of CMS Holdings, the Owner Participant or (iii) the Companies have been required to collect or withhold have been duly collected or withheld, and to the extent required, have been or will be duly paid when due to the proper Governmental Entity; (g) none of the property of any of the Companies, to the Knowledge of CMS Midland, the Partnership, or, to the Knowledge of CMS Holding, the Owner Participant is (A) subject to a safe harbor lease (pursuant to Section 168(f)(8) of the Code as in effect after the Economic Recovery Tax Act of 1981 and before the Tax Reform Act of 1986) or (B) (other than the existing $200,000,000 of tax exempt pollution control revenue refunding bonds outstanding with respect to the Facility) "tax exempt use property" (within the meaning of Section 168(h) of the Code) or "tax exempt bond financed property" (within the meaning of Section 168(g)(5) of the Code); 9 (h) (i) neither of the Companies, or (ii) to the Knowledge of CMS Midland, the Partnership, or (iii) to the Knowledge of CMS Holding, the Owner Participant has been a party to a transaction that, after the Closing, will cause the Companies, the Partnership or the Owner Participant, as applicable, to recognize gain under either Section 355(d) or 355(e) of the Code; (i) CMS Midland is the "tax matters partner" for the Partnership; (j) no shareholder of the Companies is a foreign person as defined in Section 1445 of the Code; (k) neither of the Companies has any liability for the Taxes of any other Person under applicable law, as a transferee or successor, or otherwise; (l) no written claim is pending by any authority in a jurisdiction where any of the Companies, the Partnership (subject to the Knowledge of CMS Midland) or the Owner Participant (subject to the Knowledge of CMS Holdings) does not file Tax Returns that such entity is or may be subject to taxation in that jurisdiction; (m) neither of the Companies has engaged in any transaction that would be reportable pursuant to Treasury Regulation Section 1.6011-4 that has not been properly reported in its Tax Returns; (n) neither of the Companies nor to the Knowledge of CMS Midland with respect to the Partnership or to the Knowledge of CMS Holdings with respect to the Owner Participant will be required (i) to include any amount in income for any taxable period (or portion thereof) beginning after the Closing Date as a result of a change in accounting method for any prior taxable period or pursuant to any agreement with any Governmental Entity or (ii) to include in any taxable period (or portion thereof) beginning after the Closing Date any income that accrued in a prior period but was not recognized in the prior period as a result of the installment method of accounting, the completed contract method of accounting, the long-term contract method of accounting or the cash method of accounting; (o) as of December 31, 2005, the tax basis that CMS Midland had in its equity interest in the Partnership for purposes of Section 731 of the Code was not less than $175,000,000 and the capital account with respect to such equity interest for purposes of Section 704(b) of the Code and the Treasury Regulations thereto was not less than $175,000,000. As of December 31, 2005, the tax basis that CMS Holdings had in its equity interest in the Owner Participant for purposes of Section 731 of the Code was not less than negative $100,000,000 (disregarding the partner's share of partnership liabilities); and (p) as of December 31, 2005, the net operating losses of CMS Midland that were available for a carryforward pursuant to Section 172 of the Code, were not less than $20,000,000. 3.6 Litigation. Except as set forth in Schedule 3.6 of the Disclosure Letter, there is no action, claim, suit or other proceeding at law or in equity pending or, to the Knowledge of the applicable Company, threatened against a Company or affecting the assets or properties of a Company that, if adversely determined, would reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. Except as set forth in Schedule 3.6 of the Disclosure Letter, to the Knowledge of CMS Midland with respect to the 10 Partnership and to the Knowledge of CMS Holdings with respect to the Owner Participant, there is no action, claim, suit or other proceeding at law or in equity pending or threatened against the Partnership or the Owner Participant, as applicable, or affecting its respective assets or properties that, if adversely determined, would reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. 3.7 Compliance with Laws. (a) Except as set forth in Schedule 3.7(a) of the Disclosure Letter, neither of the Companies has been given notice of or been charged with any violation of, or, to the Knowledge of the applicable Company, is in violation of or is under investigation with respect to any violation of, any Law or Governmental Order, except in each case for violations which would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. Except as set forth in Schedule 3.7(a) of the Disclosure Letter, to the Knowledge of CMS Midland with respect to the Partnership and to the Knowledge of CMS Holdings with respect to the Owner Participant, neither the Partnership nor the Owner Participant, as applicable, has been given notice of or been charged with any violation of, or is in violation of or is under investigation with respect to any violation of, any Law or Governmental Order, except for violations which would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. (b) This Section 3.7 does not relate to Tax matters, which are instead the subject of Section 3.5, employee benefits matters, which are instead the subject of Section 3.8, Company Permits, which are instead the subject of Section 3.9, or environmental matters, which are instead the subject of Section 3.12. 3.8 Employee Benefits. (a) Schedule 3.8(a) of the Disclosure Letter contains a list of each material bonus, incentive or deferred compensation, pension, retirement, profit-sharing, savings, employment, consulting, compensation, stock purchase, stock option, phantom stock or other equity-based compensation, severance pay, termination, change-in-control, retention, salary continuation, vacation, sick leave, disability, death benefit, group insurance, hospitalization, medical, dental, life, loan, educational assistance, and other fringe benefit plans, programs, agreements and arrangements maintained, to the Knowledge of CMS Midland, by the Partnership or any trade or business, whether or not incorporated, that together with the Partnership would be deemed a "single employer" within the meaning of Section 4001 of ERISA (an "ERISA Affiliate") for the benefit of any employee or former employee of the Partnership (collectively, the "Partnership Plans"). (b) With respect to each Partnership Plan, the Partnership has provided or made available to Purchaser true and complete copies of the following documents, to the extent applicable: (1) a copy of such Partnership Plan (including all amendments thereto), (2) a copy of the annual report and actuarial report, if required under ERISA or the Code, for the two (2) most recently ended plan years, (3) a copy of the most recent summary plan description, if required under ERISA, (4) if such Partnership Plan is funded through a trust or any third party funding vehicle, a copy of the trust or other funding agreement (including all amendments thereto) and 11 the most recent financial statements, and (5) the most recent determination or opinion letter, as applicable, received from the Internal Revenue Service with respect to such Partnership Plan if it is intended to qualify under Section 401(a) of the Code. (c) To the Knowledge of CMS Midland, each Partnership Plan has been administered in all material respects in compliance with its terms and applicable Law, including ERISA and the Code. To the Knowledge of CMS Midland, there is no pending or threatened legal action, suit or claim relating to the Partnership Plans (other than routine claims for benefits). To the Knowledge of CMS Midland, each Partnership Plan which is intended to qualify under Section 401(a) of the Code is qualified in form and operation and has received a favorable determination letter from the Internal Revenue Service and, to the Knowledge of CMS Midland, no circumstances exist that could be expected to result in the revocation of any such favorable determination or opinion letter, as applicable. To the Knowledge of CMS Midland, each funding vehicle of a Partnership Plan that is intended to be part of a voluntary employees' beneficiary association within the meaning of Section 501(c)(9) of the Code has (A) received an opinion letter from the Internal Revenue Service recognizing its exempt status under Section 501(c)(9) of the Code and (B) filed a timely notice with the Internal Revenue Service pursuant to Section 505(c) of the Code, and, to the Knowledge of CMS Midland, no circumstances exist that could be expected to result in the loss of the exempt status of such funding vehicle under Section 501(c)(9) of the Code. (d) To the Knowledge of CMS Midland, neither the Partnership nor any ERISA Affiliate has ever maintained, contributed to, or had an obligation to contribute to, a plan that is (i) subject to Title IV of ERISA or Section 412 of the Code, (ii) a "multiemployer plan" within the meaning of Section 3(37) of ERISA, (iii) maintained by more than one employer within the meaning of Section 413(c) of the Code, or (iv) a "multiple employer welfare arrangement" within the meaning of Section 3(40) of ERISA. (e) To the Knowledge of CMS Midland, all contributions or premiums to each Partnership Plan required under the terms of such Partnership Plan or applicable Law have been timely made. To the Knowledge of CMS Midland, all Material liabilities or expenses of the Partnership in respect of any Partnership Plan have been properly accrued on the most recent financial statements of the Partnership in compliance with GAAP. (f) Except as set forth in Schedule 3.8(f) of the Disclosure Letter, to the Knowledge of CMS Midland, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (either alone or in combination with another event) (i) entitle any current or former employee or director of the Partnership to any payment or result in any payment becoming due, increase the amount of any compensation due, or result in the acceleration of the time of any payment due to any such person or (ii) increase any benefits otherwise payable under any Partnership Plan or result in the acceleration of the time of payment or vesting of any benefit under a Partnership Plan. (g) To the Knowledge of CMS Midland, no Partnership Plan provides benefits, including without limitation death or medical benefits (whether or not insured), with respect to current or former employees of the Partnership beyond their retirement or other termination of service, other than (i) coverage mandated solely by applicable Law, (ii) death 12 benefits or retirement benefits under any "employee pension benefit plan" within the meaning of Section 3(2) of ERISA, (iii) deferred compensation benefits accrued as liabilities on the books of the Partnership or (iv) benefits the costs of which are borne entirely by the current or former employee or his or her beneficiary. Except as otherwise provided by applicable Law or written Partnership Plan terms, to the Knowledge of CMS Midland, there are no restrictions on the rights of the Partnership to unilaterally amend or terminate any such Partnership Plan at any time without incurring any material liability pursuant to the terms thereof. (h) Neither of the Companies has any liabilities to any employees or with respect to any employee benefit plans. (i) To the Knowledge of CMS Midland, neither the Partnership nor any plan fiduciary of any Partnership Plan has engaged in any transaction in violation of Section 406 of ERISA (for which transaction no exemption exists under Section 408 of ERISA) or in any "prohibited transaction" as defined in Section 4975(c)(1) of the Code (for which no exemption exists under Section 4975(c)(2) or 4975(d) of the Code. 3.9 Permits. (a) Except as set forth in Schedule 3.9(a) of the Disclosure Letter, each of the Companies and, to the Knowledge of CMS Midland, the Partnership and, to the Knowledge of CMS Holdings, the Owner Participant has all Permits that are necessary for it to conduct its operations in the manner in which they are presently conducted, other than any such Permits the failure of which to have would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect (collectively, "Company Permits"). Except as set forth in Schedule 3.9(a) of the Disclosure Letter, each Company Permit held by the applicable Company is in full force and effect other than any failure to be in full force and effect which would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. Except as set forth in Schedule 3.9(a) of the Disclosure Letter, to the Knowledge of CMS Midland with respect to the Partnership and to the Knowledge of CMS Holdings with respect to the Owner Participant, each Company Permit held by the Partnership and the Owner Participant, as applicable, is in full force and effect other than any failure to be in full force and effect which would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. (b) This Section 3.9 does not relate to environmental matters, which are instead the subject of Section 3.12. 3.10 Tangible Property. Except as to CMS Midland as specified in Schedule 3.10 of the Disclosure Letter, neither Company (i) now owns, controls or possesses any tangible property (real or personal), or interest therein, and (ii) has ever owned, controlled or possessed any tangible property (real or personal), except, in each case, such property as is owned, controlled and possessed by the Partnership, the Owner Participant or the Lessor, as the case may be. 13 3.11 Contracts. (a) Set forth in Schedule 3.11(a) of the Disclosure Letter is, as of the date hereof, a list of the following agreements and contracts to which the Companies or, to the Knowledge of CMS Midland, the Partnership or, to the Knowledge of CMS Holdings, the Owner Participant is a party or by which any of their respective properties or assets are bound, other than any insurance policies covering the Companies, the Partnership or the Owner Participant or any of their respective assets (the agreements and contracts set forth in Schedule 3.11(a) of the Disclosure Letter are referred to herein as the "Company Material Contracts" and, as used in this Section 3.11, "Contracting Party" shall refer to any Company, the Partnership or the Owner Participant party to such Company Material Contract): (i) (A) all currently effective MCV Gas Contracts and MCV Gas Transportation Agreements (as each such term is defined in the MCV Partnership Agreement), (B) all currently effective Dow Contracts, other Backup Agreements, Consumers Contracts, Facilities Agreements, Transaction Documents and Financing Documents (as each such term is defined in Appendix A; in each case by trust where there are separate documents for each undivided interest transaction), (C) each assignment to The Dow Chemical Company ("Dow") of an --- interest in any MCV Gas Contract or MCV Transportation Contract and (D) each contract or agreement to which a Company is party in its individual capacity; (ii) all Operating Contracts providing for the payment by or to the Contracting Party in excess of $2,500,000 (the "Agreed Amount") per year, other than (x) any agreements with any Company or the Partnership or the Owner Participant to document certain intercompany loans or (y) any agreements among any Company, the Partnership or the Owner Participant for the provision of services and/or payment of costs, which are terminable by either party thereto upon not more than sixty (60) days' notice; (iii) all Trading Contracts which (A) provide for payment to or from the Contracting Party in excess of the Agreed Amount per year (or its equivalent as of the date of this Agreement in foreign currency if such agreement is denominated in foreign currency) or (B) have a notional amount in excess of the Agreed Amount; (iv) all contracts (other than Operating Contracts) requiring a future capital expenditure by the Contracting Party in excess of the Agreed Amount in any twelve-month period; (v) all contracts or agreements under which the Contracting Party is obligated to sell real or personal property having a value in excess of the Agreed Amount other than in the ordinary course of business; (vi) all shareholders, partnership, voting or similar agreements to which the Partnership or the Owner Participant is a party, by which the Partnership or the Owner Participant is bound or to which the Partnership or the Owner 14 Participant is subject (other than any such agreements of the Partnership or the Owner Participant that is wholly owned, directly or indirectly, by any Company, or by which any such Person is bound); (vii) all contracts or agreements under which the Contracting Party (1) created, incurred, assumed or guaranteed (or may create, incur, assume or guarantee) indebtedness, (2) granted a Lien on its assets, whether tangible or intangible, to secure such indebtedness or (3) extended credit or advanced funds to any Person, in each case, in excess of the Agreed Amount; (viii) all executory contracts for the purchase or sale of any business, corporation, partnership, joint venture, association or other business organization or any division, assets, operating unit or product line thereof which have a purchase or sale price in excess of the Agreed Amount; (ix) to the Knowledge of the applicable Company, all contracts or agreements establishing any joint venture; (x) all agreements that grant a right of first refusal or similar right with respect to (A) any assets of the Contracting Party having a value in excess of the Agreed Amount or (B) any direct or indirect economic interest in the Contracting Party having a value in excess of the Agreed Amount; (xi) any contract or agreement providing for the use of material Intellectual Property which has an annual license payment or fee in excess of $500,000; and (xii) any other agreement not covered in clauses (i) through (xi) above that involves payment by or to the Contracting Party of more than the Agreed Amount annually or twice the Agreed Amount in the aggregate under such agreement, other than those that can be terminated without penalty in excess of 20% of the Agreed Amount to the Contracting Party upon not more than sixty (60) days' notice. (b) Except as set forth in Schedule 3.11(b)(i) of the Disclosure Letter, the Companies have made available to Purchaser complete and correct copies of all Company Material Contracts. Except as set forth in Schedule 3.11(b)(ii) of the Disclosure Letter, each Company Material Contract is (i) to the Knowledge of the applicable Company with respect to Company Material Contracts to which any of the Partnership, the Owner Participant or the Lessor is a party, in full force and effect and (ii) the valid and binding obligation of the Companies or, to the Knowledge of the applicable Company, the Partnership, the Owner Participant and the Lessor, as the case may be, and, to the Knowledge of the applicable Company, of each other party thereto, in each case (x) except as limited by Laws affecting the enforcement of creditors' rights generally or by general equitable principles and (y) with such exceptions as would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. Except as set forth in Schedule 3.11(b)(ii) of the Disclosure Letter, none of the Companies or, to the Knowledge of the applicable Company, the Partnership, 15 the Owner Participant or the Lessor is in breach or default under any Company Material Contract, which breach or default has not been waived, and, to the Knowledge of the applicable Company, no other party to any Company Material Contract is in breach or default, except in each case, for any breach or default that would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. To the Knowledge of CMS Midland, no "Lease Default" or "Lease Event of Default" (as such defined terms are applicable) exists under a Company Material Contract to which the Partnership is a party. 3.12 Environmental Matters. Except as set forth in Schedule 3.12 of the Disclosure Letter, or as would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect: (a) each of the Companies and, to the Knowledge of the applicable Company, the Partnership and the Lessor, are in compliance with all applicable Environmental Laws, including having and complying with all terms and conditions of all Permits required under applicable Environmental Laws or that are necessary for them to conduct their operations in the manner in which they are presently conducted and all such Permits are in full force and effect and not subject to appeal or challenge; (b) none of the Companies or, to the Knowledge of the applicable Company, the Partnership or the Lessor (i) has received from any Governmental Entity any written notice of violation of, alleged violation of, non-compliance with, or Liability or potential Liability pursuant to, any Environmental Law, other than notices with respect to matters that have been resolved and for which any Company or, to the Knowledge of the applicable Company, the Partnership or the Lessor has no further obligations outstanding or (ii) is subject to any outstanding Governmental Order, "consent order" or other agreement with regard to any violation, noncompliance or Liability under any Environmental Law; (c) no judicial proceeding or governmental or administrative action is pending under any applicable Environmental Law or relating to Hazardous Substances to which any Company or, to the Knowledge of the applicable Company, the Partnership or the Lessor is or has been a party; (d) none of the Companies or, to the Knowledge of the applicable Company, the Partnership or the Lessor has received any written notice, claim or demand from any Person, including any Governmental Entity, seeking costs of response, damages or requiring remedial action relating to (i) any Release of Hazardous Substances at, on or beneath any Company's, the Partnership's or the Lessor's current facilities or (ii) a Release of Hazardous Substances at any third party property to which Hazardous Substances generated by any Company, the Partnership or the Lessor were sent for treatment or disposal; and (e) to the Knowledge of the applicable Company, each of the Companies, the Partnership and the Lessor have made available to Purchaser true and correct copies of all material audits, assessments, evaluations and similar reports or documents in their possession relating to the environmental compliance or condition of assets and facilities owned or operated by the Companies, the Partnership or the Lessor. 16 Notwithstanding any of the warranties contained elsewhere in this Agreement, all environmental matters shall be governed exclusively by this Section 3.12. 3.13 Labor Matters. (a) Schedule 3.13(a) of the Disclosure Letter contains a list of all collective bargaining agreements to which any Company or, to the Knowledge of the applicable Company, the Partnership, the Owner Participant or the Lessor is bound. (b) Except as set forth on Schedule 3.13(b) of the Disclosure Letter, no employees of any Company or, to the Knowledge of the applicable Company, the Partnership, the Owner Participant or the Lessor are represented by any labor organization with respect to their employment with the Companies, the Partnership, the Owner Participant or the Lessor, as applicable. (c) To the Knowledge of the applicable Company, there are no Material labor union organizing activities with respect to any employees of any Company, the Partnership, the Owner Participant or the Lessor. (d) Since January 1, 2004, there have been no pending or, to the Knowledge of the applicable Company, threatened unfair labor practices, work stoppages, slowdowns, strikes, lockouts, arbitrations, grievances, or other labor disputes involving employees of any Company, or, to the Knowledge of the applicable Company, the Partnership, the Owner Participant or the Lessor, in each case, that is Material. 3.14 Intellectual Property. Except as would not reasonably be expected to have a Company Material Adverse Effect, (a) each of the Companies and, to the Knowledge of the applicable Company, the Partnership and the Lessor owns, or has the right to use, all patents, patent rights (including patent applications and licenses), know-how, trade secrets, trademarks (including trademark applications), trademark rights, trade names, trade name rights, service marks, service mark rights, copyrights and other proprietary intellectual property rights (collectively, "Intellectual Property") used in and necessary for the conduct of the businesses of the Companies, the Partnership and the Lessor as currently conducted, (b) to the Knowledge of the applicable Company, the use of the Intellectual Property used in the businesses of the Companies, the Partnership and the Lessor as currently conducted does not infringe or otherwise violate the Intellectual Property rights of any third party, (c) to the Knowledge of the applicable Company, no third party is challenging, infringing or otherwise violating any right of any Company, the Partnership and the Lessor in any Intellectual Property necessary for the conduct of the businesses of the Companies, the Partnership and the Lessor as currently conducted, and (d) none of the Companies or, to the Knowledge of the applicable Company, the Partnership and the Lessor has received any written notice of any pending claim that Intellectual Property used in and necessary for the conduct of the businesses of the Companies, the Partnership and the Lessor as currently conducted infringes or otherwise violates the Intellectual Property rights of any third party. 17 3.15 Affiliate Contracts. Schedule 3.15 of the Disclosure Letter contains a true and complete list of each material agreement or contract as of the date hereof between (i) any Company, the Partnership, the Owner Participant or the Lessor, on one hand and (ii) a Seller or any Affiliate thereof (other than the Companies, the Partnership, the Owner Participant or the Lessor) on the other (collectively, the "Affiliate Contracts"). 3.16 Insurance. Set forth on Schedule 3.16 of the Disclosure Letter is a list of all material policies of insurance under which any Company's or, to the Knowledge of CMS Midland, the Partnership's assets or business activities are covered, including for each such policy the type of policy, the name of the insured, the term of the policy, a description of the limits of such policy, the basis of coverage and the deductibles. Except as set forth on Schedule 3.16 of the Disclosure Letter, to the Knowledge of CMS Midland, the Partnership maintains all policies of insurance to the extent required by any applicable Financing Facility, except where the failure to maintain such policies of insurance would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect. 3.17 Brokers and Finders. None of Seller, any Company or, to the Knowledge of the applicable Company, the Partnership or the Owner Participant has entered into any agreement or arrangement entitling any agent, broker, investment banker, financial advisor or other firm or Person to any broker's or finder's fee or any other commission or similar fee payable by any Company in connection with any of the transactions contemplated by this Agreement, except J.P. Morgan Securities Inc., whose fees and expenses are governed by Section 5.6. 3.18 Absence of Certain Matters and Notices. There is no pending matter concerning CMS Holdings that has been referred to an arbitrator pursuant to Article X of the FMLP Partnership Agreement and no Notice of Dispute (as defined in the FMLP Partnership Agreement) concerning CMS Holdings that is pending. ARTICLE IV WARRANTIES OF PURCHASER Except as set forth in the Purchaser Disclosure Schedules, Purchaser warrants to the Company and to each Seller as follows in this Article IV: 4.1 Organization and Qualification. Purchaser is a corporation, duly formed, validly existing and in good standing under the laws of Delaware and has full power and authority to own, lease and operate its assets and properties and to conduct its business as presently conducted. Purchaser is duly qualified to do business and in good standing as a foreign corporation in all jurisdictions in which such qualification is necessary under applicable Law as a result of the conduct of its business or the ownership of its properties, except for those jurisdictions where failure to be so qualified or in good standing would not reasonably be expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect. 4.2 Authority; Non-Contravention; Statutory Approvals. (a) Authority. Purchaser has full corporate power and authority to enter into this Agreement and, subject to receipt of the Purchaser Required Statutory Approvals, to consummate the transactions contemplated hereby. The execution, delivery and performance by 18 Purchaser of this Agreement and the consummation by Purchaser of the transactions contemplated hereby have been duly and validly authorized by all requisite action on the part of Purchaser, and no other proceedings or approvals on the part of Purchaser are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Purchaser and, assuming the due authorization, execution and delivery hereof by each other Party, constitutes the legal, valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as limited by Laws affecting the enforcement of creditors' rights generally or by general equitable principles. (b) Non-Contravention. Except as set forth on Schedule 4.2(b) of the Disclosure Letter, the execution and delivery of this Agreement by Purchaser do not, and the consummation of the transactions contemplated hereby will not, result in any Violation or result in the creation of any Lien upon any of the properties or assets of Purchaser pursuant to any provision of (i) the Organizational Documents of Purchaser; (ii) subject to obtaining the third-party Consents set forth in Schedule 4.2(b) of the Disclosure Letter (the "Purchaser Required Consents"), any lease, mortgage, indenture, note, bond, deed of trust, or other instrument or agreement of any kind to which Purchaser is a party or by which Purchaser may be bound; or (iii) subject to obtaining the Purchaser Required Statutory Approvals, any Law, Permit or Governmental Order applicable to Purchaser, other than in the case of clauses (i), (ii) and (iii) for any such Violation or Lien which would not reasonably be expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect. (c) Statutory Approvals. Except for the filings or approvals (i) set forth in Schedule 4.2(c) of the Disclosure Letter (the "Purchaser Required Statutory Approvals") and (ii) as may be required due to the regulatory or corporate status of Seller or the Companies, no Consent of any Governmental Entity is required to be made or obtained by Purchaser in connection with the execution and delivery of this Agreement or the consummation by Purchaser of the transactions contemplated hereby, except those which the failure to obtain or make would not reasonably be expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect. 4.3 Financing. Purchaser has, and will have at the Closing, available cash and credit capacity, either in its accounts, through binding and enforceable credit arrangements or borrowing facilities or otherwise, (i) to pay the Purchase Price at the Closing, (ii) to pay all fees and expenses required to be paid by Purchaser in connection with the transactions contemplated by this Agreement, pursuant to Section 5.6 or otherwise, and (iii) to perform all of its other obligations hereunder including, without limitation, its obligations under Section 5.12 and the SEPA Payment Agreement (the "Financing Arrangements"), all without any distributions from the Companies and neither of the Companies will be required to assume or become liable for such Financing Arrangements prior to the time immediately following the Closing. A description of the Financing Arrangements is set forth on Schedule 4.3 of the Disclosure Letter. Prior to the date of this Agreement, Purchaser has provided Seller with copies of all documentation relating to the Financing Arrangements, including any commitment letters for any of the foregoing, which Purchaser intends to utilize to make the payments described in this Section 4.3. To the extent that this Agreement must be in a form acceptable to a lender, such lender has approved this Agreement and there are no other material contingencies to the lender's obligations under the Financing Arrangements or otherwise. 19 4.4 Litigation. Except as set forth in Schedule 4.4 of the Disclosure Letter, there is no action, claim, suit or proceeding at law or in equity pending or, to the Knowledge of Purchaser, threatened against Purchaser or any of its Subsidiaries or affecting any of their respective assets or properties that, if adversely determined, would reasonably be expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect. There are no Governmental Orders of or by any Governmental Entity applicable to Purchaser or any of its Subsidiaries except for such that would not reasonably be expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect. 4.5 Investment Intention; Sufficient Investment Experience; Independent Investigation. Purchaser is acquiring the Shares for its own account, for investment purposes only and not with a view to the distribution (as such term is used in Section 2(a)(11) of the United States Securities Act of 1933 (the "Securities Act")) thereof in a manner not permitted by the Securities Act. Purchaser understands that the Shares have not been registered under the Securities Act and, if and to the extent the Securities Act applies, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available and pursuant to registration or qualification (or exemption therefrom) under applicable state securities laws. Purchaser has such knowledge and experience in financial and business matters that it is capable of evaluating the Companies and the merits and risks of an investment in the Shares. Purchaser has been given adequate opportunity to examine all documents provided by, conduct due diligence and ask questions of, and to receive answers from, Seller, the Companies and their respective representatives concerning the Companies and Purchaser's investment in the Shares. Purchaser acknowledges and affirms that it has completed its own independent investigation, analysis and evaluation of the Companies, the Partnership, the Owner Participant and the Lessor, that it has made all such reviews and inspections of the business, assets, results of operations and condition (financial or otherwise) of the Companies, the Partnership, the Owner Participant and the Lessor as it has deemed necessary or appropriate, and that in making its decision to enter into this Agreement and to consummate the transactions contemplated hereby it has relied on its own independent investigation, analysis, and evaluation of the Companies, the Partnership, the Owner Participant and the Lessor and Seller's warranties set forth in Article II and the Companies' warranties set forth in Article III. 4.6 Brokers and Finders. Purchaser has not entered into any agreement or arrangement entitling any agent, broker, investment banker, financial advisor or other firm or Person to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement. 4.7 Qualified for Permits. Purchaser is qualified to obtain any Permits necessary for the operation by Purchaser of the Companies (including the ownership of the Equity Interests in the Owner Participant and the Partnership) as of the Closing in the same manner as the Companies are currently operated. 20 4.8 No Knowledge of Seller or Company Breach. Neither Purchaser nor any of its Affiliates has Knowledge of any material breach or inaccuracy of (i) any warranty of Seller set forth in Article II hereof or (ii) any warranty of the Companies set forth in Article III hereof. 4.9 Environmental Review. Purchaser has completed its on-site review of environmental matters. ARTICLE V COVENANTS 5.1 Conduct of Business. After the date hereof and prior to the Closing or earlier termination of this Agreement, except as set forth in Schedule 5.1 of the Disclosure Letter and except (i) as contemplated in or permitted by this Agreement, (ii) as may be required to comply with any Company Material Contract (including any Financing Facility), (iii) in connection with necessary or prudent repairs due to breakdown or casualty, or other actions taken in response to a business emergency or other unforeseen operational matters, (iv) in connection with necessary or prudent maintenance consistent with manufacturer's recommendations and warranties, (v) as required by applicable Law, or (vi) to the extent Purchaser shall otherwise consent, which decision regarding consent shall be made promptly and which consent shall not be unreasonably withheld, conditioned or delayed, Seller shall exercise the voting, governance and contractual powers available to it to cause the Companies to and each of the Companies shall, to the extent reasonably possible, exercise the voting, governance and contractual powers available to the Companies to cause the Partnership, the Owner Participant and the Lessor to (but subject in each case to any contractual, fiduciary or similar obligation of Seller, any Company, the Partnership, the Owner Participant or the Lessor): (a) conduct its businesses in the ordinary and usual course in substantially the same manner as heretofore conducted and, to the extent consistent therewith, use reasonable efforts to preserve its business organization intact and maintain its existing relations and goodwill with customers, suppliers, creditors, lessors, employees and business associates; (b) not (i) amend its Organizational Documents other than amendments which are ministerial in nature or not otherwise material; (ii) split, combine or reclassify its outstanding Equity Interests; or (iii) repurchase, redeem or otherwise acquire any shares of its capital stock or any securities convertible into or exchangeable or exercisable for any shares of its capital stock; (c) not issue, sell, or dispose of any shares of, or securities convertible into or exchangeable or exercisable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of its capital stock, other than any issuance, sale or disposal, solely among each of the Companies, the Partnership or the Lessor; (d) not incur any indebtedness other than (i) borrowings in the ordinary course of business or (ii) borrowings under existing credit facilities as such facilities may be amended or replaced; (e) not, other than (i) in the ordinary and usual course of business or (ii) in the case of the Partnership or the Lessor, to the extent not prohibited by a Financing Facility, make any commitments for or make capital expenditures in excess of $2,500,000 individually or $5,000,000 in the aggregate; 21 (f) not, other than in the ordinary and usual course of business consistent with past practice, make any acquisition of, or investment in, assets or stock of any other Person or entity; (g) not, other than in the ordinary and usual course of business or in the case of the Partnership or the Lessor, to the extent not prohibited by a Financing Facility, sell, lease, license, encumber or otherwise dispose of any of its assets in excess of $2,500,000 individually or $5,000,000 in the aggregate; (h) not terminate, establish, adopt, enter into, make any new grants or awards of stock-based compensation or other benefits under, amend or otherwise materially modify any Partnership Plan or increase the salary, wage, bonus or other compensation of any directors, officers or employees except (i) for grants or awards to directors, officers and employees under existing Partnership Plans in such amounts and on such terms as are consistent with past practice, (ii) in the normal and usual course of business (which shall include normal periodic performance reviews and related plans and the provision of individual Partnership Plans consistent with past practice for newly hired, appointed or promoted officers and employees) or (iii) for actions necessary to satisfy existing contractual obligations under Partnership Plans; (i) not change any Material financial or Material Tax accounting methods, policies, practices or elections, except as required by GAAP or the Code, respectively; (j) not adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization (other than the Transaction); (k) not settle or compromise any material litigation requiring payment of an amount in excess of the reserves established therefor, or waive, release or assign any material claims, in each case other than in an amount not to exceed $2,500,000 individually or $5,000,000 in the aggregate; (l) other than, in the case of the Partnership or the Lessor, to the extent not prohibited by a Financing Facility, not (i) amend or modify any Company Material Contract in any material respect, (ii) terminate any Company Material Contract or (iii) enter into any contract, agreement or instrument that would have been required to be set forth on Schedule 3.11(a) of the Disclosure Letter had it been entered into prior to the date of this Agreement; (m) not amend, modify, terminate or enter into any Trading Contract other than, in the case of the Partnership, (i) for fiscal year 2006 requirements, in the ordinary course of business consistent with past practice and within written parameters established by the management committee of the Partnership and (ii) for fiscal year 2007 requirements, in the ordinary course of business consistent with past practice and within written parameters to be established by such management committee after notice to, and consultation with, the Purchaser; (n) unless not available on commercially reasonable terms, fail to maintain insurance with financially responsible or nationally recognized insurers in such amounts and against such risks and losses as are consistent with the insurance maintained by it in the ordinary and usual course of business; and 22 (o) not commit to take any of the actions set forth in subsections (b)-(n) of this Section 5.1. 5.2 Regulatory Approvals. (a) Regulatory Approvals. Each Party shall cooperate and use reasonable efforts to prepare and file as soon as practicable all applications, notices, petitions, filings and other documents necessary to obtain, and shall use reasonable efforts to obtain, the Seller Required Statutory Approvals and the Purchaser Required Statutory Approvals. The Parties further agree to use reasonable efforts (i) to take any act, make any undertaking or receive any clearance or approval required by any Governmental Entity or applicable Law and (ii) to satisfy any conditions imposed by any Governmental Entity, in each case, in order to consummate the transaction contemplated hereby as soon as reasonably possible. Each of the Parties shall (i) respond as promptly as practicable to any inquiries or requests received from any Governmental Entity for additional information or documentation and (ii) not enter into any agreement with any Governmental Entity that would reasonably be expected to adversely affect the Parties' ability to consummate the transactions contemplated by this Agreement, except with the prior consent of the other Parties (which shall not be unreasonably withheld or delayed). (b) Communications. The Parties shall promptly provide the other Parties with copies of all filings made with, and inform one another of any communications received from, any Governmental Entity in connection with this Agreement and the transactions contemplated hereby. 5.3 Required Consents. Seller and the Companies, on the one hand, and Purchaser, on the other hand, agree to use reasonable efforts to obtain the Company Required Consents and the Purchaser Required Consents, respectively, and to cooperate with each other in connection with the foregoing. 5.4 Access. After the date hereof and prior to the Closing, Seller and the Companies agree that the Companies shall permit, and the Companies shall exercise the voting, governance and contractual powers available to either of them to cause (subject to any contractual, fiduciary or similar obligation of the Companies), if possible, each of the Partnership and the Owner Participant to permit, Purchaser and its respective employees, counsel, accountants and other representatives to have reasonable access, upon reasonable advance notice, during regular business hours, to the assets, employees, properties, books and records, businesses and operations relating to the Companies, the Partnership or the Owner Participant as Purchaser may reasonably request, provided, however, that in no event shall Seller, the Companies, the Partnership or the Owner Participant be obligated to provide any access or information (i) if Seller or the Companies determine, in good faith after consultation with counsel, that providing such access or information may violate applicable Law, cause Seller, the Companies, the Partnership, the Owner Participant or the Lessor to breach a confidentiality obligation to which it is bound or jeopardize any recognized privilege available to Seller, the Companies, the Partnership, the Owner Participant or the Lessor or (ii) to the extent set forth on Schedule 5.4 of 23 the Disclosure Letter. Purchaser agrees to indemnify and hold Seller, the Companies, the Partnership, the Owner Participant and the Lessor harmless from any and all claims and liabilities, including costs and expenses for loss, injury to or death of any representative of Purchaser, and any loss, damage to or destruction of any property owned by Seller, the Companies, the Partnership, the Owner Participant or the Lessor or others (including claims or liabilities for loss of use of any property) resulting directly or indirectly from the action or inaction of any of the employees, counsel, accountants, advisors and other representatives of Purchaser during any visit to the business or property sites of the Companies, the Partnership, the Owner Participant or the Lessor prior to the Closing Date, whether pursuant to this Section 5.4 or otherwise. During any visit to the business or property sites of the Companies, the Partnership, the Owner Participant or the Lessor, Purchaser shall, and shall cause its employees, counsel, accountants, advisors and other representatives accessing such properties to, comply with all applicable Laws and all of the Companies', the Partnership's, the Owner Participant's or the Lessor's safety and security procedures and conduct itself in a manner that could not be reasonably expected to interfere with the operation, maintenance or repair of the assets of the Companies, the Partnership, the Owner Participant or the Lessor. Each Party shall, and shall cause its Affiliates and representatives to, hold in strict confidence all documents and information concerning the other furnished to it in connection with the transactions contemplated by this Agreement in accordance with the Confidentiality Agreement. 5.5 Publicity. Except as may be required by applicable Law or by obligations pursuant to any listing agreement with or rules of any national securities exchange, prior to the Closing, none of Seller, the Companies or Purchaser or any of their respective Affiliates shall, without the express written approval of Seller, the Companies and Purchaser, make any press release or other public announcements concerning the transactions contemplated by this Agreement, except as and to the extent that any such Party shall be so obligated by applicable Law or pursuant to any such listing agreement or rules of any national securities exchange, in which case the other Parties shall be advised and the parties shall use reasonable efforts to cause a mutually agreeable release or announcement to be issued. From and after the Closing, the Confidentiality Agreement dated May 22, 2006 between Seller and GSO Capital Partners LP (the "Seller CA") shall terminate and cease to be of any force and effect. 5.6 Fees and Expenses. (a) Except as provided in paragraph (b) below, whether or not the Closing occurs, all costs and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement (including, without limitation, any fees and expenses of investment bankers, brokers, finders, counsel, advisors, experts or other agents, in each case, incident to or in connection with the negotiation, preparation, execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby (whether payable prior to, at or after the Closing Date)) shall be paid by the party incurring such expenses; provided that all such costs and expenses incurred by the Companies, the Partnership, the Owner Participant or the Lessor on or prior to the Closing shall be paid by Seller. (b) Other Transaction Expenses. Notwithstanding anything to the contrary set forth in this Agreement, (i) Seller and Purchaser shall each pay 50% of any real property transfer or gains Tax, sales Tax, use Tax, stamp Tax, stock transfer Tax or other similar Tax imposed on the transactions contemplated by this Agreement, (ii) Purchaser shall pay any out-of-pocket fees, 24 costs and expenses incurred in connection with obtaining all Purchaser Required Statutory Approvals and (iii) Seller shall pay any out-of-pocket fees, costs and expenses incurred in connection with obtaining all Company Required Statutory Approvals and Seller Required Statutory Approvals (other than the Parties' legal fees and expenses which are the subject of paragraph (a) above). 5.7 Indemnification of Directors and Officers. (a) Indemnification. From and after the Closing Date, Purchaser shall cause each Company (and, for the avoidance of doubt, in the case of CMS Midland, including its successor entities as contemplated by Schedule 1.6 of the Disclosure Letter), to the fullest extent permitted under applicable Law, to indemnify and hold harmless (and advance funds in respect of each of the foregoing) each present and former employee, agent, director, officer or manager of the respective Company and, to the extent appointed by such Company, the Partnership or the Owner Participant, as the case may be (each, together with such person's heirs, executors or administrators, an "Indemnified Person" and collectively, the "Indemnified Persons"), against any costs or expenses (including advancing attorneys' fees and expenses in advance of the final disposition of any claim, suit, proceeding or investigation to each Indemnified Person to the fullest extent permitted by law), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any actual or threatened claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative (an "Action"), arising out of, relating to or in connection with any action or omission by such Indemnified Person in his or her capacity as an employee, agent, director, officer or manager occurring or alleged to have occurred whether before or after the Closing Date (including acts or omissions in connection with such person's service as an officer, director or other fiduciary in any entity if such service was at the request or for the benefit of such Company, the Partnership or the Owner Participant, as the case may be). In the event of any such Action, Purchaser shall cooperate with the Indemnified Person in the defense of any such Action. (b) Survival of Indemnification. To the fullest extent not prohibited by Law, from and after the Closing Date, all rights to indemnification now existing in favor of the Indemnified Persons with respect to their activities as such prior to, on or after the Closing Date, as provided in each Company's (and, for the avoidance of doubt, in the case of CMS Midland, including its successor entities as contemplated by Schedule 1.6 of the Disclosure Letter), the Partnership's and the Owner Participant's respective Organizational Documents or indemnification agreements in effect on the date of such activities or otherwise in effect on the date hereof, shall survive the Closing and shall continue in full force and effect for a period of not less than six (6) years from the Closing Date, provided that, in the event any claim or claims are asserted or made within such survival period, all such rights to indemnification in respect of any claim or claims shall continue until final disposition of such claim or claims. (c) Insurance. For a period of six (6) years after the Closing Date, Purchaser shall or shall use reasonable efforts to cause the Partnership to, maintain in effect policies of directors' and officers' liability insurance equivalent to those maintained by the Partnership prior to the Closing Date for the benefit of those persons who are currently covered by such policies on terms no less favorable than the terms of such current insurance coverage; provided, however, that the Partnership will not be required to expend in any year an amount in excess of two 25 hundred percent (200%) of the annual aggregate premiums currently paid by the Partnership for such insurance; and provided, further, that, if the annual premiums of such insurance coverage exceed such amount, Purchaser shall use reasonable efforts to cause the Partnership to, obtain a policy with the best coverage available, in the reasonable judgment of the board of directors of Purchaser, for a cost not exceeding such amount. (d) Successors. If, after the Closing Date, any of the Companies or Purchaser or any of their respective successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or a substantial portion of its properties and assets to any Person, then, and in either such case, proper provisions shall be made so that the successors and assigns of any of the Companies or Purchaser, as the case may be, shall assume the obligations set forth in this Section 5.7. (e) Benefit. The provisions of this Section 5.7 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Person, his or her heirs, executors or administrators and his or her other representatives. 5.8 Termination of Affiliate Contracts. Except as identified in Schedule 5.8 of the Disclosure Letter, all Affiliate Contracts, including any agreements or understandings (written or oral) with respect thereto, shall survive the Closing without any further action on the part of the parties thereto or the Parties. 5.9 Further Assurances. Each of Seller, the Companies and Purchaser agrees that, from time to time before and after the Closing Date, they will execute and deliver, and each of the Companies shall use reasonable efforts to cause the Partnership and the Owner Participant to execute and deliver, or use reasonable efforts to cause their other respective Affiliates (including by exercising the voting, governance and contractual powers available to cause, if possible, each of the Partnership and the Owner Participant) to execute and deliver such further instruments, and take, or cause their respective Affiliates (including by exercising the voting, governance and contractual powers available to cause, if possible, each of the Partnership and the Owner Participant) to take, such other action, as may be reasonably necessary to carry out the purposes and intents of this Agreement. Purchaser, the Companies and Seller agree to use reasonable efforts to refrain from taking any action which could reasonably be expected to materially delay the consummation of the Transaction. 5.10 Supplements to Company Disclosure Schedules. Seller and the Companies may, from time to time prior to the Closing by written notice to Purchaser, supplement the Seller Disclosure Schedules or the Company Disclosure Schedules or add a schedule or section to the Seller Disclosure Schedules or the Company Disclosure Schedules with a corresponding reference to be added in this Agreement (such added Schedule to be deemed a supplement hereunder) to disclose any matter which, if occurring prior to the date hereof, would have been required to be set forth or described on the Seller Disclosure Schedules or the Company Disclosure Schedules or to correct any inaccuracy or breach in the warranties made by Seller in this Agreement. Subject to this Section 5.10, none of such supplements to the Seller Disclosure Schedules or the Company Disclosure Schedules shall be deemed to cure the warranties to which such matters relate with respect to satisfaction of the conditions set forth in 26 Section 6.2(b) hereof or otherwise affect any other term or condition contained in this Agreement; provided, however, that unless Purchaser shall have delivered a Breach Notice contemplated by Section 7.1(d) (to the extent Purchaser is entitled to deliver such Breach Notice pursuant to the terms of this Agreement) within ten (10) Business Days of the receipt by Purchaser of any supplement to the Seller Disclosure Schedules or the Company Disclosure Schedules pursuant to this Section 5.10, then Purchaser shall have waived any and all rights to terminate this Agreement, pursuant to Section 7.1(d) or otherwise, arising out of or relating to the contents of such supplement and the resulting breach or breaches of the warranties and Purchaser shall be deemed to have accepted the contents of such supplement for all purposes of this Agreement; and provided, further, that, from and after the Closing, Seller shall have no liability pursuant to this Agreement or for any matters arising out of or relating to any of the matters disclosed on the Disclosure Letter, as supplemented or amended by the Companies and Seller prior to the Closing. 5.11 Change of Name. (a) Notwithstanding anything to the contrary contained herein, within fifteen (15) Business Days after the Closing Date, the Purchaser shall have caused CMS Midland and CMS Holdings to be renamed such that each such Company does not include within its name "CMS". On or after the Closing Date, Purchaser and its Affiliates shall not use existing or develop new stationery, business cards and other similar items that bear the name or mark of "CMS Midland, Inc." or "CMS Midland Holdings Company" or any similar derivation thereof in connection with the businesses of the Companies. (b) The Parties acknowledge that any damage caused to Seller or any of its Affiliates by reason of the breach by Purchaser or any of its Affiliates of Section 5.11(a), in each case would cause irreparable harm that could not be adequately compensated for in monetary damages alone; therefore, each Party agrees that, in addition to any other remedies, at law or otherwise; Seller and any of its Affiliates shall be entitled to an injunction issued by a court of competent jurisdiction restraining and enjoining any violation by Purchaser or any of its Affiliates of Section 5.11(a), and Purchaser further agrees that it (x) will stipulate to the fact that Seller or any of its respective Affiliates, as applicable, have been irreparably harmed by such violation and not oppose the granting of such injunctive relief and (y) waive any requirement that Seller post any bond or similar requirement in order for Seller to obtain the injunctive relief contemplated by this Section 5.11(b). 5.12 Financing. Notwithstanding anything contained in this Agreement to the contrary, Purchaser expressly acknowledges and agrees that Purchaser's obligations hereunder are not conditioned in any manner whatsoever upon Purchaser obtaining any financing and any failure to fulfill any obligation hereunder arising from the failure of Purchaser to obtain financing or the unavailability of such financing shall be deemed to be intentional for purposes hereof. Purchaser shall keep Seller apprised of all developments or changes relating to the Financing Arrangements and the financing contemplated thereby. If the Financing Arrangements shall cease to be in full force and effect at any time or the lenders party thereto shall indicate any unwillingness to provide the financing contemplated thereby, or for any reason Purchaser otherwise no longer believes in good faith that it will be able to obtain the financing contemplated thereby, then Purchaser shall promptly notify Seller and use best efforts to obtain 27 replacement financing arrangements or commitment letters as soon as reasonably practicable. Purchaser shall not, or permit any of its Subsidiaries or Affiliates to, without the prior written consent of Seller, take any action or enter into any transaction, including any merger, acquisition, joint venture, disposition, lease, contract or debt or equity financing that would reasonably be expected to impair, delay or prevent the financing contemplated by the Financing Arrangements. 5.13 Termination of Tax Sharing Agreements. Any and all existing Tax sharing agreements or arrangements (written or unwritten, formal or informal, including the Amended and Restated Agreement for the Allocation of Income Tax Liabilities and Benefits dated as of January 1, 1994 to which CMS Energy, the Companies and Seller, among others, are parties), providing for the allocation or payment of Tax liabilities or payment for Tax benefits between a Company, the Partnership or the Owner Participant, on the one hand, and any other Person, on the other hand, shall be terminated as of the Closing Date and none of the Companies, the Partnership or the Owner Participant will have any liability or claims thereunder on or after the Closing Date. Purchaser shall be entitled to written confirmation of such termination and extinguishment of liability and claims from CMS Energy on behalf of itself and all affected non-Company parties to such Tax sharing agreements and arrangements. 5.14 Tax Matters. (a) Liability for Taxes. (i) Seller shall be liable for and pay (A) all Taxes imposed on any of the Companies, or for which any of the Companies may otherwise be liable, for any taxable year or period that ends on or before the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period ending on and including the Closing Date, (B) any Taxes by reason of the several liability of the Companies pursuant to Treasury Regulations Section 1.1502-6 or any analogous state, local or foreign law or regulation which is attributable to having been a member of any consolidated, affiliated, combined, unitary or similar group on or prior to the Closing Date and (C) any Taxes incurred by or imposed on Seller arising from the sale of the Companies by Seller; provided, however, that Seller shall not be liable for or pay (I) any Taxes shown as a liability or reserve on the Companies Financial Statements, (II) any Taxes imposed on any of the Companies or for which any of the Companies may otherwise be liable as a result of transactions occurring on the Closing Date that are properly allocable (based on, among other relevant factors, factors set forth in Treasury Regulations Section 1.1502-76(b)(1)(ii)(B)) to the portion of the Closing Date after the Closing, and (III) notwithstanding anything to the contrary herein, any Taxes resulting from a sale of any of the Companies by Purchaser (Taxes described in this proviso, hereinafter "Excluded Taxes"). Purchaser and Seller agree that, with respect to any transaction described in clause (II) of the preceding sentence, each of the Companies and all persons related to any of the Companies under Section 267(b) of the Code immediately after the Closing shall treat the transaction for all federal income Tax purposes (in accordance with Treasury Regulations Section 1.1502 76(b)(1)(ii)(B)), and (to the extent permitted) for other income Tax purposes, as occurring at the beginning of the day following the Closing Date. Seller shall be entitled to any refund of (or credit for) Taxes allocable to any taxable year or period that ends on or before the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period ending on and including the Closing Date. 28 (ii) Purchaser shall be liable for and pay, and pursuant to Article VIII covenants to indemnify, defend and hold harmless the Seller Indemnified Parties from and against any and all Damages arising from, (A) all Taxes imposed any of the Companies, or for which any of the Companies may otherwise be liable, for any taxable year or period that begins after the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period beginning after the Closing Date and (B) any Excluded Taxes. Except as otherwise provided herein, Purchaser shall be entitled to any refund of (or credit for) Taxes allocable to any taxable year or period that begins after the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period beginning after the Closing Date. (iii) For purposes of paragraphs (a)(i) and (a)(ii), whenever it is necessary to determine the liability for Taxes of any of the Companies for a Straddle Period, the determination of the Taxes of any of the Companies for the portion of the Straddle Period ending on and including, and the portion of the Straddle Period beginning after, the Closing Date shall be determined by assuming that the Straddle Period consisted of two taxable years or periods, one which ended at the close of the Closing Date and the other which began at the beginning of the day following the Closing Date, and items of income, gain, deduction, loss or credit of any of the Companies for the Straddle Period shall be allocated between such two taxable years or periods on a "closing of the books basis" by assuming that the books of the Companies were closed at the close of the Closing Date; provided, however, that (I) transactions occurring on the Closing Date that are properly allocable (based on, among other relevant factors, factors set forth in Treasury Regulations Section 1.1502-76(b)(1)(ii)(B)) to the portion of the Closing Date after the Closing shall be allocated to the taxable year or period that is deemed to begin at the beginning of the day following the Closing Date, and (II) exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned between such two taxable years or periods on a daily basis. (iv) If, as a result of any action, suit, investigation, audit, claim, assessment or amended Tax Return, there is any change after the Closing Date in an item of income, gain, loss, deduction, credit or amount of Tax that results in an increase in a Tax liability for which Seller would otherwise be liable pursuant to paragraph (a)(i) of this Section 5.14, and such change results in or will result in a decrease in the Tax liability of any of the Companies, Purchaser or successor of any thereof for any taxable year or period beginning after the Closing Date or for the portion of any Straddle Period beginning after the Closing Date, Seller shall not be liable pursuant to such paragraph (a)(i) with respect to such increase to the extent of the present value (using a discount rate equal to the then "Federal mid-term rate," as that term is defined in Section 1274(d) of the Code) of such decrease (and, to the extent such increase in Tax liability is paid to a taxing 29 authority by Seller or any Affiliate thereof, Purchaser shall pay Seller an amount equal to the present value of such decrease). Conversely, if, as a result of any action, suit, investigation, audit, claim, assessment or amended Tax Return, there is any change after the Closing Date in an item of income, gain, loss, deduction, credit or amount of Tax that results in an increase in a Tax liability for which Purchaser would otherwise be liable pursuant to paragraph (a)(ii) of this Section 5.14, and such change results in or will result in a decrease in the Tax liability of any of the Companies, Seller or successor of any thereof for any taxable year or period ending on or before the Closing Date or for the portion of any Straddle Period beginning before the Closing Date, Purchaser shall not be liable pursuant to such paragraph (a)(ii) with respect to such increase to the extent of the present value (using a discount rate equal to the then "Federal mid-term rate", as that term is defined in Section 1274(d) of the Code) of such decrease (and, to the extent such increase in Tax liability is paid to a taxing authority by Purchaser or any Affiliate thereof, Seller shall pay Purchaser an amount equal to the present value of such decrease). (b) Tax Returns. (i) Seller shall file or cause to be filed when due (taking into account all extensions properly obtained all Tax Returns that are required to be filed by or with respect to any of the Companies for taxable years or periods ending on or before the Closing Date and Seller shall remit or cause to be remitted any Taxes due in respect of such Tax Returns, and Purchaser shall file or cause to be filed when due (taking into account all extensions properly obtained) all Tax Returns that are required to be filed by or with respect to any of the Companies for taxable years or periods ending after the Closing Date, and Purchaser shall remit or cause to be remitted any Taxes due in respect of such Tax Returns. Seller or Purchaser shall pay the other party for the Taxes for which Seller or Purchaser, respectively, is liable pursuant to paragraph (a) of this Section 5.14 but which are payable with any Tax Return to be filed by the other party pursuant to this paragraph (b) upon the written request of the party entitled to payment, setting forth in detail the computation of the amount owed by Seller or Purchaser, as the case may be, but in no event earlier than 10 days prior to the due date for paying such Taxes without regard to any indemnification limitations set forth in Article VIII. If either Company has the right (contractually or under applicable Law) to review, provide comments with respect to, consent to the filing of or take any other action with respect to, any Tax Return required to be filed by or with respect to the Owner Participant or the Partnership, then (i) to the extent such Tax Return relates to a taxable year or period ending on or before the Closing Date, Seller shall control such Company's exercise of such right and (ii) to the extent such Tax Return relates to a Straddle Period, Purchaser shall control such Company's exercise of such right, but Seller shall be entitled to participate in such Company's exercise of such right. (ii) None of Purchaser or any Affiliate of Purchaser shall (or shall cause or permit any of the Companies to) (i) in the case of any Tax Return relating in whole or in part to any of the Companies with respect to any taxable year or period ending on or before the Closing Date (or with respect to any Straddle 30 Period), amend, refile or otherwise modify (or grant an extension of any statute of limitation with respect to) such Tax Return or (ii) in the case of any Tax Return relating in whole or in part to the Owner Participant or the Partnership with respect to any taxable year or period ending on or before the Closing Date (or with respect to any Straddle Period), consent to, or otherwise exercise the rights of either Company (contractually or under applicable Law) with respect to, the amendment, refiling or other modification of (or the grant of any extension of any statute of limitation with respect to) any such Tax Return, in each case without the prior written consent of Seller, which consent may not be unreasonably withheld. (iii) Purchaser shall promptly cause each of the Companies to prepare and provide to Seller a package of Tax information materials (including, without limitation, (i) schedules and work papers and (ii) any Schedule K-1s delivered to the Companies by the Owner Participant or the Partnership, as the case may be) (the "Tax Package") required by Seller to enable Seller to prepare and file all Tax Returns required to be prepared and filed by it pursuant to paragraph (b)(i). The Tax Package shall be completed in accordance with past practice, including past practice as to providing such information and as to the method of computation of separate taxable income or other relevant measure of income of the Company. Purchaser shall cause the Tax Package to be delivered to Seller within 60 days after the Closing Date. To the extent requested by Purchaser, Seller shall provide reasonable assistance and guidance with respect to Purchaser's preparation of the Tax Package. (c) Contest Provisions. Purchaser shall promptly notify Seller in writing upon receipt by Purchaser, any of its Affiliates, or any of the Companies of notice of any pending or threatened federal, state, local or foreign Tax audits, examinations or assessments which might affect the Tax liabilities for which Seller may be liable pursuant to paragraph (a) of this Section 5.14 (including, but not limited to, notice of any pending or threatened audits, examinations or assessments involving the Owner Participant or the Partnership which might affect the Tax liabilities for which Seller may be liable pursuant to paragraph (a) of this Section 5.14). Seller shall have the sole right to represent each of the Company's interests in any Tax audit or administrative or court proceeding relating to taxable periods ending on or before the Closing Date or otherwise relating to Taxes for which Seller may be liable pursuant to paragraph (a) of this Section 5.14 (including, but not limited to, the right to exercise any participation rights the Company may have (either contractually or under applicable Law) in any Tax audit or administrative or court proceeding involving the Owner Participant or the Partnership which might affect the Tax liabilities for which Seller may be liable pursuant to paragraph (a) of this Section 5.14), and to employ counsel of its choice at its expense. In the case of a Straddle Period, Seller shall be entitled to participate at its sole expense in any Tax audit or administrative or court proceeding relating (in whole or in part) to Taxes attributable to the portion of such Straddle Period ending on and including the Closing Date (including any Tax audit or administrative or court proceeding involving the Owner Participant or Partnership, to the extent either Company is entitled to participate in such Tax audit or administrative or court proceeding (either contractually or and under applicable Law)) and, with the written consent of Purchaser, and at Seller's sole expense, may assume the entire control of such audit or proceeding (or, in the case of any audit or proceeding involving the Owner Participant or Partnership, the entire 31 participation by either Company in such audit or proceeding). None of Purchaser, any of its Affiliates, or any of the Companies may settle any Tax claim (or consent to or otherwise exercise the rights of either Company (contractually or under applicable Law) with respect to the settlement of any Tax claim by the Owner Participant or the Partnership) relating to Taxes for which Seller may be liable pursuant to paragraph (a) of this Section 5.14 without the prior written consent of Seller, which consent may be withheld in the sole discretion of Seller. (d) Assistance and Cooperation. After the Closing Date, each of Seller and Purchaser shall (and cause their respective Affiliates to): (i) assist the other party in preparing any Tax Returns which such other party is responsible for preparing and filing in accordance with paragraph (b) of this Section 5.14; (ii) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of any of the Companies, the Owner Participant or the Partnership; (iii) make available to the other and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of each of the Companies, the Owner Participant or the Partnership; (iv) provide timely notice to the other in writing of any pending or threatened Tax audits or assessments of any of the Companies, the Owner Participant or the Partnership for taxable periods for which the other may have a liability under this Section 5.14; (v) furnish the other with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period; (vi) timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise reduce), or file Tax Returns or other reports with respect to, Taxes described in paragraph (a)(ii)(B) of this Section 5.6(b) (relating to sales, transfer and similar Taxes); and (vii) timely provide to the other powers of attorney or similar authorizations necessary to carry out the purposes of this Section 5.14. 5.15 Unwind Agreement. The Companies shall have been (i) completely released from all liabilities to CMS Energy and its Affiliates under the Class I Contracts and (ii) released from all liabilities to CMS Energy and its Affiliates under the Class II Contracts to the extent exceeding $5,000,000 (and a copy of such release shall have been provided to Purchaser). 5.16 Books and Records. At the Closing, Seller shall deliver to Purchaser copies or originals (where available) of the minute books for each Company which are complete and correct in all material respects. As soon as practicable following the Closing, Seller shall deliver or cause to be delivered to Purchaser originals (where reasonably available, including 32 duplicate original counterparts held by former debt trustees and former counsel) or copies of other books and records of the Companies, Seller and CMS Energy in respect of the Partnership and the Owner Participant, in each case, listed on any Schedule of the Disclosure Letter or otherwise made available for review by Purchaser prior to the Closing in the electronic data room for "Project MCV" maintained by Intralinks, Inc. 5.17 FIRPTA Certificate. At the Closing, Purchaser shall have received a certification of Seller's non-foreign status as set forth in Treasury Regulations Section 1.1445-2(b). ARTICLE VI CONDITIONS TO CLOSING 6.1 Conditions to the Obligations of the Parties. The obligations of the Parties to effect the Closing shall be subject to the satisfaction or waiver (to the extent permitted by Law) by Purchaser and Seller, on or prior to the Closing Date, of each of the following conditions precedent: (a) Statutory Approvals. The Seller Required Statutory Approvals and the Purchaser Required Statutory Approvals set forth on Schedule 6.1(a) of the Disclosure Letter shall have been obtained at or prior to the Closing Date and the Seller Required Statutory Approvals shall not, individually or in the aggregate, contain terms or conditions that have, or could reasonably be expected to have, (i) a Company Material Adverse Effect or (ii) Purchaser Material Adverse Effect. (b) No Injunction. No statute, rule or regulation shall have been enacted or promulgated by any Governmental Entity which prohibits the consummation of the transactions contemplated hereby and there shall be no order or injunction of a court of competent jurisdiction in effect precluding or prohibiting the consummation of the transactions contemplated hereby; provided, however, that should any such order or injunction be entered into or in effect, the parties shall use reasonable efforts (at the sole cost and expense of the Party against which such order or injunction has been entered) to have any order or injunction vacated or lifted. 6.2 Conditions to the Obligation of Purchaser. The obligation of Purchaser to effect the Closing shall be subject to the satisfaction or waiver by Purchaser on or prior to the Closing Date of each of the following conditions: (a) Performance of Obligations of Seller and the Companies. Each of Seller and the Companies shall have performed in all Material respects its respective agreements and covenants contained in or contemplated by this Agreement which are required to be performed by it at or prior to the Closing. (b) Warranties. The warranties of Seller and the Companies set forth in this Agreement shall be true and correct (i) on and as of the date hereof and (ii) on and as of the Closing Date with the same effect as though such warranties had been made on and as of the Closing Date (except for warranties that expressly speak only as of a specific date or time which 33 need only be true and correct as of such date or time) except in each of cases (i) and (ii) for such failures of warranties to be true and correct (without giving effect to any materiality qualification or standard contained in any such warranties) which would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect or a Seller Material Adverse Effect. (c) Company Required Consents. The Company Required Consents, the failure of which to obtain would be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect or a Seller Material Adverse Effect, shall have been obtained. (d) Officer's Certificate. Purchaser shall have received a certificate from an authorized officer of Seller, dated the Closing Date, to the effect that, to the best of such officer's Knowledge, the conditions set forth in Sections 6.2(a) and 6.2(b) have been satisfied. (e) Resignations of Certain Officers and Directors. Purchaser shall have received the resignations or removals of the officers and directors and other persons set forth on Schedule 6.2(e) of the Disclosure Letter from their position as officer or director, or other management or employment position, of the Companies, the Partnership or the Owner Participant set forth opposite the name of such officer, director or person on Schedule 6.2(e) of the Disclosure Letter. (f) Alanna Holding Corporation. CMS Midland shall have become (for $1.00 of consideration) the record and beneficial owner of all shares of common stock of Alanna Holdings Corporation presently held by CMS Energy and, in connection therewith, CMS Midland shall have become a party to a stockholders agreement in the form required by the Stockholder's Agreement dated as of June 14, 1990 to which CMS Energy is a party, and CMS Midland shall have assumed all of CMS Energy's rights and obligations under such Stockholder's Agreement. (g) MCV2 and MCV Expansion. Purchaser shall have received an instrument of assignment (which form is attached hereto as Exhibit C), pursuant to which (i) CMS Generation Co. shall have assigned to Purchaser all its right, title and interest in and to MCV2 and (ii) CMS Generation Co. shall have assigned to Purchaser all its right, title and interest in and to MCV Expansion, which instrument shall be effective at the Effective Time. (h) Closing Deliverables. Purchaser shall have received all documents and other items required to be delivered by Seller to Purchaser pursuant to Section 1.4. 6.3 Conditions to the Obligation of Seller. The obligation of Seller to effect the Closing shall be subject to the satisfaction or waiver by Seller on or prior to the Closing Date of each of the following conditions: (a) Performance of Obligations of Purchaser. Purchaser shall have performed in all Material respects its agreements and covenants contained in or contemplated by this Agreement which are required to be performed by it at or prior to the Closing. 34 (b) Warranties. The warranties of Purchaser set forth in this Agreement shall be true and correct (i) on and as of the date hereof and (ii) on and as of the Closing Date with the same effect as though such warranties had been made on and as of the Closing Date (except for warranties that expressly speak only as of a specific date or time which need only be true and correct as of such date or time) except in each of cases (i) and (ii) for such failures of warranties to be true and correct (without giving effect to any materiality qualification or standard contained in any such warranties) which would not reasonably be expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect. (c) Purchaser Required Consents. The Purchaser Required Consents, the failure of which to obtain would reasonably be expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect, shall have been obtained. (d) Officer's Certificate. Seller shall have received a certificate from an authorized officer of Purchaser, dated the Closing Date, to the effect that, to the best of such officer's Knowledge, the conditions set forth in Sections 6.3(a) and 6.3(b) have been satisfied. (e) Demand Note. Seller shall have received a dividend of the $10,000,000 demand note issued by Seller in favor of CMS Midland or such note and the obligations thereunder shall have been cancelled without any payment by Seller in respect thereof. (f) Closing Deliverables. Seller shall have received all documents and other items required to be delivered by Purchaser to Seller pursuant to Section 1.4. ARTICLE VII TERMINATION 7.1 Termination. This Agreement may be terminated at any time prior to the Closing Date: (a) by the mutual written agreement of Purchaser, the Companies and Seller; (b) by Purchaser or Seller, if (i) a statute, rule, regulation or executive order shall have been enacted, entered or promulgated prohibiting the consummation of the transactions contemplated hereby or (ii) an order, decree, ruling or injunction shall have been entered permanently restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated hereby, and such order, decree, ruling or injunction shall have become final and nonappealable; (c) by Purchaser or Seller, by written notice, if the Closing Date shall not have occurred on or before December 31, 2006 (the "Termination Date"); provided, however, that the right to terminate the Agreement under this Section 7.1(c) shall not be available to any Party whose failure to fulfill any obligation under this Agreement shall have caused or resulted in the failure of the Closing Date to occur on or before such date; 35 (d) by Purchaser, so long as Purchaser is not then in breach of any of its warranties, covenants or agreements hereunder, by written notice to Seller, if there shall have been a breach of any warranty of Seller or the Companies, or a breach of any covenant or agreement of Seller hereunder, which breaches would be reasonably expected to have, individually or in the aggregate, a Company Material Adverse Effect, and such breach shall not have been remedied within thirty (30) days after receipt by Seller and the Companies of notice in writing from Purchaser (a "Breach Notice"), specifying the nature of such breach and requesting that it be remedied or Purchaser shall not have received adequate assurance of a cure of such breach within such thirty-day period; or (e) by Seller, so long as Seller or the Companies are not then in breach of any of their warranties, covenants or agreements hereunder, by written notice to Purchaser, if there shall have been a breach of any warranty, or a breach of any covenant or agreement of Purchaser hereunder, which breaches would reasonably be expected to have, individually or in the aggregate, a Purchaser Material Adverse Effect, and such breach shall not have been remedied within thirty (30) days after receipt by Purchaser of notice in writing from Seller, specifying the nature of such breach and requesting that it be remedied or Seller shall not have received adequate assurance of a cure of such breach within such thirty-day period. 7.2 Effect of Termination. No termination of this Agreement pursuant to Section 7.1 shall be effective until notice thereof is given to the non-terminating Parties specifying the provision hereof pursuant to which such termination is made. Subject to Section 1.5 hereof, if validly terminated pursuant to Section 7.1, this Agreement shall, subject to Section 8.1, become wholly void and of no further force and effect without liability to any Party or to any Affiliate, or their respective members or shareholders, directors, officers, employees, agents, advisors or representatives, and following such termination no Party shall have any liability under this Agreement or relating to the transactions contemplated by this Agreement to any other Party; provided that no such termination shall (i) relieve Purchaser, Seller or the Companies from liability for fraud or any willful or intentional breach of any provision of this Agreement prior to such termination or (ii) relieve Purchaser from any liability for any breach of Purchaser's warranties contained in Section 4.3 (whether or not such breach is fraudulent, willful or intentional). If this Agreement is terminated as provided in Section 7.1, Purchaser shall redeliver to Seller or the Companies, as the case may be, and will cause its agents to redeliver to Seller or the Companies, as the case may be, all documents, workpapers and other materials of Seller, the Companies, the Partnership, the Owner Participant and the Lessor relating to any of them and the transactions contemplated hereby, whether obtained before or after the execution hereof, and Purchaser shall comply with all of its obligations under the Confidentiality Agreement. ARTICLE VIII LIMITS OF LIABILITY 8.1 Non-Survival of Warranties, Covenants and Agreements. (a) Except as expressly provided in Section 8.1(b), none of the warranties, covenants or agreements of Purchaser, the Companies or Seller in this Agreement shall survive the Closing, and no claim of any sort or on any basis may be made by any Party in respect of any breach of any such warranty, covenant or agreement after the Closing, and no breach thereof shall confer any right of rescission of this Agreement. Except in respect of the warranties, 36 covenants and agreements referred to in Section 8.1(b) that survive the Closing and except as otherwise provided for in this Agreement, the sole remedy that a Party may have for a breach of any warranty, covenant or agreement of Purchaser, the Companies or Seller in this Agreement shall be to terminate this Agreement to the extent provided for under, and in accordance with the terms of, this Agreement. (b) The warranties, covenants and agreements of Purchaser, Companies and Seller in this Agreement shall survive as follows: (i) the warranties of Seller contained in Sections 2.2 (Company Capitalization; Right and Title to Interests), 2.3(a) (Authority) and 2.6 (Composite PPA, etc.) hereof shall survive indefinitely; (ii) the warranties of the Companies contained in Sections 3.1(a) (Organization and Qualification), 3.1(b) (Authority) and 3.2 (Capitalization) hereof shall survive indefinitely; (iii) the warranties of the Companies contained in Section 3.11 (Contracts) shall survive through December 31, 2007; (iv) the warranties of Purchaser contained in Sections 4.2(a) (Authority) and 4.8 (No Knowledge of Seller or Company Breach) hereof shall survive indefinitely; (v) the covenants and agreements of Purchaser and Companies contained in Section 5.7 (Indemnification of Directors and Officers) hereof shall survive in accordance with their terms; (vi) the covenants and agreements of the Parties set forth in the last sentence of Section 5.4 (Access), Sections 5.6 (Fees and Expenses), 5.9 (Further Assurances) and 5.11 (Change of Name) hereof, Section 7.2 (Effect of Termination) hereof, Article VIII (Limits of Liability) hereof and Article X (General Provisions) hereof shall survive indefinitely; (vii) the covenants and agreements of the Parties contained in Sections 5.13 (Termination of Tax Sharing Agreements) and 5.14 (Tax Matters) hereof shall survive the Closing and shall not terminate until the Tax Statute of Limitations Date. No claim or cause of action arising out of the inaccuracy or breach of any warranty, covenant or agreement of Seller, the Companies or Purchaser may be made following the termination of the applicable survival period referred to in this Section 8.1(b). The Parties intend to change the statutory limitations and agree that, after the Closing Date, with respect to Seller, the Companies and Purchaser, any claim or cause of action against any of the Parties, or any of their respective directors, officers, employees, Affiliates, successors, permitted assigns, advisors, agents, or representatives based upon, directly or indirectly, any of the warranties, covenants or agreements contained in this Agreement, or any other agreement, document or instrument to be executed and delivered in connection with this Agreement, may be brought only as expressly provided in this Article VIII. 37 (c) The liability of any Party in respect of which a notice of claim is given under this Agreement shall (if such claim has not been previously satisfied, settled or withdrawn) absolutely determine and any claim made therein be deemed to have been withdrawn (and no new claim may be made in respect of the facts, event, matter or circumstance giving rise to such withdrawn claim) unless legal proceedings in respect of such claim shall have been commenced within six (6) months of the date of service of such notice (or such other period as may be agreed by the relevant Parties) and for this purpose proceedings shall not be deemed to have commenced unless they shall have been properly issued and validly served upon the relevant Party. 8.2 Seller Indemnity. From and after the Closing Date and subject to the provisions of this Article VIII, Seller agrees to indemnify, defend and hold harmless the Purchaser Indemnified Parties, from and against any and all Damages arising from breach of warranties of the Companies contained in Sections 3.1(a) (Organization and Qualification), 3.1(b) (Authority), 3.2 (Capitalization) and 3.11 (Contracts) hereof, subject in each case to any limits on liability contained in this Agreement. Sections 3.1(a), 3.1(b) and 3.2 of this Agreement shall survive indefinitely and Section 3.11 hereof shall survive through December 31, 2007 but Seller shall have no claim for indemnity, contribution or subrogation against the Companies for any breach of such Sections or against any officer of any Company that may have certified as to the matters specified in such Sections. 8.3 Purchaser Indemnity. From and after the Closing Date and subject to the provisions of this Article VIII, Purchaser agrees to indemnify, defend and hold harmless the Seller Indemnified Parties, from and against any and all Damages arising from and after the Effective Time in connection with or relating to the business and operation of the Companies, the Partnership, the Owner Participant and the Lessor, arising out of or relating to conduct occurring from and after the Effective Time only excluding Damages arising from and after the Effective Time in connection with or relating to (i) the business and operations of the Companies, the Partnership, the Owner Participant and the Lessor under the Consumers Contracts or the Dow Contracts, (ii) MPSC Matters or (iii) Specified Environmental Matters. 8.4 Claim Process. (a) The party or parties making a claim for breach of warranty or indemnification under this Agreement shall be, for the purposes of this Agreement, referred to as the "Indemnified Party" and the party or parties against whom such claims are asserted under this Agreement shall be, for the purposes of this Agreement, referred to as the "Indemnifying Party". (b) In the event that: (i) any action, application, suit, demand, claim or legal, administrative, arbitration or other alternative dispute resolution proceeding, hearing or investigation (each, a "Proceeding") is asserted or instituted by any Person other than the Parties or their Affiliates which could give rise to Damages for which an Indemnifying Party could be liable to an Indemnified Party under this Agreement (such Proceeding, a "Third Party Claim") or 38 (ii) any Indemnified Party under this Agreement shall have a claim for Damages under this Agreement which does not involve a Third Party Claim (such claim, a "Direct Claim" and, together with Third Party Claims, "Claims"), the Indemnified Party shall, promptly after it becomes aware of a Third Party Claim, or facts supporting a Direct Claim, send to the Indemnifying Party a written notice specifying the nature of such Proceeding and the amount or estimated amount thereof (which amount or estimated amount shall not be conclusive of the final amount, if any, of such Proceeding) (a "Claim Notice"), together with copies of all notices and documents (including court papers) served on or received by the Indemnified Party in the case of a Third Party Claim, provided that a delay in notifying the Indemnifying Party shall not relieve the Indemnifying Party of its obligations under this Article VIII except to the extent that (and only to the extent that) the Indemnifying Party shall have been materially prejudiced by such failure to give such notice, in which case the Indemnifying Party shall be relieved of its obligations under this Article VIII to the extent of such material prejudice. (c) In the event of a Third Party Claim, the Indemnifying Party shall have the right to defend the Indemnified Party against such Third Party Claim and be entitled to appoint counsel of the Indemnifying Party's choice at the expense of the Indemnifying Party to represent the Indemnified Party in connection with such Proceeding (in which case the Indemnifying Party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by any Indemnified Party or any other costs or expenses with respect to the defense of a Third Party Claim except as set forth below); provided that such counsel is acceptable to the Indemnified Party, the Indemnified Party acting reasonably. Notwithstanding an Indemnifying Party's election to defend such Third Party Claim and appoint counsel to represent an Indemnified Party in connection with a Third Party Claim, an Indemnified Party shall have the right to employ separate counsel, but the Indemnifying Party shall bear the reasonable fees, costs and expenses of such separate counsel only if (i) the use of counsel selected by the Indemnifying Party to represent the Indemnified Party would present such counsel with a conflict of interest or (ii) the Indemnifying Party shall not have employed counsel to represent the Indemnified Party within a reasonable time after notice of the institution of such Third Party Claim, provided that, notwithstanding such failure to employ counsel within a reasonable time, the Indemnifying Party shall have the right to assume the defense of such Third Party Claim by appointment of counsel reasonably acceptable to the Indemnified Party and shall thereafter cease to be responsible for the fees and expenses of counsel appointed by the Indemnified Party. Nothing in this Section 8.4(c) shall require the Indemnifying Party to be responsible for the fees and expenses of more than one counsel at any time in connection with the defense against a Third Party Claim. If requested by the Indemnifying Party, the Indemnified Party agrees to cooperate with the Indemnifying Party and its counsel in defending and contesting any Proceeding which the Indemnifying Party defends, or, if appropriate and related to the Proceeding in question, in making any counterclaim against the person asserting the Third Party Claim, or any cross-complaint against any person. No Third Party Claim may be settled or compromised (i) by the Indemnified Party without the prior written consent of the Indemnifying Party or (ii) by the Indemnifying Party without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed), unless, in the case of this clause (ii), the sole relief provided is monetary damages that are paid in full by the Indemnifying Party (if such claim by the Indemnified Party for indemnification is successful). In the event any Indemnified Party settles or compromises or consents to the entry of any judgment with respect to any Third Party Claim without the prior written consent of the Indemnifying Party (except in the event the 39 Indemnifying Party unreasonably withheld or delayed its consent), each Indemnified Party shall be deemed to have waived all rights against the Indemnifying Party for indemnification under this Article VIII with respect to such Third Party Claim. (d) In the event of a Direct Claim, the Indemnifying Party shall notify the Indemnified Party within thirty (30) days of receipt of a Claim Notice whether the Indemnifying Party disputes such claim. From and after the delivery of a Claim Notice under this Agreement, at the reasonable request of the Indemnifying Party, each Indemnified Party shall grant the Indemnifying Party and its representatives reasonable access to the books, records, employees, representatives and properties of such Indemnified Party to the extent reasonably related to the matters to which the Claim Notice relates. If the Indemnified Party is Purchaser, Purchaser shall cause each of the Companies, and shall use reasonable efforts to cause each of the Partnership, the Owner Participant and the Lessor, to grant to the Indemnifying Party the access described in the immediately preceding sentence. All such access shall be granted during normal business hours and shall be granted under conditions which will not unreasonably interfere with the business and operations of the Indemnified Party. The Indemnifying Party will not, and shall use reasonable efforts to cause its representatives not to, use (except in connection with such Claim Notice) or disclose to any third person other than the Indemnifying Party's representatives (except as may be required by applicable Law) any information obtained pursuant to this Section 8.4(d) which is designated as confidential by an Indemnified Party. (e) If there shall be any conflicts between the provisions of this Section 8.4 and Section 5.14(c) hereof, the provisions of such Section 5.14(c) shall control with respect to Tax contests. 8.5 Limitations on Claims. (a) Maximum Liability. Notwithstanding anything in this Agreement to the contrary, but subject to the limitations set forth in this Section 8.5, Section 10.10 hereof or otherwise in this Agreement, the aggregate amount of Purchaser's or Seller's liability (in each case) pursuant to this Agreement and the transactions contemplated hereby (in addition to Purchaser's obligation to pay the Purchase Price in accordance with Article I hereof) shall not exceed the amount of the Purchase Price plus any amounts paid by Purchaser under the SEPA Payment Agreement and not otherwise reimbursed. (b) Additional Limitations. (i) The amount of any Damages incurred by the Indemnified Party shall be reduced by the net amount the Indemnified Party or any of its Affiliates recovers (after deducting all attorneys' fees, expenses and other costs of recovery) from any insurer or other party liable for such Damages (other than Seller). The Indemnified Party shall use reasonable efforts to effect any such recovery. (ii) The amount of any Damages incurred by the Indemnified Party shall be reduced by the amount of any Tax benefit to the Indemnified Party arising from the recognition of Damages. 40 (iii) Any liability under this Agreement shall be determined without duplication of recovery by reason of the state of facts giving rise to such liability constituting a breach of more than one warranty, covenant or agreement. (iv) No recovery under this Agreement shall be available for Damages arising out of or relating to any inaccuracy or breach of any warranty of Seller or the Company to the extent Purchaser or any Affiliate of Purchaser had Knowledge of such breach or inaccuracy prior to the Closing. (v) No Party shall be entitled to recover Damages or obtain payment, reimbursement or restitution more than once in respect of any inaccuracy or breach of any provision of this Agreement. No liability shall attach to any Party under this Agreement to the extent the subject thereof has otherwise been made good or is compensated for. (vi) Seller's liability for all claims made under Section 8.2 hereof with respect to breach of the warranties of the Companies contained in Section 3.11 (Contracts) shall be subject to the following limitations: (A) Seller shall have no liability for such claims until the aggregate amount of the Damages incurred (determined without regard to any materiality qualification or qualification with reference to Seller Material Adverse Effect or Company Material Adverse Effect) shall exceed $1,000,000, in which case Seller shall be liable only for the portion of the Damages exceeding such amount and (B) Seller's aggregate liability for all such Section 3.11-based claims shall not exceed 50% of the Purchase Price. (c) Limitation of Remedies. (i) Except for the warranties set forth in Articles II and III hereof, none of Seller, the Companies or their respective Affiliates nor any of their respective directors, officers, employees, subsidiaries, controlling persons, agents or representatives, makes or has made, and each of Seller, the Companies and their respective Affiliates and all of their respective directors, officers, employees, subsidiaries, controlling persons, agents or representatives hereby negate and disclaim, any other warranty, written or oral, statutory, express or implied, concerning the Shares, the business, assets or liabilities of any of the Companies, the Partnership, the Owner Participant, the Lessor, the transactions contemplated hereby, or any other matter in connection with Purchaser's investigation of the Companies, the Partnership, the Owner Participant and the Lessor. Purchaser has received and may continue to receive from Seller, the Companies and their respective representatives certain estimates, projections and other forecasts for the Companies, the Partnership and the Owner Participant and certain plan and budget information. Purchaser acknowledges that these estimates, projections, forecasts, plans and budgets and the assumptions on which they are based were prepared for specific purposes and may vary significantly from each other. Further, Purchaser acknowledges that there are uncertainties inherent in attempting to make such estimates, projections, forecasts, plans and budgets, that Purchaser is taking full responsibility for making its own evaluation of the 41 adequacy and accuracy of all estimates, projections, forecasts, plans and budgets so furnished to it, and that Purchaser is not relying on any estimates, projections, forecasts, plans or budgets furnished by Seller, the Companies or their respective representatives, and Purchaser shall not hold any such person liable with respect thereto. Neither Seller nor the Companies make any representation or warranty with respect to any estimates, projections, forecasts, plans or budgets. Except as expressly provided in this Agreement, Purchaser acknowledges that none of Seller, the Companies, the Partnership, the Owner Participant, the Lessor and their respective Affiliates and none of their respective directors, officers, employees, subsidiaries, controlling persons, agents or representatives has made, and Seller and the Companies hereby expressly disclaim and negate, and Purchaser hereby expressly waives, any representation or warranty, express or implied, at common law, by statute or otherwise relating to, and Purchaser hereby expressly waives and relinquishes any and all rights, claims and causes of action against Seller, the Companies, the Partnership, the Owner Participant and the Lessor and their respective Affiliates and all of their respective directors, officers, employees, subsidiaries, controlling persons, agents or representatives in connection with, the accuracy, completeness or materiality of any information, data or other materials (written or oral) furnished to Purchaser or its Affiliates or representatives prior to, on or after the date hereof by or on behalf of Seller, the Companies, the Partnership, the Owner Participant and the Lessor. The provisions of this Section 8.5(c)(i) are intended to be for the benefit of, and be enforceable by, the respective Affiliates of Seller and the Companies, and directors, officers, employees, subsidiaries, controlling persons, agents and representatives of Seller, the Companies and their respective Affiliates. (ii) Except to the extent provided in Sections 5.12 and 10.12 hereof, from and after the Closing, the rights expressly provided for in this Article VIII shall be the exclusive remedies of the Parties and their respective officers, directors, employees, Affiliates, agents, representatives, successors and assigns for any breach or inaccuracy of any warranty or breach of or noncompliance with any covenant or agreement contained in this Agreement and the parties shall not be entitled to a rescission of this Agreement or to any further indemnification or other rights or claims of any nature whatsoever (including under statute, regulation, common law, in equity or for negligence) in respect thereof, all of which the parties hereto hereby waive to the fullest extent permitted by law. 8.6 Characterization of Payments for Damages. Purchaser and Seller agree to treat any payment made under this Article VIII, to the maximum extent permitted by applicable Law, as an adjustment to the Purchase Price for all Tax purposes. 42 ARTICLE IX DEFINITIONS AND INTERPRETATION 9.1 Defined Terms. The following terms are defined in the corresponding Sections of this Agreement:
Defined Term Section Reference - ------------ ----------------- Action Section 5.7(a) Affiliate Contracts Section 3.15 Agreed Amount Section 3.11(a)(ii) Agreement Preamble Breach Notice Section 7.1(d) Claims Section 8.4(b) C&E Agreements Section 2.6 Claim Notice Section 8.4(b) Closing Section 1.3 Closing Date Section 1.3 CMS Holdings Preamble CMS Holdings Shares Section 2.2 CMS Midland Preamble CMS Midland Shares Section 2.2 Code Section 3.5(a) Companies Preamble Company Preamble Company Financial Statements Section 3.3 Company Material Contracts Section 3.11(a) Company Permits Section 3.9(a) Company Required Consents Section 3.1(c) Company Required Statutory Approvals Section 3.1(d) Composite PPA Section 2.6 Contracting Party Section 3.11(a) Direct Claim Section 8.4(b) Disclosure Letter Article II Dow Section 3.11(a)(i) ERISA Affiliate Section 3.8(a) Excluded Taxes Section 5.14(a)(i) Financing Arrangements Section 4.3 Indemnified Party Section 8.4(a) Indemnified Person Section 5.7(a) Indemnifying Party Section 8.4(a) Intellectual Property Section 3.14 Owner Participant Recitals Parties Preamble Partnership Recitals Partnership Plans Section 3.8(a) Proceeding Section 8.4(b) Purchase Agreement Fee Section 1.5 Purchase Price Section 1.2 Purchaser Preamble Purchaser Required Consents Section 4.2(b) Purchaser Required Statutory Approvals Section 4.2(c)
43
Defined Term Section Reference - ------------ ----------------- Reg-Out Waiver Period Section 2.6 Securities Act Section 4.5 Seller Preamble Seller CA Section 5.5 Seller Required Consents Section 2.3(b) Seller Required Statutory Approvals Section 2.3(c) SEPA Payment Agreement Section 1.4(c) Shares Section 2.2 Tax Package Section 5.14(b)(iii) Termination Date Section 7.1(c) Third Party Claim Section 8.4(b) Transaction Section 1.1 Violation Section 2.3(b)
9.2 Definitions. Except as otherwise expressly provided in this Agreement, or unless the context otherwise requires, whenever used in this Agreement (including the Schedules), the following terms will have the meanings indicated below: "Affiliate" means, with respect to any Person or group of Persons, a Person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such Person or group of Persons. "Control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of a Person, whether through the ownership of voting securities or other Equity Interests, by contract or credit arrangement, as trustee or executor, or otherwise. Solely for the purpose of the preceding sentence, a company is "directly controlled" by another company or companies holding shares carrying the majority of votes exercisable at a general meeting (or its equivalent) of the first mentioned company; and a particular company is "indirectly controlled" by a company or companies (hereinafter called the "parent company or companies") if a series of companies can be specified, beginning with the parent company or companies and ending with the particular company, so related that each company of the series except the parent company or companies is directly controlled by one or more of the preceding companies in the series. "Appendix A" means Appendix A to the Participation Agreement. "Business Day" means a day other than a Saturday, or Sunday or any other day on which banks are not required to be open or are authorized to close in New York, New York. "Class I Contracts" are items 1, 2, 4, 7 and 8 listed on Schedule A to the Unwind Agreement. "Class II Contracts" are (i) the Amended and Restated Investor Partner Tax Indemnification Agreement dated as of June 1, 1990 and (ii) items 3, 5 (but only to the extent constituting a guaranty of such Amended and Restated Investor Partner Tax Indemnification Agreement) and 6 listed on Schedule A to the Unwind Agreement. 44 "CMS Consent" means the Consent and Agreement dated as of June 1, 1990 among Seller, the Partnership, the Lessor and certain other signatories thereto. "CMS Energy" means CMS Energy Corporation, a Michigan corporation and the parent entity of Seller. "Company Disclosure Schedules" means the Schedules setting forth certain disclosures of the Companies, or qualifications or exceptions to any of the Companies' warranties set forth in Article III, contained in the Disclosure Letter delivered simultaneously with the execution and delivery of this Agreement. "Company Material Adverse Effect" means any material adverse effect on (a) the business, assets, financial condition or results of operations of the Companies, the Partnership and the Owner Participant taken as a whole or (b) the ability of Seller to consummate the transactions contemplated by this Agreement or perform its obligations hereunder; provided, however, that (with respect to clause (a) of this definition) the term "Company Material Adverse Effect" shall not include effects that result from or are consequences of (i) changes in financial, securities or currency markets, changes in prevailing interest rates or foreign exchange rates, changes in general economic conditions, changes in electricity, gas or other fuel supply and transmission and transportation markets, including changes to market prices for electricity, steam, natural gas or other commodities, or effects of weather or meteorological events, (ii) changes in law, rule or regulation of any Governmental Entity or changes in regulatory conditions in the United States or any state in which the Companies, the Partnership or the Owner Participant operates, (iii) events or changes that are consequences of hostility, terrorist activity, acts of war or acts of public enemies, (iv) changes in accounting standards, principles or interpretations, (v) the negotiation, announcement, execution, delivery, consummation or pendency of this Agreement or the transactions contemplated by this Agreement or any action by Seller or its Affiliates contemplated by or required by this Agreement, or (vi) actions taken or not taken solely at the request of Purchaser. "Confidentiality Agreement" means, collectively, (i) the Confidentiality Agreement, dated as of June 12, 2006 among the Partnership, GSO Capital Partners LP and Rockland Capital Energy Investments LLC and (ii) the Seller CA. "Consent" means any consent, approval, authorization, order, filing, registration or qualification of, by or with any Person. "Consumers Contracts" means (i) the Consumers Contracts (as defined in Appendix A) and (ii) the Consumers Consent (as defined in Appendix A) as in effect on the date hereof. "Damages" means Liabilities, demands, claims, suits, actions, or causes of action, losses, costs, expenses, damages and judgments, whether or not resulting from third party claims (including reasonable fees and expenses of attorneys and accountants). 45 "Dow Contracts" has the meaning specified in Appendix A as in effect on the date hereof. "Effective Time" means such time on the Closing Date at which the Transaction and the other transactions contemplated by this Agreement are consummated. "Environmental Law" means any foreign, federal, state, or local Law relating to (a) the treatment, disposal, emission, discharge, Release or threatened Release of Hazardous Substances or (b) the preservation and protection of the environment (including natural resources, air and surface or subsurface land or waters). "Equity Interests" means shares of capital stock or other equity interests. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Financing Facility" means debt instruments incurred by the Partnership, if any, and leveraged lease debt. "FMLP Partnership Agreement" means the Amended and Restated Agreement of Limited Partnership dated as of June 14, 1990 among the parties signatory thereto. "GAAP" means United States generally accepted accounting principles. "Governmental Entity" means any supranational, national, federal, state, municipal or local governmental or quasi-governmental or regulatory authority (including a national securities exchange or other self-regulatory body), agency, court, commission or other similar entity, domestic or foreign. "Governmental Order" means any order, decree, ruling, injunction, judgment or similar act of or by any Governmental Entity. "Hazardous Substance" means (a) any material, substance or waste (whether liquid, gaseous or solid) that (i) requires removal, remediation or reporting under any Environmental Law, or is listed, classified or regulated as a "hazardous waste" or "hazardous substance" (or other similar term) pursuant to any applicable Environmental Law or (ii) is regulated under applicable Environmental Laws as being, toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and (b) any petroleum product or by-product, petroleum-derived substances wastes or breakdown products, asbestos or polychlorinated biphenyls. "Knowledge" when used with respect to the applicable Company, means the actual knowledge of any fact, circumstance or condition of those officers of such Company or its Affiliates set forth on Schedule 9.2(a) of the Disclosure Letter and to the extent set forth on Schedule 9.2(a) of the Disclosure Letter; when used with respect to CMS Midland, means the actual knowledge of any fact, circumstance or condition of those individuals set forth on Schedule 9.2(a) of the Disclosure Letter and to the extent set forth on Schedule 9.2(a) of the Disclosure Letter; when used with respect to CMS 46 Holdings, means the actual knowledge of any fact, circumstance or condition of those individuals set forth on Schedule 9.2(a) of the Disclosure Letter and to the extent set forth on Schedule 9.2(a) of the Disclosure Letter; when used with respect to Seller, means the actual knowledge of any fact, circumstance or condition of those officers of Seller or its Affiliates set forth on Schedule 9.2(a) of the Disclosure Letter and to the extent set forth on Schedule 9.2(a) of the Disclosure Letter; and when used with respect to Purchaser, means the actual knowledge of any fact, circumstance or condition of those officers of Purchaser or its Affiliates set forth on Schedule 9.2(b) of the Disclosure Letter and to the extent set forth on Schedule 9.2(b) of the Disclosure Letter. "Law" means any law, statute, ordinance, regulation or rule of or by any Governmental Entity or any arbitrator. "Lessor" means Bank of America, N.A., as successor in interest to The Connecticut National Bank, not in its individual capacity but solely as Owner Trustee under the Trust Agreement. "Liabilities" means any and all known liabilities or indebtedness of any nature (whether direct or indirect, absolute or contingent, liquidated or unliquidated, due or to become due, accrued or unaccrued, matured or unmatured, asserted or unasserted, determined or determinable and whenever or however arising). "Lien" means any lien, claim, security interest, encumbrance or other adverse claim. "Material" when used with respect to the applicable Company, means material to CMS Midland and the Partnership, taken as a whole, or to CMS Holdings, the Owner Participant and the Lessor, taken as a whole, and when used with respect to Purchaser, means material to Purchaser and its Subsidiaries, taken as a whole. "MCV2" means MCV2 Development Company, a Michigan general partnership. "MCV Expansion" means Midland Cogeneration Venture Expansion, LLC, a Delaware limited liability company. "MCV Facility" means the 1,500 MW natural gas-fired, combined-cycle, cogeneration facility located in Midland County, Michigan operated by the Partnership. "MCV Partnership Agreement" means that certain Amended and Restated Limited Partnership Agreement of the Partnership, dated as of June 13, 1988, by and among CMS Midland, Tempco I, Inc., Tempco II, Inc., Rofan Energy Inc., Micogen Limited Partnership, MEI Limited Partnership, Source Midland Limited Partnership, Coastal Midland, Inc. and C-E Midland Energy, Inc. in effect on the date hereof (including Amendment No. 4 thereto to be entered into on or about the date hereof). "MPSC Matters" means any past or future proceeding, order or settlement with respect to the MCV Facility or a Consumers Contract before any Governmental Entity involving the nature or extent of MPSC authority, the recovery in retail rates of costs under the Composite PPA or any past settlement, order or proceeding relating to the Composite PPA or recovery in rates of Composite PPA costs. 47 "Operating Contract" means any contract or agreement (i) providing for the purchase, sale, supply, transportation, disposal or distribution of electricity, steam, fuel or any byproduct from electricity generation, (ii) for the operation and maintenance of any assets of the Companies and (iii) governing any Facility output or input. "Organizational Documents" means, with respect to any corporation, its articles or certificate of incorporation, memorandum or articles of association and by-laws or documents of similar substance; with respect to any limited liability company, its articles or certificate of organization, formation or association and its operating agreement or limited liability company agreement or documents of similar substance; with respect to any limited partnership, its certificate of limited partnership and partnership agreement or documents of similar substance; and with respect to any other entity, documents of similar substance to any of the foregoing. "Participation Agreement" means the Amended and Restated Participation Agreement (Trust 1) dated as of June 1, 1990 between the Partnership, the Owner Participant and certain other parties signatory thereto in effect on the date hereof. "Permits" means all permits, licenses, franchises, registrations, variances, authorizations, Consents, orders, certificates and approvals obtained from or otherwise made available by any Governmental Entity or pursuant to any Law. "Permitted Liens" means any Lien arising under the Organizational Documents of any of the Companies, the Partnership or the Owner Participant, as applicable. "Person" means any natural person, firm, partnership, association, corporation, company, joint venture, trust, business trust, Governmental Entity or other entity. "Purchaser Disclosure Schedules" means Schedules 4.2(b), 4.2(c), 4.3 and 4.4 setting forth disclosures of Purchaser, or qualifications or exceptions to any of Purchaser's warranties set forth in Article IV delivered simultaneously with the execution and delivery of this Agreement by Purchaser. "Purchaser Indemnified Parties" means Purchaser, Purchaser's Affiliates, and their respective directors, officers, shareholders, attorneys, accountants, representatives, agents and employees, and their respective heirs, successors and assigns. "Purchaser Material Adverse Effect" means any material adverse effect on (a) the business, assets, financial condition or results of operations of Purchaser and its Subsidiaries taken as a whole or (b) the ability of Purchaser to consummate the transactions contemplated by this Agreement or perform its obligations hereunder. "RCA" means the Resource Conservation Agreement dated as of February 12, 2004, by and between the Partnership and Seller. 48 "RDA" means the Reduced Dispatched Agreement dated as of July 7, 2004, by and between the Partnership and Seller. "Release" means the release, spill, emission, leaking, pumping, pouring, emptying, escaping, dumping, injection, deposit, disposal, discharge, dispersal, leaching or migrating of any Hazardous Substance into the environment. "Seller Indemnified Parties" means Seller, Seller's Affiliates, and their respective directors, officers, shareholders, attorneys, accountants, representatives, agents and employees, and their respective heirs, successors and assigns. "Seller Material Adverse Effect" means, with respect to Seller, any material adverse effect on the ability of Seller to consummate the transactions contemplated by this Agreement or perform its obligations hereunder. "Seller Disclosure Schedules" means the Schedules setting forth certain disclosures of Seller, or qualifications or exceptions to any of Seller's warranties set forth in Article II, contained in the Disclosure Letter delivered simultaneously with the execution and delivery of this Agreement. "Specified Environmental Matters" means matters addressed in any environmental agreement or environmental indemnification agreement as in effect on the date hereof where Seller, CMS Energy and/or Dow has a hold harmless and indemnity obligation in respect of an environmental matter relating to the site of the MCV Facility, excluding, however, matters to the extent that such matters attributable to the business and operations of the Companies, the Partnership, the Owner Participant and/or the Lessor from and after the Effective Time. "Specified Rate" means the per annum rate of interest published as the "Prime Rate" in The Wall Street Journal determined as of the date the obligation to pay interest arises. "Straddle Period" shall mean any taxable year or period beginning on, or before and ending after the Closing Date. "Subsidiary" means, with respect to any Person (for the purposes of this definition, the "parent"), any other Person (other than a natural person), whether incorporated or unincorporated, of which at least a majority of the securities or ownership interests having by their terms ordinary voting power to elect a majority of the board of directors or other persons performing similar functions is directly or indirectly owned or controlled by the parent or by one or more of its respective Subsidiaries or by the parent and any one or more of its respective Subsidiaries. "Tax" or "Taxes" means federal, state, local or foreign income, gross receipts, property, sales, use, license, excise, environmental (including taxes under Code Section 59A), stamp, franchise, employment, payroll, withholding, social security (or similar), unemployment, property, personal property, alternative or add-on minimum, ad valorem, value added, transfer or excise tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, whether disputed or not, imposed by any Governmental Entity. 49 "Tax Returns" means all tax returns, declarations, statements, reports, claims for refund, schedules, forms and information returns and any amendments, schedules or attachments to any of the foregoing relating to Taxes. "Tax Statute of Limitations Date" means the close of business on the 45th day after the expiration of the applicable statute of limitations with respect to Taxes, including any extensions thereof (or if such date is not a Business Day, the next Business Day). "Trading Contract" means any swap, forward, option or hedging agreement relating to the purchase or sale of energy-related products and services. "Trust Agreement" means the Amended and Restated Trust Agreement dated as of March 1, 1990 between the Owner Participant and the Lessor. "Unwind Agreement" means the Unwind Agreement dated as of December 10, 1991 among CMS Energy, Seller, the Companies and MEC Development Corp. and included as Schedule 9.2(c) of the Disclosure Letter. 9.3 Interpretation. In this Agreement, unless otherwise specified, the following rules of interpretation apply: (a) references to Sections, Schedules, Annexes, Exhibits and Parties are references to sections or sub-sections, schedules, annexes and exhibits of, and parties to, this Agreement; (b) the section and other headings contained in this Agreement are for reference purposes only and do not affect the meaning or interpretation of this Agreement; (c) words importing the singular include the plural and vice versa; (d) references to the word "including" do not imply any limitation; (e) the words "hereof", "herein" and "hereunder" and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision of this Agreement; and (f) references to "$" or "dollars" refer to U.S. dollars. 50 ARTICLE X GENERAL PROVISIONS 10.1 Notices. All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given on if (a) delivered personally, (b) mailed by certified or registered mail with postage prepaid, (c) sent by next-day or overnight mail or delivery, or (d) sent by fax or telegram, as follows: (a) if to Purchaser, MCV Power Partners, Inc. c/o GSO Capital Partners, LP 280 Park Avenue 11th Floor East Tower New York, New York 10023 Fax: 212-503-6930 Telephone: 212-503-2100 Attention: D. Dwight Scott with a copy to: Rockland Capital Energy Investments, LLC 2204 Timberlock Place, Suite 190 The Woodlands, TX 77380 Fax: 832-585-0104 Telephone: 832-585-0035 Attention: W. Scott Harlan (b) if to Seller, Consumers Energy Company One Energy Plaza Jackson, MI 49201 Fax: (517) 788-0768 Telephone: (517) 788-1257 Attention: James E. Brunner with a copy to: Sidley Austin LLP One South Dearborn Chicago, IL 60603 Fax: (312) 853-7036 Telephone: (312) 853-7324 Attention: Andrew H. Shaw (c) if to CMS Midland, CMS Midland Holdings Company One Energy Plaza Jackson, MI 49201 Fax: (517) 788-0768 Telephone: (517) 788-1257 Attention: James E. Brunner 51 with a copy to: Sidley Austin LLP One South Dearborn Chicago, IL 60603 Fax: (312) 853-7036 Telephone: (312) 853-7324 Attention: Andrew H. Shaw (d) If to CMS Holdings, CMS Midland Holdings Company One Energy Plaza Jackson, MI 49201 Fax: (517) 788-0768 Telephone: (517) 788-1257 Attention: James E. Brunner with a copy to: Sidley Austin LLP One South Dearborn Chicago, IL 60603 Fax: (312) 853-7036 Telephone: (312) 853-7324 Attention: Andrew H. Shaw or, in each case, at such other address as may be specified in writing to the other Parties. All such notices, requests, demands, waivers and other communications shall be deemed to have been received, if by personal delivery, certified or registered mail or next-day or overnight mail or delivery, on the day delivered or, if by fax or telegram, on the next Business Day following the day on which such fax or telegram was sent, provided that a copy is also sent by certified or registered mail. For the purposes of this Section 10.1, notice to any of the Companies shall not constitute notice to Seller, and vice versa. 10.2 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective heirs, successors and permitted assigns. 10.3 Assignment; Successors; Third-Party Beneficiaries. (a) This Agreement is not assignable by any Party without the prior written consent of all of the other Parties and any attempt to assign this Agreement without such consent shall be void and of no effect; provided, however, no consent shall be required with respect to any merger or conversion contemplated in Schedule 1.6 of the Disclosure Letter. 52 (b) This Agreement shall inure to the benefit of, and be binding on and enforceable by and against, the successors and permitted assigns of the respective Parties, whether or not so expressed. (c) This Agreement is intended for the benefit of the Parties hereto and does not grant any rights to any third parties unless specifically stated herein. 10.4 Amendment; Waivers; etc. No amendment, modification or discharge of this Agreement, and no waiver under this Agreement, shall be valid or binding unless set forth in writing and duly executed by the Party against whom enforcement of the amendment, modification, discharge or waiver is sought. Any such waiver shall constitute a waiver only with respect to the specific matter described in such writing and shall in no way impair the rights of the Party granting such waiver in any other respect or at any other time. The waiver by any of the Parties of a breach of or a default under any of the provisions of this Agreement, or any failure or delay to exercise any right or privilege under this Agreement, shall not be construed as a waiver thereof or otherwise affect any of such provisions, rights or privileges under this Agreement. 10.5 Entire Agreement. (a) This Agreement (including the Schedules and Exhibits referred to in or delivered under this Agreement, including the Disclosure Letter) and the Confidentiality Agreement contains the entire agreement between the parties relating to the subject matter of this Agreement to the exclusion of any terms implied by law which may be excluded by contract and supersedes all prior agreements and understandings, both written and oral, among the Parties with respect to their subject matters. Each Party acknowledges that it has not been induced to enter this Agreement by and, in agreeing to enter into this Agreement, it has not relied on, any warranties except as expressly stated or referred to in this Agreement. (b) The liability of a Party shall be limited or excluded as set out in this Agreement if and to the extent such limitations or exclusions apply, save in the event of fraud, fraudulent misrepresentation, death or personal injury. 10.6 Severability. Any term or provision of this Agreement that is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction or other authority declares that any term or provision hereof is invalid, void or unenforceable, the Parties agree that the court making such determination, to the greatest extent legally permissible, shall have the power to reduce the scope, duration, area or applicability of the term or provision, to delete specific words or phrases, or to replace any invalid, void or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. 53 10.7 Counterparts. This Agreement may be executed and delivered (including via facsimile) in several counterparts, each of which shall be deemed an original and all of which shall together constitute one and the same instrument. 10.8 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAW PRINCIPLES OF SUCH STATE. 10.9 Jurisdiction. (a) The courts of the State of New York are to have non-exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement. Any Proceedings shall be brought in the courts of the State of New York sitting in the County of New York, the court of the United States of America for the Southern District, and appellate courts having jurisdiction of appeals from any of the foregoing. Each Party waives (and agrees not to raise) any objection, on the ground of forum non conveniens or on any other ground, to the taking of proceedings in such courts. Each Party also agrees that a judgment against it in Proceedings brought in the State of New York shall be conclusive and binding upon it and may be enforced in any other jurisdiction. (b) Each Party irrevocably submits and agrees to submit to the jurisdiction of the courts of the State of New York sitting in the County of New York, the court of the United States of America for the Southern District, and appellate courts having jurisdiction of appeals from any of the foregoing. 10.10 Limitation on Damages. No Party shall, under any circumstance, have any liability to any other Party for any special, indirect, consequential or punitive damages claimed by such other Party under the terms of or due to any breach or non-performance of this Agreement, including lost profits, loss of revenue or income, cost of capital, or loss of business reputation or opportunity. 10.11 Enforcement. The Parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not to be performed in accordance with the terms hereof and that the Parties shall be entitled to specific performance of the terms hereof in addition to any other remedies at law or in equity. 10.12 No Right of Set-Off. Purchaser, for itself and its successors and permitted assigns, hereby unconditionally and irrevocably waives any rights of set-off, netting, offset, recoupment, or similar rights that such Purchaser or any of its successors and permitted assigns has or may have with respect to the payment of the Purchase Price or any other payments to be made by Purchaser pursuant to this Agreement or any other document or instrument delivered by Purchaser in connection herewith. 54 IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the date first above written. CONSUMERS ENERGY COMPANY By: /s/ Thomas J. Webb ------------------------------------ Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer CMS MIDLAND, INC. By: /s/ Thomas J. Webb ------------------------------------ Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer CMS MIDLAND HOLDINGS COMPANY By: /s/ Thomas J. Webb ------------------------------------ Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer MCV POWER PARTNERS, INC. By: /s/ D. Dwight Scott ------------------------------------ Name: D. Dwight Scott Title: Vice President 55 EX-31.(A) 5 k06781exv31wxay.txt CMS ENERGY CORPORATION'S CERTIFICATION OF 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, 2006 By: /s/ David W. Joos ---------------------------- David W. Joos President and Chief Executive Officer EX-31.(B) 6 k06781exv31wxby.txt CMS ENERGY CORPORATION'S CERTIFICATION OF CFO TO SECTION 302 Exhibit (31)(b) CERTIFICATION OF THOMAS J. WEBB I, Thomas J. Webb, certify that: 1. I have reviewed this 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, 2006 By /s/ Thomas J. Webb ------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer EX-31.(C) 7 k06781exv31wxcy.txt CONSUMERS ENERGY COMPANY'S CERTIFICATION OF 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, 2006 By: /s/ David W. Joos --------------------------- David W. Joos Chief Executive Officer EX-31.(D) 8 k06781exv31wxdy.txt CONSUMERS ENERGY COMPANY'S CERTIFICATION OF CFO TO SECTION 302 Exhibit (31)(d) CERTIFICATION OF THOMAS J. WEBB I, Thomas J. Webb, certify that: 1. I have reviewed this 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, 2006 By /s/ Thomas J. Webb --------------------------------- Thomas J. Webb Executive Vice President and Chief Financial Officer EX-32.(A) 9 k06781exv32wxay.txt CMS ENERGY CORPORATION'S CERTIFICATIONS 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, 2006 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, 2006 /s/ Thomas J. Webb - ------------------------------------------- Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer Date: August 4, 2006 EX-32.(B) 10 k06781exv32wxby.txt CONSUMERS ENERGY COMPANY'S CERTIFICATIONS 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, 2006 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, 2006 /s/ Thomas J. Webb - -------------------------------------------- Name: Thomas J. Webb Title: Executive Vice President and Chief Financial Officer Date: August 4, 2006 -----END PRIVACY-ENHANCED MESSAGE-----