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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 SEPTEMBER 30, 2001
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)
Fairlane Plaza South, Suite 1100
330 Town Center Drive, Dearborn, Michigan 48126
(313)436-9200
1-5611 CONSUMERS ENERGY COMPANY 38-0442310
(A Michigan Corporation)
212 West Michigan Avenue, Jackson, Michigan 49201
(517)788-0550
1-2921 PANHANDLE EASTERN PIPE LINE COMPANY 44-0382470
(A Delaware Corporation)
5444 Westheimer Road, P.O. Box 4967, Houston, Texas 77210-4967
(713)989-7000
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
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Panhandle Eastern Pipe Line Company meets the conditions set forth in General
Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q
with the reduced disclosure format. In accordance with Instruction H, Part I,
Item 2 has been reduced and Part II, Items 2, 3 and 4 have been omitted.
Number of shares outstanding of each of the issuer's classes of common stock at
October 31, 2001:
CMS ENERGY CORPORATION:
CMS Energy Common Stock, $.01 par value 132,980,247
CONSUMERS ENERGY COMPANY, $10 par value, privately held by CMS Energy 84,108,789
PANHANDLE EASTERN PIPE LINE COMPANY, no par value, indirectly privately
held by CMS Energy 1,000
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CMS ENERGY CORPORATION
AND
CONSUMERS ENERGY COMPANY
AND
PANHANDLE EASTERN PIPE LINE COMPANY
QUARTERLY REPORTS ON FORM 10-Q TO THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
This combined Form 10-Q is separately filed by each of CMS Energy Corporation,
Consumers Energy Company and Panhandle Eastern Pipe Line Company. Information
contained herein relating to each individual registrant is filed by such
registrant on its own behalf. Accordingly, except for their respective
subsidiaries, Consumers Energy Company and Panhandle Eastern Pipe Line Company
make no representation as to information relating to any other companies
affiliated with CMS Energy Corporation.
TABLE OF CONTENTS
PAGE
------
Glossary 4
PART I: FINANCIAL INFORMATION
CMS Energy Corporation
Management's Discussion and Analysis
Results of Operations CMS-1
Market Risk Information CMS-7
Capital Resources and Liquidity CMS-9
Outlook CMS-12
Other Matters CMS-17
Consolidated Financial Statements
Consolidated Statements of Income CMS-20
Consolidated Statements of Cash Flows CMS-22
Consolidated Balance Sheets CMS-24
Consolidated Statements of Common Stockholders' Equity CMS-26
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Basis of Presentation CMS-27
2. Discontinued Operations CMS-28
3. Loss Contracts and Reduced Asset Valuations CMS-29
4. Uncertainties CMS-32
5. Short-Term and Long-Term Financings, and Capitalization CMS-44
6. Earnings Per Share and Dividends CMS-47
7. Risk Management Activities and Financial Instruments CMS-48
8. Reportable Segments CMS-54
9. Leases CMS-55
Report of Independent Public Accountants CMS-56
2
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
Consumers Energy Company
Management's Discussion and Analysis
Results of Operations CE-1
Capital Resources and Liquidity CE-4
Outlook CE-5
Other Matters CE-8
Consolidated Financial Statements
Consolidated Statements of Income CE-12
Consolidated Statements of Cash Flows CE-13
Consolidated Balance Sheets CE-14
Consolidated Statements of Common Stockholder's Equity CE-16
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure and Summary of Significant
Accounting Policies CE-17
2. Uncertainties CE-20
3. Short-Term Financings and Capitalization CE-30
4. Leases CE-32
Report of Independent Public Accountants CE-33
Panhandle Eastern Pipe Line Company
Management's Discussion and Analysis
Results of Operations PE-1
Outlook PE-2
Other Matters PE-3
Consolidated Financial Statements
Consolidated Statements of Income PE-5
Consolidated Statements of Cash Flows PE-6
Consolidated Balance Sheets PE-7
Consolidated Statements of Common Stockholder's Equity PE-9
Condensed Notes to Consolidated Financial Statements:
1. Corporate Structure PE-10
2. Regulatory Matters PE-10
3. Related Party Transactions PE-11
4. Commitments and Contingencies PE-11
5. Implementation of SFAS No. 133 PE-13
6. System Gas PE-13
7. Trunkline LNG Financing PE-13
Report of Independent Public Accountants PE-14
Quantitative and Qualitative Disclosures about Market Risk CO-1
PART II: OTHER INFORMATION
Item 1. Legal Proceedings CO-1
Item 4. Submission of Matters to a Vote of Security Holders CO-2
Item 5. Other Information CO-2
Item 6. Exhibits and Reports on Form 8-K CO-2
Signatures CO-4
3
GLOSSARY
Certain terms used in the text and financial statements are defined below.
ABATE Association of Businesses Advocating Tariff Equity
ALJ Administrative Law Judge
APB Accounting Principles Board
Alliance Alliance Regional Transmission Organization
Anadarko Anadarko Petroleum Corporation, a non-affiliated company
Articles Articles of Incorporation
Attorney General Michigan Attorney General
bcf Billion cubic feet
BG LNG Services BG LNG Services, Inc., a subsidiary of BG Group of the United Kingdom
Big Rock Big Rock Point nuclear power plant, owned by Consumers
Board of Directors Board of Directors of CMS Energy
Bookouts Unplanned netting of transactions from multiple contracts
Btu British thermal unit
Clean Air Act Federal Clean Air Act, as amended
CMS Capital CMS Capital Corporation, a subsidiary of Enterprises
CMS Electric and Gas CMS Electric and Gas Company, a subsidiary of Enterprises
CMS Energy CMS Energy Corporation, the parent of Consumers and Enterprises
CMS Energy Common Stock Common stock of CMS Energy, par value $.01 per share
CMS Gas Transmission CMS Gas Transmission Company, a subsidiary of Enterprises
CMS Generation CMS Generation Company, a subsidiary of Enterprises
CMS Holdings CMS Midland Holdings Company, a subsidiary of Consumers
CMS Midland CMS Midland Inc., a subsidiary of Consumers
CMS MST CMS Marketing, Services and Trading Company, a subsidiary of Enterprises
CMS Oil and Gas CMS Oil and Gas Company, a subsidiary of Enterprises
CMS Panhandle Holding CMS Panhandle Holding Company, a subsidiary of CMS Gas Transmission
Common Stock All classes of Common Stock of CMS Energy and each of its subsidiaries, or any of
them individually, at the time of an award or grant under the Performance Incentive
Stock Plan
Consumers Campus Holdings Consumers Campus Holdings, L.L.C., a wholly owned subsidiary of Consumers
Consumers Consumers Energy Company, a subsidiary of CMS Energy
Court of Appeals Michigan Court of Appeals
Customer Choice Act Customer Choice and Electricity Reliability Act, a Michigan statute enacted in
June 2000 that allows all retail customers choice of alternative electric
suppliers no later than January 1, 2002, provides for full recovery of net stranded
costs and implementation costs, establishes a five percent reduction in residential
rates, establishes rate freeze and rate cap, and allows for Securitization
Detroit Edison The Detroit Edison Company, a non-affiliated company
DIG Dearborn Industrial Generation, L.L.C., a wholly owned subsidiary of CMS Generation
DOE U.S. Department of Energy
4
Dow The Dow Chemical Company, a non-affiliated company
Duke Energy Duke Energy Corporation, a non-affiliated company
EITF Emerging Issues Task Force
Enterprises CMS Enterprises Company, a subsidiary of CMS Energy
EPA U.S. Environmental Protection Agency
EPS Earnings per share
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FMLP First Midland Limited Partnership, a partnership which holds a lessor interest in
the MCV facility
FTC Federal Trade Commission
GCR Gas cost recovery
GTNs CMS Energy General Term Notes(R), $250 million Series A, $125 million Series B,
$150 million Series C, $200 million Series D, $400 million Series E and $300 million
Series F
INGAA Interstate Natural Gas Association of America
Jorf Lasfar The 1,356 MW coal-fueled power plant in Morocco, jointly owned by CMS Generation
and ABB Energy Venture, Inc.
kWh Kilowatt-hour
LIBOR London Inter-Bank Offered Rate
Loy Yang The 2,000 MW brown coal fueled Loy Yang A power plant and an associated coal mine
in Victoria, Australia, in which CMS Generation holds a 50 percent ownership interest
LNG Liquefied natural gas
Ludington Ludington pumped storage plant, jointly owned by Consumers and Detroit Edison
mcf Thousand cubic feet
MCV Facility A natural gas-fueled, combined-cycle cogeneration facility operated by the
MCV Partnership
MCV Partnership Midland Cogeneration Venture Limited Partnership in which Consumers has a 49 percent
interest through CMS Midland
MD&A Management's Discussion and Analysis
MEPCC Michigan Electric Power Coordination Center
METC Michigan Electric Transmission Company, a subsidiary of Consumers Energy
Michigan Gas Storage Michigan Gas Storage Company, a subsidiary of Consumers
MMBtu Million British thermal unit
MPSC Michigan Public Service Commission
MTH Michigan Transco Holdings, Limited Partnership
MW Megawatts
NEIL Nuclear Electric Insurance Limited, an industry mutual insurance company owned by
member utility companies
5
NMC Nuclear Management Company, a Wisconsin company, 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
capacity owned by the four utilities.
NOx Nitrogen Oxide
NRC Nuclear Regulatory Commission
NYMEX New York Mercantile Exchange
OATT Open Access Transmission Tariff
Palisades Palisades nuclear power plant, owned by Consumers
Pan Gas Storage Pan Gas Storage Company, a subsidiary of Panhandle Eastern Pipe Line Company
Panhandle Panhandle Eastern Pipe Line Company, including its subsidiaries Trunkline, Pan Gas
Storage, Panhandle Storage, and Trunkline LNG. Panhandle is a wholly owned subsidiary
of CMS Gas Transmission
Panhandle Eastern Pipe Line Panhandle Eastern Pipe Line Company, a wholly owned subsidiary of CMS Gas Transmission
Panhandle Storage CMS Panhandle Storage Company, a subsidiary of Panhandle Eastern Pipe Line Company
PCB Poly chlorinated biphenyl
PFD Proposal For Decision
Powder River CMS Oil & Gas owns a significant interest in 13 coal bed methane fields or projects
developed within the Powder River Basin which spans the border between Wyoming
and Montana.
PPA The Power Purchase Agreement between Consumers and the MCV Partnership with a
35-year term commencing in March 1990
PSCR Power supply cost recovery
PUHCA Public Utility Holding Company Act of 1935
RTO Regional Transmission Organization
SAB Staff Accounting Bulletin
Sea Robin Sea Robin Pipeline Company
SEC U.S. Securities and Exchange Commission
Securitization A financing authorized by statute in which a MPSC approved flow of revenues from a
portion of the rates charged by a utility to its customers is set aside and pledged
as security for the repayment of Securitization bonds issued by a special purpose
entity affiliated with such utility.
Senior Credit Facilities $450 million one-year revolving credit facility, maturing in June 2002 and a
$300 million three-year revolving credit facility, maturing in June 2004
SFAS Statement of Financial Accounting Standards
SIPS State Implementation Plans
SOP Statement of Position
Stranded Costs Costs incurred by utilities in order to serve their customers in a regulated
monopoly environment, but which may not be recoverable in a competitive environment
because of customers leaving their systems and ceasing to pay for their costs.
These
6
Superfund costs could include owned and purchased generation and regulatory assets. Comprehensive
Environmental Response, Compensation and Liability Act
TBtu Trillion british thermal unit
Transition Costs Stranded Costs, as defined, plus the costs incurred in the transition to competition.
Trunkline Trunkline Gas Company, a subsidiary of Panhandle Eastern Pipe Line Company
Trunkline LNG Trunkline LNG Company, a subsidiary of Panhandle Eastern Pipe Line Company
Trust Preferred Securities Securities representing an undivided beneficial interest in the assets of statutory
business trusts, which interests have a preference with respect to certain trust
distributions over the interests of either CMS Energy or Consumers, as applicable,
as owner of the common beneficial interests of the trusts
Union Utility Workers of America, AFL-CIO
7
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8
CMS ENERGY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers is a combination electric and gas utility company serving Michigan's
Lower Peninsula. Enterprises, through subsidiaries, including Panhandle and its
subsidiaries, is engaged in several domestic and international diversified
energy businesses including: natural gas transmission, storage and processing;
independent power production; oil and gas exploration and production; and energy
marketing, services and trading.
The MD&A of this Form 10-Q should be read along with the MD&A and other
parts of CMS Energy's 2000 Form 10-K. This MD&A refers to, and in some sections
specifically incorporates by reference, CMS Energy's Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Consolidated Financial Statements and Notes. This report and other written and
oral statements that CMS Energy may make contain forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. CMS Energy's
intentions with the use of the words "anticipates," "believes," "estimates,"
"expects," "intends," and "plans," and variations of such words and similar
expressions, are solely to identify forward-looking statements that involve risk
and uncertainty. These forward-looking statements are subject to various factors
that could cause CMS Energy's actual results to differ materially from the
results anticipated in such statements. CMS Energy has 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 such
statements. CMS Energy does, however, discuss certain risk factors,
uncertainties and assumptions in this MD&A and in Item 1 of the 2000 Form 10-K
in the section entitled "Forward-Looking Statements Cautionary Factors and
Uncertainties" and in various public filings it periodically makes with the SEC.
CMS Energy designed this discussion of potential risks and uncertainties, which
is by no means comprehensive, to highlight important factors that may impact CMS
Energy's outlook. This report also describes material contingencies in CMS
Energy's Condensed Notes to Consolidated Financial Statements, and CMS Energy
encourages its readers to review these Notes.
RESULTS OF OPERATIONS
CMS ENERGY CONSOLIDATED EARNINGS
In October 2001, CMS Energy announced a plan to make significant changes in
its business strategy to strengthen its balance sheet, provide more transparent
and predictable future earnings and lower its business risk by focusing future
business growth primarily in North America. In connection with the change in
business strategy and associated plans to sell non-strategic assets CMS Energy
recorded a $613 million after-tax write-down in recognition of planned
divestitures, reduced asset valuations and loss contracts. Included were: a $183
million charge related to discontinuation of the Company's South American energy
distribution unit; a $218 million charge related to energy development projects
and international investments in recognition of the net recoverable value of
these investments; a $130 million charge related to the Dearborn Industrial
Generation plant power supply contract with the Ford/Rouge complex, due to
higher than expected fuel and operating costs; and an $82 million charge related
to revised estimates of Consumers Energy's payments to the Midland Cogeneration
Venture for purchased power. For CMS Energy's business units, the after-tax
write-down is comprised of: $32 million for the oil and gas exploration unit,
$28 million for the gas pipeline and processing business, $268 million for
independent power production, $93 million for Consumers Energy and $9 million
for other areas. For further information regarding the write-downs, see Note 2,
Discontinued Operations and Note 3, Loss Contracts and Reduced Asset Valuations,
incorporated by reference herein.
CMS-1
The following tables depict CMS Energy's Results of Operations before and
after the effects of reconciling items.
THREE MONTHS ENDED
SEPTEMBER 30
------------------
2001 2000
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In millions, Except Per Share Amounts
Net Income Before Reconciling Items $ 46 $ 46
Effects of Loss Contracts (212) -
Effects of Reduced Asset Valuations (218) -
Asset Sales - 5
Loss on Disposal of Discontinued Operations (183) -
Income (Loss) from Discontinued Operations (2) 2
------ -----
Consolidated Net Income (Loss) $ (569) $ 53
====== =====
Basic Earnings Per Average Common Share:
Earnings Per Share Before Reconciling Items $ 0.35 $0.43
Effects of Loss Contracts (1.60) -
Effects of Reduced Asset Valuations (1.64) -
Asset Sales - 0.04
Loss on Disposal of Discontinued Operations (1.38) -
Income (Loss) from Discontinued Operations (0.02) 0.02
------ -----
Earnings Per Share After Reconciling Items $(4.29) $0.49
====== =====
Diluted Earnings Per Average Common Share:
Earnings Per Share Before Reconciling Items $ 0.35 $0.43
Effects of Loss Contracts (1.60) -
Effects of Reduced Asset Valuations (1.64) -
Asset Sales - 0.04
Loss on Disposal of Discontinued Operations (1.38) -
Income (Loss) from Discontinued Operations (0.02) 0.02
------ -----
Earnings Per Share After Reconciling Items $(4.29) $0.49
====== =====
For the three months ended September 30, 2001, consolidated net income
before reconciling items compared to the comparable period in 2000 before
reconciling items, reflects increased earnings from CMS Energy's diversified
energy businesses offset by lower earnings at the utility due primarily to
increased power supply costs resulting from an unplanned outage at Consumers
Palisades nuclear plant.
CMS-2
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
2001 2000
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In millions, Except Per Share Amounts
Net Income Before Reconciling Items $ 202 $ 152
Effects of Loss Contracts (212) -
Effects of Reduced Asset Valuations (218) -
Asset Sales 6 56
Cumulative Effects of Change in Accounting for Inventories - (5)
Loss on Disposal of Discontinued Operations (183) -
Income (Loss) from Discontinued Operations (2) 4
------ ------
Consolidated Net Income (Loss) $ (407) $ 207
====== ======
Basic Earnings Per Average Common Share:
Earnings Per Share Before Reconciling Items $ 1.55 $ 1.40
Effects of Loss Contracts (1.63) -
Effects of Reduced Asset Valuations (1.68) -
Asset Sales 0.05 0.47
Cumulative Effect of Change in Accounting for Inventories - (0.04)
Loss on Disposal of Discontinued Operations (1.41) -
Income (Loss) from Discontinued Operations (0.01) 0.03
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Earnings Per Share After Reconciling Items $(3.13) $ 1.86
====== ======
Diluted Earnings Per Average Common Share:
Earnings Per Share Before Reconciling Items $ 1.55 $ 1.39
Effects of Loss Contracts (1.63) -
Effects of Reduced Asset Valuations (1.68) -
Asset Sales 0.05 0.47
Cumulative Effect of Change in Accounting for Inventories - (0.04)
Loss on Disposal of Discontinued Operations (1.41) -
Income (Loss) from Discontinued Operations (0.01) 0.03
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Earnings Per Share After Reconciling Items $(3.13) $ 1.85
====== ======
For the nine months ended September 30, 2001, consolidated net income
before reconciling items increased over the comparable period in 2000 before
reconciling items primarily due to increased earnings from CMS Energy's
diversified energy businesses and improved earnings from Consumers Gas Utility
business segment, reflecting a $29 million after-tax regulatory obligation
related to gas prices recorded in the second quarter of 2000. The increase was
partially offset by lower earnings at Consumers Electric Utility as a result of
increased power supply costs associated with the unplanned outage at Consumers
Palisades nuclear plant.
For further information, see the individual results of operations for each
CMS Energy business segment in this MD&A.
CMS-3
CONSUMERS' ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
SEPTEMBER 30
-------------------------
2001 2000 CHANGE
---- ---- ------
IN MILLIONS
Three months ended $(62) $118 $(180)
Nine months ended 157 342 (185)
==== ==== =====
For the three months ended September 30, 2001, electric pretax operating
income decreased $180 million from the comparable period in 2000. The earnings
decrease reflects a $126 million loss related to Consumers' Power Purchase
Agreement with the MCV and increased replacement power costs, discussed in the
consolidated earnings section, partially offset by higher electric deliveries to
higher margin customers. For the nine months ended September 30, 2001, electric
pretax operating income decreased $185 million from the comparable period in
2000. The earnings decrease reflects the above referenced loss related to the
MCV along with the increase in power costs, also partially offset by higher
electric deliveries to higher margin customers. The following table quantifies
these impacts on pretax operating income:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
CHANGE COMPARED TO PRIOR YEAR 2001 vs 2000 2001 vs 2000
- ----------------------------- ------------------ ------------------
IN MILLIONS
Electric deliveries $ 19 $ 21
Power supply costs and related production revenue (68) (71)
Rate decrease 0 (17)
Non-commodity revenue (13) (4)
Other operating expenses 8 12
Loss on MCV Power Purchases (126) (126)
----- -----
Total change $(180) $(185)
===== =====
ELECTRIC DELIVERIES: For the three months ended September 30, 2001,
electric deliveries including intersystem volumes were 11.0 billion kWh, an
increase of 0.3 billion kWh or 3.0 percent from the comparable period in 2000.
Total electric deliveries increased primarily due to higher residential and
commercial usage. For the nine months ended September 30, 2001, electric
deliveries were 30.2 billion kWh, which is a slight decrease from the comparable
period in 2000. Although total deliveries were below the 2000 level, current
year increased deliveries to the higher margin residential and commercial
sectors more than offset the impact of reductions to the lower margin industrial
sector.
POWER SUPPLY COSTS:
SEPTEMBER 30
-------------------------
2001 2000 CHANGE
------ ---- ------
IN MILLIONS
Three months ended $ 444 $355 $ 89
Nine months ended 1,050 949 101
====== ==== ====
For the three and nine months ended September 30, 2001, power supply costs
increased $89 million and $101 million, respectively, from the comparable period
in 2000, primarily due to higher interchange power
CMS-4
purchases. Consumers had to purchase greater quantities of higher-priced
external power primarily because of decreased internal generation resulting from
unscheduled outages. Further, the continuing unscheduled outage at Palisades
materially affected third quarter results because of the necessity to utilize
higher cost internal generation and purchase replacement power.
CONSUMERS' GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
SEPTEMBER 30
-----------------------
2001 2000 CHANGE
---- ---- ------
IN MILLIONS
Three months ended $(1) $ 9 $(10)
Nine months ended 81 44 37
=== === ====
For the three months ended September 30, 2001, gas pretax operating income
decreased by $10 million. The earnings decrease is primarily the result of
higher operation and maintenance costs and lower gas deliveries due to the
economic slowdown. For the nine months ended September 30, 2001, gas pretax
operating income increased by $37 million, primarily the result of the recording
of a $45 million regulatory obligation related to gas prices in the second
quarter of 2000. The following table quantifies these impacts on pretax
operating income.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
CHANGE COMPARED TO PRIOR YEAR 2001 VS 2000 2001 VS 2000
- ----------------------------- ------------------ ------------------
IN MILLIONS
Gas deliveries $ (1) $ 7
Gas commodity costs and related revenue (3) 38
Gas wholesale and retail services 1 7
Operation and maintenance expense (8) (15)
General taxes and depreciation expense 1 0
---- ----
Total change $(10) $ 37
==== ====
GAS DELIVERIES: For the three months ended September 30, 2001, gas system
deliveries, including miscellaneous transportation volumes totaled 42 bcf, a
decrease of 3 bcf or 7 percent from the comparable period in 2000. During the
third quarter of 2001, the decreased deliveries reflect a reduction in demand
due to decelerated economic activity. For the nine months ended September 30,
2001, gas system deliveries, including miscellaneous transportation totaled 258
bcf, a decrease of 15 bcf or 5.2 percent from the comparable period in 2000.
Although deliveries were below the 2000 level, year to date deliveries to the
higher margin residential and commercial sectors more than offset the impact of
reductions to the lower margin industrial sector.
COST OF GAS SOLD:
SEPTEMBER 30
-----------------------
2001 2000 CHANGE
---- ---- ------
IN MILLIONS
Three months ended $ 72 $ 60 $ 12
Nine months ended 562 450 112
==== ==== ====
CMS-5
For the three months ended September 30, 2001, the cost of gas sold
increased due to higher gas prices. During the third quarter of 2001, these
higher gas costs were partially offset by decreased sales due to reduced
economic demand. For the nine months ended September 30, 2001, higher gas prices
through the first three quarters contributed to the increased cost of gas sold.
NATURAL GAS TRANSMISSION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended September 30, 2001,
pretax operating income excluding the effects of write-downs increased $3
million (6 percent) from the comparable period in 2000. The increase reflects
increased earnings from the GasAtacama project and lower operating expenses. For
the nine months ended September 30, 2001, pretax operating income, excluding the
effects of write-downs increased $17 million (10 percent) from the comparable
period in 2000 primarily reflecting a 43 percent increase in LNG shipments (57
shipments compared to 40), and improved gas gathering and processing results of
operations.
INDEPENDENT POWER PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended September 30, 2001,
pretax operating income, excluding the effects of the investment write-downs,
the write-offs of unsuccessful development costs, and the recognition of the DIG
loss contract reserve, was unchanged from the comparable period in 2000,
reflecting decreased earnings from domestic plants due to reduced earnings from
the MCV facility, construction delays at the DIG plant that led to increased
steam generation costs and decreased international plant earnings primarily from
investments in Argentina offset by the earnings benefits from the expansion of
the Jorf Lasfar facility in Africa in late 2000 and early 2001. For the nine
months ended September 30, 2001, pretax operating income excluding the effects
of the write-downs, decreased $32 million (23 percent) from the comparable
period in 2000. The decrease reflects decreased earnings from domestic plants
due to the sale of power plants in 2000, construction delays at the DIG plant
that led to increased costs for steam generation, and a gain recorded in 2000
reflecting the restructuring of a power supply contract. These decreases were
partially offset by the earnings benefits from the expansion of the Jorf Lasfar
facility, the operation of additional units at the Takoradi facility and the
absence of operating losses in 2001 from the investment in Loy Yang, which was
written off in the fourth quarter of 2000.
OIL AND GAS EXPLORATION AND PRODUCTION RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income, excluding write-downs,
for the three months ended September 30, 2001, increased $14 million (147
percent) from the comparable period in 2000 as a result of higher realized oil
and natural gas prices and increased production from Equatorial Guinea and
Powder River properties. Partially offsetting these increases were higher
operating, exploration costs and general and administrative costs. Pretax
operating income, excluding write-downs, for the nine months ended September 30,
2001, increased $49 million (304 percent) as a result of higher oil and natural
gas commodity prices and increased production from Equatorial Guinea and Powder
River properties. Partially offsetting these increases were lower production due
to selling our Michigan and Ecuador properties and higher operating, exploration
costs and general and administrative costs.
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended September 30, 2001,
pretax operating income increased $22 million from the comparable period in
2000. The increase reflects higher gas (159 bcf vs 119
CMS-6
bcf) and electric (21.4 billion kWh vs 12.6 billion kWh) volumes and improved
margins, the increased net value of long-term power contracts and wholesale
power trading activity, net of reserves. For the nine months ended September 30,
2001, pretax operating income increased $76 million from the comparable period
in 2000. The increase reflects higher gas (657 bcf vs 355 bcf) and electric
(69.9 billion kWh vs 15.6 kWh) volumes and gas margins, partially offset by
lower electric margins, the execution of long-term power sales contracts and
increased wholesale gas and power trading, net of reserves. Due to the variable
and competitive nature of energy trading, results for interim periods are not
necessarily indicative of results to be achieved for the fiscal year.
INTERNATIONAL ENERGY DISTRIBUTION RESULTS OF OPERATIONS
In the third quarter of 2001, CMS Energy discontinued the operations of
International Energy Distribution. For more information, see Note 2,
Discontinued Operations, incorporated by reference herein.
MARKET RISK INFORMATION
CMS Energy is exposed to market risks including, but not limited to,
changes in interest rates, currency exchange rates, and certain commodity and
equity security prices. CMS Energy's derivative activities are subject to the
direction of the Executive Oversight Committee, which is comprised of certain
members of CMS Energy's senior management, and its Risk Committee, which is
comprised of CMS Energy business unit managers. The purpose of the risk
management policy is to measure and limit CMS Energy's overall energy commodity
risk by implementing an enterprise-wide policy across all CMS Energy business
units. This allows CMS Energy to maximize the use of hedges among its business
units before utilizing derivatives with external parties. The role of the Risk
Committee is to review the corporate commodity position and ensure that net
corporate exposures are within the economic risk tolerance levels established by
the Board of Directors. Management employs established policies and procedures
to manage its risks associated with market fluctuations, including the use of
various derivative instruments such as futures, swaps, options and forward
contracts. Management believes that any losses incurred on derivative
instruments used to hedge risk would be offset by an opposite movement of the
value of the hedged risk. For further information on CMS Energy's use of
derivative instruments to manage risks, see Note 7, Risk Management Activities
and Financial Instruments, incorporated by reference herein.
CMS Energy has performed sensitivity analyses to assess the potential loss
in fair value, cash flows and earnings based upon hypothetical 10 percent
increases and decreases in market exposures. Management does not believe that
sensitivity analyses alone provide an accurate or reliable method for monitoring
and controlling risks; therefore, CMS Energy and its subsidiaries rely on the
experience and judgment of senior management and traders to revise strategies
and adjust positions as they deem necessary. Losses in excess of the amounts
determined in the sensitivity analyses could occur if market rates or prices
exceed the 10 percent shift used for the analyses.
COMMODITY PRICE RISK: CMS Energy is exposed to market fluctuations in the
price of natural gas, oil, electricity, coal and natural gas liquids. CMS Energy
employs established policies and procedures to manage these risks using various
commodity derivatives, including futures contracts, options and swaps (which
require a net cash payment for the difference between a fixed and variable
price.) The prices of these energy commodities can fluctuate because of, among
other things, changes in the supply of and demand for those commodities. To
minimize adverse price changes, CMS Energy also hedges certain inventory and
purchases and sales contracts. Based on a sensitivity analysis, CMS Energy
estimates that if energy commodity prices average 10 percent higher or lower,
pretax operating income for the remainder of 2001 would increase or decrease by
$1.9 million and $2.0 million, respectively. These hypothetical 10 percent
shifts in quoted commodity prices would not have had a material impact on CMS
Energy's consolidated financial position or
CMS-7
cash flows as of September 30, 2001. The analysis does not quantify short-term
exposure to hypothetically adverse price fluctuations in inventories.
Consumers enters into, for purposes other than trading, electricity and gas
fuel call options and swap contracts to protect against risk due to fluctuations
in the market price of these commodities and to ensure a reliable source of
capacity to meet its customers' electric needs.
As of September 30, 2001, the fair value based on quoted future market
prices of electricity-related option and swap contracts was $14 million.
Assuming a hypothetical 10 percent adverse change in market prices, the
potential reduction in fair value associated with these contracts would be $4
million. As of September 30, 2001, Consumers had an asset of $73 million as a
result of premiums incurred for electricity call option contracts. Consumers'
maximum exposure associated with the call option contracts is limited to the
premiums paid.
INTEREST RATE RISK: CMS Energy is exposed to interest rate risk resulting
from the issuance of fixed-rate and variable-rate debt, including that
associated with trust preferred securities, and from interest rate swaps and
interest rate lock agreements. CMS Energy uses a combination of fixed-rate and
variable-rate debt, as well as interest rate swaps and rate locks to manage and
mitigate interest rate risk exposure when deemed appropriate, based upon market
conditions. CMS Energy employs these strategies to attempt to provide and
maintain the lowest cost of capital. At September 30, 2001, the carrying amounts
of long-term debt and trust preferred securities were $7.8 billion and $1.3
billion, respectively, with corresponding fair values of $7.7 billion and $1.2
billion, respectively. Based on a sensitivity analysis at September 30, 2001,
CMS Energy estimates that if market interest rates average 10 percent higher or
lower, earnings before income taxes for the subsequent 12 months would not have
a material impact on CMS Energy's consolidated financial position or cash flows.
In addition, based on a 10 percent adverse shift in market rates, CMS Energy
would have an exposure of approximately $429 million to the fair value of its
long-term debt and trust preferred securities if it had to refinance all of its
long-term fixed-rate debt and trust preferred securities. CMS Energy does not
intend to refinance its fixed-rate debt and trust preferred securities in the
near term and believes that any adverse change in interest rates would not have
a material effect on CMS Energy's consolidated financial position as of
September 30, 2001.
The fair value of CMS Energy's floating to fixed interest rate swaps at
September 30, 2001, with a notional amount of $569 million, was $15 million,
which represents the amount CMS Energy would pay upon settlement. The swaps
mature at various times through 2006 and are designated as cash flow hedges for
accounting purposes.
The fair value of CMS Energy's fixed to floating interest rate swaps at
September 30, 2001, with a notional amount of $850 million, was $1 million,
which represents the amount CMS Energy would receive upon settlement. The swaps
mature at various times through 2006 and are designated as fair value hedges for
accounting purposes.
CURRENCY EXCHANGE RISK: CMS Energy is exposed to currency exchange risk
that arises from net investments in foreign operations as well as various
international projects in which CMS Energy has an equity interest and have debt
denominated in the US dollar. CMS Energy uses forward exchange and option
contracts to hedge these currency exchange risks. At September 30, 2001, CMS
Energy's primary currency exchange rate exposure was the Argentine peso. The
impact of the hedges of the net investments in foreign operations is reflected
in other comprehensive income as a component of the foreign currency translation
adjustment. For the third quarter of 2001, the adjustment for hedging was $5
million of the total net foreign currency translation adjustment of $(17)
million. CMS Energy did not incur any significant gain or loss as a result of
exchange rate
CMS-8
fluctuations during the third quarter of 2001 related to hedges of US dollar
denominated debt that did not qualify as net investment hedges, and
consequently, were marked-to-market through earnings.
Based on a sensitivity analysis at September 30, 2001, a 10 percent adverse
shift in currency exchange rates would not have a material effect on CMS
Energy's consolidated financial position or results of operations as of
September 30, 2001, but would result in a net cash settlement of approximately
$16 million. The estimated fair value of the foreign exchange hedges at
September 30, 2001 was $18 million, which represents the amount CMS Energy would
receive upon settlement.
EQUITY SECURITY PRICE RISK: CMS Energy and certain of its subsidiaries have
equity investments in companies in which they hold less than a 20 percent
interest. A hypothetical 10 percent adverse shift in equity security prices
would not have a material effect on CMS Energy's consolidated financial
position, results of operations or cash flows as of September 30, 2001.
For a discussion of accounting policies related to derivative transactions,
see Note 7, Risk Management Activities and Financial Instruments, incorporated
by reference herein.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
CMS Energy's primary ongoing source of cash is dividends and other
distributions from subsidiaries. During the first nine months of 2001, Consumers
paid $134 million in common dividends and Enterprises paid $413 million in
common dividends and other distributions to CMS Energy. In September 2001,
Consumers declared a $55 million common dividend to CMS Energy, payable in
November 2001. CMS Energy's consolidated cash requirements are met by its
operating and financing activities.
OPERATING ACTIVITIES: CMS Energy's consolidated net cash provided by
operating activities is derived mainly from the processing, storage,
transportation and sale of natural gas; the generation, transmission,
distribution and sale of electricity; and the sale of oil. For the first nine
months of 2001 and 2000, consolidated cash from operations totaled $246 million
and $163 million, respectively. The $83 million increase resulted primarily from
an increase in cash earnings, excluding the effects of asset revaluations and
discontinued operations, an increase in distributions from related parties, and
the timing of cash receipts and payments related to working capital items. CMS
Energy uses its cash derived from operating activities primarily to maintain and
expand its diversified energy businesses, to maintain and expand electric and
gas systems of Consumers, to pay interest on and retire portions of its
long-term debt, and to pay dividends.
INVESTING ACTIVITIES: For the first nine months of 2001 and 2000, CMS
Energy's consolidated net cash used in investing activities totaled $994 million
and $372 million, respectively. In 2001 the increased use of cash of $622
million primarily reflects $474 million of reduced proceeds from the sales of
assets compared to 2000. CMS Energy's expenditures (excluding acquisitions)
during the first nine months of 2001 for its utility and diversified energy
businesses were $532 million and $530 million, respectively, compared to $377
million and $436 million, respectively, during the comparable period in 2000.
FINANCING ACTIVITIES: For the first nine months of 2001 and 2000, CMS
Energy's net cash provided by financing activities totaled $779 million and $358
million, respectively. The increase of $421 million resulted primarily from an
increase in the proceeds from notes, bonds, and other long term debt ($886
million), an increase in the issuance of common stock ($331 million), a decrease
in the retirement of trust preferred
CMS-9
securities ($250 million) and a decrease in the repurchase of common stock ($124
million), partially offset by an increase in the retirement of bonds and other
long-term debt ($595 million), an increase in the retirement of notes payable
($478 million) and a decrease in proceeds from trust preferred securities ($99
million). The following table summarizes securities issued during the first nine
months of 2001:
DISTRIBUTION/ PRINCIPAL
MONTH ISSUED MATURITY INTEREST RATE AMOUNT USE OF PROCEEDS
------------ -------- ------------- --------- --------------------------
IN MILLIONS
CMS ENERGY
GTNs Series F (1) (1) 8.28% $ 221 General corporate purposes
Common Stock February n/a 10.0 shares 296 Repay debt and general
corporate purposes
Common Stock (2) n/a 1.4 shares 41 General corporate purposes
Senior Notes March 2011 8.50% 350 Repay debt and general
corporate purposes
Senior Notes July 2008 8.90% 269 Repay debt and general
------ corporate purposes
Subtotal $1,177
------
CONSUMERS
Senior Notes September 2006 6.25% $ 350 General corporate purposes
Trust Preferred
Securities May 2031 9.00% 121 General corporate purposes
------
$ 471
------
Total $1,648
======
- ------------
(1) GTNs are issued from time to time with varying maturity dates. The rate
shown herein is a weighted average interest rate.
(2) Common Stock is issued from time to time in conjunction with the stock
purchase plan and various employee savings and stock incentive plans.
In the first nine months of 2001, CMS Energy paid $135 million in cash
dividends to holders of CMS Energy Common Stock. In September 2001, the Board of
Directors declared a quarterly dividend of $.365 per share, or $54 million on
CMS Energy Common Stock, payable in November 2001.
OTHER INVESTING AND FINANCING MATTERS: At September 30, 2001, the book
value per share of CMS Energy Common Stock was $14.98.
At November 1, 2001, CMS Energy had an aggregate $1.2 billion in securities
registered for future issuance.
CMS Energy has $750 million of senior credit facilities consisting of a
$450 million one-year revolving credit facility, maturing in June 2002 and a
$300 million three-year revolving credit facility, maturing in June 2004 (Senior
Credit Facilities). CMS Energy also has unsecured lines of credit as anticipated
sources of funds to finance working capital requirements and to pay for capital
expenditures between long-term financings. At
CMS-10
September 30, 2001, the total amount available under the Senior Credit
Facilities and the unsecured lines of credit were $325 million and $12 million,
respectively. For detailed information, see Note 5, Short-Term and Long-Term
Financings, and Capitalization, incorporated by reference herein.
Pursuant to the outstanding authorization by the Board of Directors to
repurchase shares of CMS Energy Common Stock from time to time, in open market
or private transactions, as of September 30,2001, CMS Energy has repurchased
approximately 232,000 shares for $5 million.
In September 2001, CMS Energy made cash infusions to Consumers in the
amount of $150 million. The proceeds are reflected as a financing activity on
the Consumers Consolidated Statement of Cash Flows.
CMS Energy intends to sell assets in 2001 and 2002 resulting in
approximately $2.4 billion in cash proceeds.
In November 2001, Consumers Funding LLC, a special purpose subsidiary of
Consumers, issued $469 million of Securitization bonds. For further information,
see Note 4, Uncertainties, Consumers' Electric Utility Rate Matters,
incorporated by reference herein.
Consumers has credit facilities, lines of credit and a trade receivable
sale program in place as anticipated sources of funds to fulfill its currently
expected capital expenditures. For detailed information about this source of
funds, see Note 5, Short-Term and Long-Term Financings and Capitalization,
incorporated by reference herein.
In April 2001, Consumers Campus Holdings, a wholly owned subsidiary of
Consumers, entered into a $70 million operating lease agreement for the
construction of an office building to be used as the main headquarters for
Consumers in Jackson, Michigan. The seven-year agreement, with payments
commencing upon completion of construction, includes options to renew the lease,
purchase the property under the lease, or return the property at the end of the
lease term and assist the lessor in remarketing the building. Lease payments
will be determined based on LIBOR rates and the total cost of the construction,
which is projected to be completed on or before March 2003. For further
information on the lease agreement, see Note 9, Leases, incorporated by
reference herein.
CAPITAL EXPENDITURES
CMS Energy estimates that capital expenditures, including new lease
commitments and investments in new business developments through partnerships
and unconsolidated subsidiaries, will total $3.3 billion during 2001 through
2003. These estimates are prepared for planning purposes and are subject to
revision. CMS Energy expects to satisfy a substantial portion of the capital
expenditures with cash from operations. CMS Energy will continue to evaluate
capital markets in 2001 as a potential source for financing its subsidiaries'
investing activities. CMS Energy estimates capital expenditures by business
segment over the next three years as follows:
CMS-11
YEARS ENDING DECEMBER 31
--------------------------
2001 2002 2003
----- ------ ----
IN MILLIONS
Consumers electric operations(a)(b) $ 590 $ 480 $405
Consumers gas operations(a) 145 175 165
Natural gas transmission 218 185 140
Independent power production 140 30 25
Oil and gas exploration and production 195 125 170
Marketing, services and trading 3 15 15
International energy distribution 30 - -
Other 44 15 10
------ ------ ----
$1,365 $1,025 $930
====== ====== ====
- ------------
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
(b) These amounts include estimates for capital expenditures possibly required
to comply with recently revised national air quality standards under the
Clean Air Act. For further information see Note 4, Uncertainties - Electric
Environmental Matters.
(c) The amounts for 2002 and 2003 exclude expenditures associated with a
potential LNG terminal expansion. The expansion expenditures, estimated at
$25 million in 2002 and $90 million in 2003, are currently expected to be
funded through a joint venture via loans or equity contributions from
Panhandle or equity investors or by third party financings acceptable to
the lenders of the joint venture.
For further explanation of CMS Energy's planned investments for the years
2001 through 2003, see the Outlook section below.
OUTLOOK
CMS Energy's vision is to be an integrated energy company with a strong
asset base, supplemented with an active marketing, services and trading
capability. CMS Energy intends to integrate the skills and assets of its
business units to obtain optimal returns and to provide expansion opportunities
for its multiple existing businesses.
To achieve this vision, CMS Energy announced in October 2001, significant
changes in its business strategy in order to strengthen its balance sheet,
provide more transparent and predictable future earnings, and lower its business
risk by focusing its future business growth primarily in North America.
Specifically, the Company plans to sell non-strategic international assets,
discontinue its international energy distribution business and sell its entire
interest in its Equatorial Guinea oil and gas production and reserves and
methanol plant. CMS Energy has entered into a definitive agreement to sell with
Marathon Oil Company. CMS Energy also plans to discontinue all new development
outside North America, which includes closing all non-U.S. development offices,
except for exploration and production projects and prior commitments in the
Middle East. CMS Energy is pursuing the sale of these non-strategic and
non-performing assets, including those that were not determined to be impaired.
Upon the sale of these assets, the proceeds realized may be materially different
than the remaining book value of these assets. Even though these assets have
been identified for sale, management cannot predict when, nor make any
assurances, that these asset sales will occur.
Consistent with changes in its business strategy, CMS Energy will continue
to sharpen its geographic focus on key growth areas where it already has
significant investments and opportunities. As a result, CMS Energy's focus will
be in North America, particularly in the United States' central corridor and in
existing operations including commitments in the Middle East. At the plan's
completion, approximately 90% of CMS Energy's assets are expected to be in North
America.
CMS-12
CMS Energy is currently evaluating longer-term growth initiatives,
including: acquisitions and joint ventures in CMS Energy's North American
diversified energy businesses, and expanded and new North American LNG
regasification terminals.
DIVERSIFIED ENERGY OUTLOOK
NATURAL GAS TRANSMISSION OUTLOOK: CMS Energy seeks to build on Panhandle's
position as a leading United States interstate natural gas pipeline system and
the nation's largest operating LNG receiving terminal through expansion and
better utilization of its existing facilities and construction of new
facilities. In October 2001 CMS Trunkline LNG Company announced the expansion of
its Lake Charles, Louisiana facility to approximately 1.2 billion cubic feet per
day of send out capacity, up from its current send out capacity of 630 million
cubic feet per day. The terminal's storage capacity will also be expanded to 9
billion cubic feet from its current storage capacity of 6.3 billion cubic feet.
With FERC approval, the expanded facility is planned to be in operation in early
2005. In addition, CMS Energy is pursuing financings and monetizations of
several of its assets, including the value created by contracts for capacity at
its Lake Charles, Louisiana, LNG receiving facility. By providing additional
transportation, storage and other asset-based, value-added services to customers
such as new gas-fueled power plants, local distribution companies, industrial
and end-users, marketers and others, CMS Energy expects to expand its natural
gas pipeline business. CMS Energy is in the process of converting certain
Panhandle pipeline facilities through a joint venture to permit the throughput
of liquid products, such as gasoline. CMS Energy is also participating in the
Guardian Pipeline project, a 150-mile natural gas pipeline venture from Illinois
to Wisconsin to meet the needs of significantly growing markets. In November
2001, Guardian Pipeline closed project financing in the amount of $180 million
for construction of the pipeline. Completion and operation of the Guardian
Pipeline is expected by November 2002. Panhandle continues to attempt to
maximize revenues from existing assets and to advance acquisition opportunities
and development projects that provide expanded services to meet the specific
needs of customers. In May 2001, Trunkline LNG signed an agreement with BG Group
of the United Kingdom that provides for a 22-year contract, beginning January
2002, for all the existing uncommitted capacity at Trunkline LNG's facility. CMS
Energy and Sempra Energy announced an agreement in October 2001 to jointly
develop a major new LNG receiving terminal to bring much-needed natural gas
supplies into northwestern Mexico and Southern California. The plant will be
located on the Pacific Coast, north of Ensenada, Baja California, Mexico. It
will have a send out capacity of approximately 1 billion cubic feet per day of
natural gas via a new 40-mile pipeline between the terminal and existing
pipelines in the region. Commercial operation of the LNG terminal is expected to
begin in late 2005.
INDEPENDENT POWER PRODUCTION OUTLOOK: CMS Energy's independent power
production business plans to complete the restructuring of its operations during
2002 by narrowing the scope of its existing operations and commitments from four
regions to two regions: the U.S. and the Middle East/North Africa. In addition,
its plans include selling designated assets and investments that are
non-performing, non-region focused and non-synergistic with other CMS Energy
business units. The independent power production business unit will continue to
strive to improve the operations and management of its remaining portfolio of
assets in order to contribute to CMS Energy's earnings and to maintain its
reputation for solid performance in the construction and operation of power
plants. CMS Energy is currently negotiating a definitive agreement for the sale
of its interest in the Loy Yang Power facility in Australia. Even though a
deadline has not been established, and the sale cannot be assured, management
anticipates that the transaction will close early in 2002.
OIL AND GAS EXPLORATION AND PRODUCTION OUTLOOK: CMS Energy seeks to
accelerate natural gas exploration, development and production in North America
by exploiting the significant natural gas potential in its existing properties
in West Texas, Wyoming and Montana. CMS Energy also seeks to explore for, or
acquire, natural gas reserves in North America where integrated development
opportunities exist with other CMS Energy
CMS-13
businesses involved in gathering, processing and pipeline activities. CMS Energy
plans to further explore and develop its oil and gas assets in the Republic of
Congo, Eritrea, Tunisia, Cameroon, Colombia and Venezuela. In November 2001, CMS
Energy announced that it has signed a definitive agreement with Marathon Oil
Company for the sale of all of CMS's ownership interests in Equatorial Guinea,
West Africa, for approximately $1 billion. Included in the sale are all of CMS
Oil and Gas' oil and gas reserves in Equatorial Guinea and CMS Gas
Transmission's ownership interest in the related methanol plant. The transaction
is expected to close in January 2002 and is subject to approval by the
Government of Equatorial Guinea.
MARKETING, SERVICES AND TRADING OUTLOOK: CMS Energy intends to use its
marketing, services and trading business to focus on wholesale customers such as
municipals, cooperative utilities and large industrial customers in the central
United States where CMS Energy's existing assets are concentrated. CMS Energy's
marketing, services and trading business also intends to contract for use of
significant gas transportation and storage assets in the central United States
to provide a platform for wholesale marketing, trading, and physical arbitrage.
CMS Energy also seeks to continue developing importing and marketing
opportunities for LNG. CMS Energy plans to capitalize on favorable market
conditions for energy performance contracting by expanding its services business
in selected markets.
Recent events related to very large market makers in the energy trading
market have raised concerns about the liquidity in this market. Management
cannot predict what effect these events may have on the liquidity of the trading
markets in the short-term, but believes the markets will be stable and grow over
the long-term.
UNCERTAINTIES: The results of operations and financial position of CMS
Energy's diversified energy businesses may be affected by a number of trends or
uncertainties that have, or CMS Energy reasonably expects could have, a material
impact on income from continuing operations and cash flows. Such trends and
uncertainties include: 1) the ability to sell or refinance assets or businesses
and achieve balance sheet and credit improvement in accordance with its
financial plan; 2) the international monetary fluctuations, particularly in
Argentina, Brazil and Australia; 3) the changes in foreign governmental and
regulatory policies that could significantly reduce the tariffs charged and
revenues recognized by certain foreign projects; 4) the imposition of stamp
taxes on certain South American contracts that could significantly increase
project expenses; 5) the ability to resolve alleged environmental violations at
an independent power plant; 6) the increased competition in the market for
transmission of natural gas to the Midwest causing pressure on prices charged by
Panhandle; and 7) the expected increase in competition for LNG terminalling
services, and the volatility in natural gas prices, creating volatility in LNG
terminalling revenues.
Since the September 11, 2001 terrorists attack in the United States,
CMS Energy has increased security at substantially all facilities and
infrastructure, and will continue to evaluate security on an ongoing basis. CMS
Energy may be required to comply with potential federal and state regulatory
security measures. As a result, CMS Energy anticipates increased operating costs
related to security after September 11, 2001 that could be significant. CMS
Energy cannot quantify these costs at this time. Additionally, it is not certain
that these additional costs will be recovered in Consumers' or Panhandle's
rates.
CMS Energy has become aware that Rouge Steel Company (Rouge), with whom DIG
has contracted to provide steam for industrial use and to supply DIG with blast
furnace gas at prices significantly less than the cost of natural gas, is
pursuing a significant capital investment for their operations which may result
in Rouge altering certain of its operational processes as early as 2004. These
alterations could have an adverse operational and financial impact on DIG by
resulting in Rouge requiring significantly less steam from DIG and not being in
a position to provide economical blast furnace gas for DIG's use in the
production of steam and electricity. However, these alterations may result in
additional electric sales to Rouge that DIG may be able to supply. CMS Energy is
currently assessing these potential operational and financial impacts and DIG is
evaluating alternatives to its current contractual arrangements with Rouge but
CMS Energy cannot predict the ultimate outcome of these matters at this time.
CONSUMERS' ELECTRIC UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects electric system
deliveries (including both full service sales and delivery service to customers
who choose to buy generation service from an alternate energy supplier) to grow
at an average rate of approximately two percent per year based primarily on a
steadily growing customer base. This growth rate reflects a long-range expected
trend of growth. Growth from year to year may vary from this trend due to
customer response to abnormal weather conditions or changes in economic
conditions including utilization and expansion of manufacturing facilities.
CMS-14
COMPETITION AND REGULATORY RESTRUCTURING: Regulatory changes and other
developments have resulted and will continue to result in increased competition
in the electric business. Generally, increased competition threatens Consumers'
market share and can reduce profit margins.
Consumers has in the last several years experienced and expects to continue
to experience a significant increase in competition for generation services with
the introduction of retail direct access in the State of Michigan. Under
Michigan's Customer Choice Act, effective in June 2000, all electric customers
will have the choice of electric generation suppliers by January 1, 2002.
The Customer Choice Act imposes certain rate caps that could result in
Consumers being unable to collect customer rates sufficient to fully recover its
cost of conducting business. Some of these costs may be wholly or partially
beyond Consumers' ability to control. In particular, if Consumers needs to
purchase power from wholesale suppliers at market-based prices during the period
when retail rates are frozen or capped, the rate caps imposed by the Customer
Choice Act may make it difficult for Consumers to purchase the power at prices
that it could recover in the rates it charges its customers. As a result, it is
not certain that Consumers can maintain its profit margins in its electric
utility business during the rate freeze.
In December 2000, as a result of electric restructuring, the MPSC issued a
new code of conduct that applies to electric utilities and alternative energy
suppliers. The code of conduct seeks to prevent cross-subsidization, information
sharing and preferential treatment between a utility's regulated and unregulated
services as well as between a utility and its affiliates. The new code of
conduct is broadly written, and as a result could affect Consumers' retail gas
business, the marketing of unregulated services and equipment to customers in
Michigan, and internal transfer pricing between Consumers' departments and
affiliates and could restrict the level of business between Consumers and other
CMS Energy subsidiaries or adversely affect the terms on which that business is
conducted. The new code of conduct was recently reaffirmed after hearing without
substantial modification, and is scheduled to be effective at the end of 2001.
Consumers anticipates that it will appeal MPSC orders related to the code of
conduct and seek a stay of its effective date. In addition, Consumers
anticipates that it will seek waivers to the code of conduct with respect to
utility activities that may be prohibited by the new code of conduct, and CMS
Energy non-utility subsidiaries may seek waivers for certain of their activities
that may be prohibited by the new code of conduct. The full impact of the new
code of conduct on CMS Energy's businesses will remain uncertain until the MPSC
or appellate courts issue definitive rulings in regard to the implementation
issues.
Several years prior to the enactment of the Customer Choice Act, in
response to industry restructuring efforts, Consumers entered into multi-year
electric supply contracts with some of its largest industrial customers to
provide power to some of their facilities. The MPSC approved those contracts as
part of its phased introduction to competition. During the period from 2001
through 2005, either Consumers or these industrial customers can terminate or
restructure some of these contracts. As of September 2001, neither Consumers nor
any of its industrial customers have terminated or restructured any of these
contracts. These contracts involve approximately 600 MW of customer power supply
requirements. Consumers cannot predict the ultimate financial impact of changes
related to these power supply contracts.
Uncertainty exists with respect to the enactment of federal electric
industry restructuring legislation. A variety of bills introduced in Congress in
recent years have sought to change existing federal regulation of the industry,
and recently the House of Representatives passed a bill that is currently before
the Senate. If the federal government enacts legislation restructuring the
electric industry, then that legislation could potentially affect or even
supercede state regulation.
In part because of certain policy pronouncements by the FERC, Consumers
joined the Alliance RTO. In January 2001, the FERC granted Consumers'
application to transfer ownership and control of its transmission facilities to
a wholly owned subsidiary, METC. On April 1, 2001, Consumers transferred the
transmission facilities to METC. In October 2001, Consumers announced an
agreement to sell METC to MTH, an independent limited partnership whose general
partner is a subsidiary of Trans-Elect Inc. METC will continue to own and
operate the system until the companies meet all conditions of closing, including
approval of the
CMS-15
transaction from the FERC. Regulatory approvals and operational transfer are
expected to take place in the second quarter of 2002; however, Consumers can
make no assurances as to when or if the transaction will be completed. For
further information, see Note 4, Uncertainties, Consumers' Electric Utility Rate
Matters, incorporated by reference herein.
CMS Energy cannot predict the outcome of these electric
industry-restructuring issues on its financial position, liquidity, or results
of operations.
RATE MATTERS: Prior to the enactment of the Customer Choice Act, there were
several pending rate issues that could have affected Consumers' electric
business. As a result of the passage of this legislation, the MPSC dismissed
certain rate proceedings and a complaint filed by ABATE seeking a reduction in
rates. ABATE filed a petition for rehearing with the MPSC, which was denied in
October 2001.
For further information and material changes relating to the rate matters
and restructuring of the electric utility industry, see Note 1, Corporate
Structure and Basis of Presentation, Utility Matters, and Note 4, Uncertainties,
Consumers' Electric Utility Rate Matters, incorporated by reference herein.
NUCLEAR MATTERS: In June 2001, an unplanned outage began at Palisades that
negatively affected, and will continue to negatively affect, power costs through
fourth quarter 2001. On June 20, 2001, the Palisades reactor was shut down so
technicians could inspect a small steam leak on a control rod drive assembly.
There was no risk to the public or workers. In August 2001, Consumers completed
an expanded inspection that included all similar control rod drive assemblies
and elected to completely replace the defective components immediately, as
opposed to partially repairing the components now followed eventually by
complete replacement during a future outage. The Company adopted this approach
because it provides more certainty of schedule for return to service, greater
regulatory acceptability, and avoids future plant outage time and associated
replacement power costs. Installation of the new components is expected to be
completed in December 2001, with the plant expected to return to service in
January 2002. Consumers cannot, however, make any assurances as to the date on
which the new components will be installed or the plant will return to service.
For further information and material changes relating to nuclear matters, see
Note 4, Uncertainties, Nuclear Matters, incorporated by reference herein.
UNCERTAINTIES: Several electric business trends or uncertainties may affect
Consumers' financial results and condition. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) capital expenditures and increased operating expenses
for compliance with the Clean Air Act; 2) environmental liabilities arising from
various federal, state and local environmental laws and regulations, including
potential liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Acts and Superfund; 3) uncertainties relating to the
storage and ultimate disposal of spent nuclear fuel and the successful operation
of the Palisades plant by NMC; 4) electric industry restructuring, including: a)
how the MPSC ultimately calculates the amount of Stranded Costs and the related
true-up adjustments and the manner in which the true-up operates; b) the ability
to recover fully the cost of doing business under the rate caps; c) the ability
to meet peak electric demand requirements at a reasonable cost and without
market disruption and initiatives undertaken to reduce exposure to energy price
increases; d) the restructuring of the MEPCC and the termination of joint
merchant operations with Detroit Edison; e) the ability to sell wholesale power
at market based rates; f) the effect of the transfer of Consumers transmission
facilities to METC and its successful disposition or integration into an RTO;
and g) the MPSC adoption of proposed electric distribution performance standards
requiring customer credits for prolonged outages; 5) the power outage at
Palisades and the incremental cost of replacement power and maintenance; and 6)
the effects of derivative accounting and
CMS-16
potential earnings volatility. For detailed information about these trends or
uncertainties, see Note 4, Uncertainties, incorporated by reference herein.
CONSUMERS' GAS UTILITY BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers anticipates gas deliveries,
including gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average of about one percent
per year based primarily on a steadily growing customer base. Actual gas
deliveries in future periods may be affected by abnormal weather, alternative
energy costs, changes in competitive conditions, and the level of natural gas
consumption per customer.
During the spring and summer months of 2001, Consumers purchased natural
gas for inventory to meet anticipated future customer needs during the winter
heating season. Consumers anticipates that it will incur financing costs on
these natural gas purchases that are higher than the costs recovered in current
rates.
UNCERTAINTIES: Several gas business trends or uncertainties may affect
Consumers' financial results and conditions. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) implementation of the permanent gas
customer choice program for all gas retail customers; 4) any initiatives
undertaken to protect customers against gas price increases; and 5) market and
regulatory responses to increases in gas costs. For detailed information about
these uncertainties, see Note 4, Uncertainties, incorporated by reference
herein.
CONSUMERS' OTHER OUTLOOK
Consumers offers a variety of energy-related services to electric and gas
customers that focus on appliance maintenance, home safety, commodity choice and
assistance to customers purchasing heating, ventilation and air conditioning
equipment. Consumers continues to look for additional growth opportunities in
energy-related services for Consumers' customers.
In July 2001, the MPSC directed gas utilities under its jurisdiction to
prepare and file an unbundled cost of service study. The purpose of the study is
to allow parties to advocate or oppose the unbundling of the following services:
metering, billing information, transmission, balancing, storage, backup and
peaking, and customer turn-on and turn-off services. Unbundled services could be
separated from future rates and the services could be provided by an approved
third party. Consumers was directed to make this filing in connection with its
June 2001 request for a gas service rate increase and Consumers has complied
with this request.
OTHER MATTERS
FOREIGN CURRENCY TRANSLATION
CMS Energy adjusts common stockholders' equity to reflect foreign currency
translation adjustments for the operation of long-term investments in foreign
countries. During the first nine months of 2001, the change in the
CMS-17
foreign currency translation adjustment decreased equity by $64 million, of
which $17 million was recognized during the third quarter, net of after-tax
hedging proceeds. Although management currently believes that the currency
exchange rate fluctuations over the long term will not have a material adverse
affect on CMS Energy's financial position, liquidity or results of operations,
CMS Energy hedges its exposure to the Argentine peso. Previous hedges for the
Australian dollar and the Brazilian real expired during the third quarter. CMS
Energy uses forward exchange and option contracts to hedge certain receivables,
payables, long-term debt and equity value relating to foreign investments. The
notional amount of the outstanding foreign exchange contracts on the Argentine
peso was $223 million at September 30, 2001. The estimated fair value of the
foreign exchange and option contracts at September 30, 2001 was $18 million,
which represents the amount CMS Energy would receive upon settlement.
In 2000, an impairment loss of $329 million ($268 million after-tax) was
realized on the carrying amount of the Loy Yang investment. This loss does not
include cumulative net foreign currency losses of $164 million due to
unfavorable changes in the exchange rates, which, in accordance with SFAS No.
52, Foreign Currency Translation, will not be realized until there has been a
sale or full liquidation of CMS Energy's investment.
NEW ACCOUNTING RULES
During July 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001, be accounted for under the
purchase method; use of the pooling of interests method is no longer permitted.
The adoption of SFAS No. 141 effective July 1, 2001 will result in CMS Energy
accounting for any future business combinations under the purchase method of
accounting, but will not change the method of accounting used in previous
business combinations.
SFAS No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment on an annual basis. The amortization of
goodwill ceases upon adoption of the standard. At September 30, 2001 the amount
of unamortized goodwill was $824 million. Goodwill amortization was
approximately $6 million and $18 million, excluding the effects of write-downs,
for the three months and nine months ended September 30, 2001, respectively. The
provisions of SFAS No. 142 require adoption as of January 1, 2002 for calendar
year entities. CMS Energy is currently studying the effects of the new standard,
but cannot predict at this time if any amounts will be recognized as impairments
of goodwill or other intangible assets upon adoption.
In August 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. The provisions of SFAS No. 143 require adoption as of January 1,
2003. The standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. CMS Energy is currently studying the
effects of the new standard.
FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, in October 2001 that supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The accounting model for long-lived assets to be disposed of by sale applies to
all long-lived assets, including discontinued operations, and replaces the
provisions of APB Opinion No. 30, Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, for the disposal of segments
of a business.
CMS-18
SFAS No. 144 requires that those long-lived assets be measured at the lower
of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured at net realizable value or include amounts
for operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The adoption of SFAS No. 144, effective January 1, 2002, will
result in CMS Energy accounting for any future impairments or disposals of
long-lived assets under the provisions of SFAS No. 144, but will not change the
accounting principles used in previous asset impairments or disposals.
In October 2001, the FASB also issued clarifying guidance for Derivative
Implementation Issue No. C15, Scope Exceptions: Normal Purchases and Normal
Sales Exception for Option-Type Contracts and Forward Contracts in Electricity,
and final guidance for Derivative Implementation Issue No. C16, Scope
Exceptions: Applying the Normal Purchases and Normal Sales Exception to
Contracts That Combine a Forward Contract and a Purchased Option Contract. These
issues could have a significant impact upon the implementation of derivative
accounting for certain contracts, and are effective January 1, 2002 and April 1,
2002, respectively.
CMS-19
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPEMBER 30 SEPEMBER 30
--------------------- ---------------------
2001 2000 2001 2000
------ ------ ------- -------
IN MILLIONS, EXCEPT PER SHARE AMOUNTS
OPERATING REVENUE
Electric utility $ 738 $ 715 $ 2,027 $2,002
Gas utility 149 142 928 765
Natural gas transmission 205 247 854 604
Independent power production 97 144 314 357
Oil and gas exploration and production 62 33 158 96
Marketing, services and trading 1,743 1,034 7,176 1,776
Other 2 8 15 20
------ ------ ------- ------
2,996 2,323 11,472 5,620
------ ------ ------- ------
OPERATING EXPENSES
Operation
Fuel for electric generation 94 104 265 286
Purchased and interchange power - Marketing, services and trading 1,283 574 4,282 685
Purchased and interchange power 190 140 416 311
Purchased power - related parties 155 141 399 438
Cost of gas sold - Marketing, services and trading 377 471 2,519 1,065
Cost of gas sold 120 133 991 560
Other 336 254 1,060 717
------ ------ ------- ------
2,555 1,817 9,932 4,062
Maintenance 60 67 190 214
Depreciation, depletion and amortization 125 145 388 446
General taxes 54 57 177 178
Loss contracts and reduced asset valuations (Note 3) 603 - 603 -
------ ------ ------- ------
3,397 2,086 11,290 4,900
------ ------ ------- ------
PRETAX OPERATING INCOME (LOSS)
Electric utility (62) 118 157 342
Gas utility (1) 9 81 44
Natural gas transmission 8 48 146 172
Independent power production (327) 51 (273) 137
Oil and gas exploration and production (25) 10 16 16
Marketing, services and trading 20 (2) 78 2
Other (14) 3 (23) 7
------ ------ ------- ------
(401) 237 182 720
------ ------ ------- ------
OTHER INCOME (DEDUCTIONS)
Accretion income - - - 2
Accretion expense (9) (8) (26) (25)
Gain on asset sales, net of foreign currency translation losses of $25
in 2000 - 7 10 76
Other, net 6 4 17 12
------ ------ ------- ------
(3) 3 1 65
------ ------ ------- ------
EARNINGS (LOSS) BEFORE INTEREST AND TAXES (404) 240 183 785
------ ------ ------- -------
FIXED CHARGES
Interest on long-term debt 139 152 426 443
Other interest 18 10 46 17
Capitalized interest (7) (14) (34) (34)
Preferred dividends - - 1 1
Preferred securities distributions 25 24 71 71
------ ------ ------- ------
175 172 510 498
------ ------ ------- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTERESTS (579) 68 (327) 287
INCOME TAXES (BENEFITS) (196) 17 (108) 78
MINORITY INTERESTS 1 - 3 1
------ ------ ------- ------
INCOME (LOSS) FROM CONTINUING OPERATIONS (384) 51 (222) 208
DISCONTINUED OPERATIONS, NET OF TAX BENEFIT OF $20 (NOTE 2) (185) 2 (185) 4
------ ------ ------- ------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (569) 53 (407) 212
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR TREATMENT OF INVENTORY,
NET OF TAX BENEFIT OF $(2) - - - (5)
------ ------ ------- ------
CONSOLIDATED NET INCOME (LOSS) $ (569) $ 53 $ (407) $ 207
====== ====== ======= ======
CMS-20
THREE MONTHS ENDED NINE MONTHS ENDED
SEPEMBER 30 SEPEMBER 30
--------------------- ---------------------
2001 2000 2001 2000
------ ------ ------- ------
AVERAGE COMMON SHARES OUTSTANDING 133 110 130 111
====== ====== ======= ======
BASIC EARNINGS (LOSS) PER AVERAGE COMMON SHARE:
CONTINUING OPERATIONS $(2.89) $ .47 $ (1.71) $ 1.83
DISCONTINUED OPERATIONS $(1.40) $ .02 $ (1.42) $ .03
------ ------ ------- ------
$(4.29) $ .49 $ (3.13) $ 1.86
====== ====== ======= ======
DILUTED EARNINGS (LOSS) PER AVERAGE COMMON SHARE:
CONTINUING OPERATIONS $(2.89) $ .47 $ (1.71) $ 1.82
DISCONTINUED OPERATIONS $(1.40) $ .02 $ (1.42) $ .03
------ ------ ------- ------
$(4.29) $ .49 $ (3.13) $ 1.85
====== ====== ======= ======
DIVIDENDS DECLARED PER COMMON SHARE $ .365 $ .365 $ 1.095 $1.095
====== ====== ======= ======
The accompanying condensed notes are an integral part of these statements.
CMS-21
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
2001 2000
------ ------
IN MILLIONS
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income $ (407) $ 207
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $5 and $29, respectively) 388 446
Contract losses and asset revaluations (Note 3) 628 -
Discontinued operations (Note 2) 185 (4)
Capital lease and debt discount amortization 17 25
Accretion expense 26 25
Accretion income - abandoned Midland project - (2)
MCV power purchases (9) (42)
Undistributed earnings from related parties (2) (125)
Cumulative effect of an accounting change - 7
Gain on the sale of assets, net of foreign currency translation losses (10) (76)
Changes in other assets and liabilities:
Decrease (increase) in accounts receivable and accrued revenues 180 (592)
Increase in inventories (365) (143)
Increase (decrease) in accounts payable and accrued expenses (334) 454
Decrease in deferred income taxes and investment tax credit (30) (2)
Regulatory obligation - gas choice (16) 27
Changes in other assets and liabilities (5) (42)
------ ------
Net cash provided by operating activities 246 163
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (862) (732)
Acquisition of companies, net of cash acquired - (74)
Investments in partnerships and unconsolidated subsidiaries (163) (48)
Cost to retire property, net (73) (78)
Proceeds from sale of property 109 583
Other (5) (23)
------ ------
Net cash used in investing activities (994) (372)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes, bonds, and other long-term debt 1,644 758
Proceeds from trust preferred securities 121 220
Issuance of common stock 334 3
Retirement of bonds and other long-term debt (923) (328)
Retirement of trust preferred securities - (250)
Repurchase of common stock (5) (129)
Payment of common stock dividends (135) (122)
Increase (decrease) in notes payable, net (250) 228
Payment of capital lease obligations (17) (22)
Other financing 10 -
------ ------
Net cash provided by financing activities 779 358
------ ------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 31 149
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 182 132
------ ------
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 213 $ 281
====== ======
CMS-22
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------
2001 2000
------- ------
IN MILLIONS
OTHER CASH FLOW ACTIVITIES AND NON-CASH INVESTING AND FINANCING ACTIVITIES WERE:
CASH TRANSACTIONS
Interest paid (net of amounts capitalized) $ 450 $ 423
Income taxes paid (net of refunds) (6) 24
NON-CASH TRANSACTIONS
Nuclear fuel placed under capital lease $ 13 $ 3
Other assets placed under capital leases 15 10
======= ======
All highly liquid investments with an original maturity of three months or
less are considered cash equivalents.
The accompanying condensed notes are an integral part of these statements.
CMS-23
CMS ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
2001 2000 2000
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
IN MILLIONS
ASSETS
PLANT AND PROPERTY (AT COST)
Electric utility $ 7,513 $ 7,241 $ 7,146
Gas utility 2,566 2,503 2,529
Natural gas transmission 2,207 2,191 2,119
Independent power production 888 398 736
Oil and gas properties (successful efforts method) 783 630 577
International energy distribution 215 258 460
Other 91 101 96
------- ------- -------
14,263 13,322 13,663
Less accumulated depreciation, depletion and amortization 6,735 6,252 6,315
------- ------- -------
7,528 7,070 7,348
Construction work-in-progress 567 761 817
------- ------- -------
8,095 7,831 8,165
------- ------- -------
INVESTMENTS
Independent power production 781 924 959
Natural gas transmission 540 436 410
Midland Cogeneration Venture Limited Partnership 296 290 273
First Midland Limited Partnership 249 245 241
Other 93 121 69
------- ------- -------
1,959 2,016 1,952
------- ------- -------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 213 182 281
Accounts receivable - Marketing, services and trading, less
allowances of $4, $3 and $2, respectively 634 526 837
Accounts receivable, notes receivable and accrued revenue, less
allowances of $16, $15 and $20, respectively 585 914 741
Inventories at average cost
Gas in underground storage 630 297 334
Materials and supplies 145 124 172
Generating plant fuel stock 50 46 48
Deferred income taxes - 39 28
Prepayments and other 295 325 241
------- ------- -------
2,552 2,453 2,682
------- ------- -------
NON-CURRENT ASSETS
Regulatory Assets
Securitization costs 710 709 -
Postretirement benefits 214 232 317
Abandoned Midland Project 12 22 28
Unamortized nuclear costs - 6 476
Other 89 87 116
Goodwill, net 824 891 903
Nuclear decommissioning trust funds 568 611 617
Notes receivable - related party 163 155 180
Notes receivable 142 150 148
Other 761 688 657
------- ------- -------
3,483 3,551 3,442
------- ------- -------
TOTAL ASSETS $16,089 $15,851 $16,241
======= ======= =======
CMS-24
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
2001 2000 2000
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
IN MILLIONS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholders' equity $ 1,987 $ 2,361 $ 2,300
Preferred stock of subsidiary 44 44 44
Company-obligated convertible Trust Preferred Securities
of subsidiaries(a) 694 694 694
Company-obligated mandatorily redeemable preferred securities
of Consumer's subsidiaries(a) 520 395 395
Long-term debt 7,402 6,770 7,246
Non-current portion of capital leases 57 54 81
------- ------- -------
10,704 10,318 10,760
------- ------- -------
MINORITY INTERESTS 82 88 221
------- ------- -------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 802 707 542
Notes payable 153 403 432
Accounts payable 593 614 620
Accounts payable - Marketing, services and trading 392 410 735
Accrued interest 155 159 145
Accrued taxes 72 309 276
Accounts payable - related parties 68 70 67
Deferred income taxes 9 - -
Other 657 530 515
------- ------- -------
2,901 3,202 3,332
------- ------- -------
NON-CURRENT LIABILITIES
Deferred income taxes 646 749 639
Postretirement benefits 347 437 450
Deferred investment tax credit 104 110 119
Regulatory liabilities for income taxes, net 270 246 86
Power loss contract reserves 365 54 37
Gas supply contract obligations 291 304 283
Other 379 343 314
------- ------- -------
2,402 2,243 1,928
------- ------- -------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 4)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $16,089 $15,851 $16,241
======= ======= =======
- ------------
(a) For further discussion, see Note 5 of the Condensed Notes to Consolidated
Financial Statements.
The accompanying condensed notes are an integral part of these statements.
CMS-25
CMS ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPEMBER 30 SEPEMBER 30
--------------------- --------------------
2001 2000 2001 2000
------ ------ ------ ------
IN MILLIONS
COMMON STOCK
At beginning and end of period $ 1 $ 1 $ 1 $ 1
OTHER PAID-IN CAPITAL
At beginning of period 3,264 2,626 2,936 2,749
Common stock repurchased (5) - (5) (129)
Common stock reacquired - (14) - (14)
Common stock reissued - 8 - 11
Common stock issued 6 3 334 6
------ ------ ------ ------
At end of period 3,265 2,623 3,265 2,623
------ ------ ------ ------
REVALUATION CAPITAL
Investments
At beginning of period (4) 1 (2) 3
Unrealized gain (loss) on investments (a) (1) - (3) (2)
------ ------ ------ ------
At end of period (5) 1 (5) 1
------ ------ ------ ------
Derivative Instruments
At beginning of period (b) (24) - 13 -
Unrealized gain (loss) on derivative instruments (a) (15) - (44) -
Reclassification adjustments included in consolidated net income (a) - - (8) -
------ ------ ------ ------
At end of period (39) - (39) -
------ ------ ------ ------
FOREIGN CURRENCY TRANSLATION
At beginning of period (301) (173) (254) (108)
Change in foreign currency translation realized from asset sale (a) - - - 25
Change in foreign currency translation (a) (17) (48) (64) (138)
------ ------ ------ ------
At end of period (318) (221) (318) (221)
------ ------ ------ ------
RETAINED EARNINGS (DEFICIT)
At beginning of period (252) (117) (320) (189)
Consolidated net income (a) (569) 53 (407) 207
Common stock dividends declared (96) (40) (190) (122)
------ ------ ------ ------
At end of period (917) (104) (917) (104)
------ ------ ------ ------
TOTAL COMMON STOCKHOLDERS' EQUITY $1,987 $2,300 $1,987 $2,300
====== ====== ====== ======
- ------------
(a) Disclosure of Comprehensive Income:
Revaluation capital
Investments
Unrealized gain (loss) on investments, net of tax of
$1, $-, $1 and $1, respectively $ (1) $ - $ (3) $ (2)
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $2, $-, $13 and $-, respectively (15) - (44) -
Reclassification adjustments included in consolidated net income,
net of tax of $-, $-, $4 and $-, respectively _ - (8) -
Foreign currency translation, net (17) (48) (64) (113)
Consolidated net income (569) 53 (407) 207
----- ------ ----- -----
Total Consolidated Comprehensive Income $(602) $ 5 $(526) $ 92
===== ====== ===== =====
(b) Nine months ended September 30, 2001 reflects the cumulative effect of
change in accounting principle, net of $(8) tax (Note 7)
The accompanying condensed notes are an integral part of these statements.
CMS-26
CMS ENERGY CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These interim Consolidated Financial Statements have been prepared by CMS
Energy and reviewed by the independent public accountant in accordance with SEC
rules and regulations. As such, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles 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 necessary to assure the fair presentation
of financial position, results of operations and cash flows for the periods
presented. The Condensed Notes to Consolidated Financial Statements and the
related Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained in CMS Energy's Form 10-K for the year ended December 31, 2000, which
includes the Reports of Independent Public Accountants. 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 BASIS OF PRESENTATION
CORPORATE STRUCTURE AND BASIS OF PRESENTATION
CMS Energy is the parent holding company of Consumers and Enterprises.
Consumers, a combination electric and gas utility company serving Michigan's
Lower Peninsula, is a subsidiary of CMS Energy. Enterprises, through
subsidiaries, is engaged in several domestic and international diversified
energy businesses including: natural gas transmission, storage and processing;
independent power production; oil and gas exploration and production; and energy
marketing, services and trading.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of CMS Energy,
Consumers and Enterprises and their majority-owned subsidiaries. Investments in
affiliated companies where CMS Energy has the ability to exercise significant
influence, but not control, are accounted for using the equity method. For the
three and nine months ended September 30, 2001, undistributed equity earnings
were $28 million and $2 million, respectively, compared to $24 million and $125
million for the three and nine months ended September 30, 2000, respectively.
Intercompany transactions and balances have been eliminated.
CMS Energy's subsidiaries and affiliates whose functional currency is other
than the U.S. dollar translate their assets and liabilities into U.S. dollars at
the current exchange rates in effect at the end of the fiscal period. The
revenue and expense accounts of such subsidiaries and affiliates are translated
into U.S. dollars at the average exchange rates that prevailed during the
period. The gains or losses that result from this process, and gains and losses
on intercompany foreign currency transactions that are long-term in nature, and
which CMS Energy does not intend to settle in the foreseeable future, are shown
in the stockholders' equity section of the balance sheet.
CMS-27
For subsidiaries operating in highly inflationary economies, the U.S.
dollar is considered to be the functional currency, and transaction gains and
losses are included in determining net income. Gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency, except those that are hedged, are included in
determining net income. During the first nine months of 2001, the change in the
foreign currency translation adjustment decreased equity by $64 million, net of
after-tax hedging proceeds.
OIL AND GAS PROPERTIES
CMS Oil and Gas follows the successful efforts method of accounting for its
investments in oil and gas properties. CMS Oil and Gas capitalizes, as incurred,
the costs of property acquisitions, successful exploratory wells, all
development costs, and support equipment and facilities. It expenses
unsuccessful exploratory wells when they are determined to be non-productive.
CMS Oil and Gas also charges to expense, as incurred, production costs,
overhead, and all exploration costs other than exploratory drilling. CMS Oil and
Gas determines depreciation, depletion and amortization of proved oil and gas
properties on a field-by-field basis using the units-of-production method over
the life of the remaining proved reserves.
UTILITY REGULATION
Consumers accounts for the effects of regulation based on the regulated
utility accounting standard SFAS No. 71, Accounting for the Effects of Certain
Types of Regulation. As a result, the actions of regulators affect when
Consumers recognizes revenues, expenses, assets and liabilities.
In March 1999, Consumers received MPSC electric restructuring orders.
Consistent with these orders, Consumers discontinued application of SFAS No. 71
for the energy supply portion of its business in the first quarter of 1999
because Consumers expected to implement retail open access for its electric
customers in September 1999. Discontinuation of SFAS No. 71 for the energy
supply portion of Consumers' business resulted in Consumers reducing the
carrying value of its Palisades plant-related assets by approximately $535
million and establishing a regulatory asset for a corresponding amount, which is
now included as a component of securitization assets. According to current
accounting standards, Consumers can continue to carry its energy supply-related
regulatory assets if legislation or an MPSC rate order allows the collection of
cash flows to recover these regulatory assets from its regulated transmission
and distribution customers. As of September 30, 2001, Consumers had a net
investment in energy supply facilities of $1.284 billion included in electric
plant and property. See Note 4, Uncertainties.
2: DISCONTINUED OPERATIONS
In September 2001, management recommended and the Board of Directors
approved, a plan to discontinue the operations of the International Energy
Distribution segment. Incorporated in 1996, CMS Electric and Gas had been formed
to purchase, invest in and operate gas and electric distribution systems
worldwide and currently, has significant ownership interests in electric
distribution companies located in Brazil and Venezuela. CMS Energy is actively
seeking a buyer for the assets of CMS Electric and Gas, and although the timing
of this sale is difficult to predict, nor can it be assured, management expects
the sale to occur within one year.
CMS-28
The following summarizes the balance sheet information of the discontinued
operations:
September 30
------------------------
2001 2000(a)
---- -------
In millions
Assets
Accounts receivable, net $11 $75
Materials and supplies 8 14
Property, plant and equipment, net 10 454
Goodwill 34 54
Deferred taxes 26 27
Other 30 54
---- ----
$119 $678
---- ----
Liabilities
Accounts payable $13 $31
Current and long-term debt 3 85
Accrued taxes -- 27
Minority interest 47 151
Other 20 34
---- ----
$ 83 $328
---- ----
- -----------
(a) For the nine months ended September 30, 2000, total assets included assets
of EDEERSA, which was subsequently sold, of $289 million. Total liabilities
included debt and other liabilities of EDEERSA of $77 million and $34
million, respectively.
Revenues from such operations were $105 million and $196 million for the
nine months ended September 30, 2001 and 2000, respectively. In accordance with
APB Opinion No. 30, the net losses of the operation are included in the
consolidated statements of income under "discontinued operations". The pre-tax
loss recorded for the period ended September 30, 2001 on the anticipated sale of
the operation was $203 million, which included a reduction in asset values, a
provision for anticipated closing costs and operating losses until disposal, and
a portion of CMS Energy's interest expense. Interest expense was allocated to
the operation based on its ratio of total capital to that of CMS Energy. See
table below for income statement components of the discontinued operations.
Nine months ended
September 30
----------------------
2001 2000
----- ----
In millions
Discontinued operations:
Income (loss) from discontinued operations, net of taxes of $1 $(2) $4
Loss on disposal of discontinued operations, including provision
of $1 for operating losses during phase-out period, net of
tax benefit of $21 (183) --
----- --
Total $(185) $4
----- --
3: LOSS CONTRACTS AND REDUCED ASSET VALUATIONS
DEARBORN INDUSTRIAL GENERATION LOSS CONTRACT: In 1998, DIG, which operates
the Dearborn Industrial Generation complex, a 710 MW combined cycle facility
constructed primarily to fulfill the contract requirements, executed Electric
Sales Agreements with Ford Motor Company, Rouge Industries and certain other
Ford and Rouge affiliates that require DIG to deliver up to 300 MWs of
electricity at pre-determined prices for a fifteen year term beginning in June
2000. As a result of continued plant construction delays, the majority of the
DIG project did not achieve commercial operation until the third quarter of
2001. At that time,
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DIG entered into long-term natural gas fuel contracts that fixed portions
of the anticipated fuel requirements related to the electricity contracts and
defined an operational model that reasonably reflects the expected economics of
the project and the contracts involved. Based on this operational model, CMS
Energy determined the estimated costs to perform under the electric contracts
using an incremental-cost (net of revenues) approach. Using this approach, CMS
Energy estimated that the incremental costs to provide electricity under the
Electric Sales Agreements exceeded the anticipated revenues to be earned over
the life of the contracts by $200 million. Accordingly, in the third quarter,
CMS Energy recorded a reserve for the loss on these contracts of $200 million
($130 million after-tax, or $.98 per basic and diluted share) in "Loss contracts
and reduced asset valuations" on the Consolidated Statements of Income.
MIDLAND COGENERATION VENTURE LOSS CONTRACT: In 1992, Consumers recognized a
loss for the present value of the estimated future underrecoveries of power
costs under the PPA based on MPSC cost recovery orders. Consumers continually
evaluates the adequacy of the PPA liability for future underrecoveries. These
evaluations consider management's assessment of operating levels at the MCV
Facility through 2007, along with certain other factors including MCV related
costs that are included in Consumers' frozen retail rates. Management's
assumptions of these factors have changed significantly enough that the
expectation of the level of future underrecoveries has increased. As a result,
in September 2001, Consumers increased the PPA liability by $126 million ($82
million, after-tax, or $.62 per basic and diluted share), which appears on the
Consolidated Statements of Income in the caption "Loss contracts and reduced
asset valuations". Management believes that, following this increase, the
liability adequately reflects the PPA's future effect on Consumers. At September
30, 2001 and 2000, the remaining after-tax present value of the estimated future
PPA liability associated with the loss totaled $122 million and $55 million,
respectively. For further discussion on the impact of the frozen PSCR, see Note
4, Uncertainties - Electric Rate Matters.
PLANNED DIVESTITURES AND REDUCED ASSET VALUATIONS: Implementing a new
strategic direction of CMS Energy has resulted in assets and development
projects that have been identified by the business units as non-strategic or
non-performing. These assets include, both domestic and international, electric
power plants, gas processing facilities, exploration and production assets and
certain equity method and other investments. CMS Energy has written off the
carrying value of the development projects that will no longer be pursued. In
addition, management evaluated the operating assets for impairment in accordance
with the provisions of SFAS No. 121 for asset projects and APB Opinion No. 18
for equity investments. Based on this evaluation, certain of these assets were
determined to be impaired. Reductions in asset valuations related to these
write-downs were recognized in the third quarter in the amount of $277 million
($203 million, after tax, or $1.53 per basic and diluted share) to reflect the
excess of the carrying value of these assets over their fair value. The charges
are reflected in the Consolidated Statements of Income under the caption "Loss
contracts and reduced asset valuations".
CMS Energy is pursuing the sale of all of these non-strategic and
non-performing assets, including those that were not determined to be impaired.
Upon the sale of these assets, the proceeds realized may be materially different
than the remaining book value of these assets. Even though these assets have
been identified for sale, management cannot predict when, nor make any
assurances that these asset sales will occur.
OTHER CHARGES: The total of other charges recognized in the third quarter
were $25 million ($15 million, after tax, or $.11 per basic and diluted share)
that consisted of the following items:
In 1996, Consumers filed with the FERC and self-implemented OATT
transmission rates. Certain intervenors contested these rates, and hearings were
held before an ALJ in 1998. During 1999, the ALJ rendered an initial decision,
which if upheld by the FERC, would ultimately reduce Consumers' OATT rates and
require Consumers to refund, with interest, any over-collections for past
services. Consumers, since that time has been
CMS-30
reserving a portion of revenues billed to customers under these OATT rates. At
the time of the initial decision, the company believed that certain issues would
be decided in Consumers' favor, and that a relatively quick order would be issue
by the FERC regarding this matter. However, due to changes in regulatory
interpretations Consumers believes that a successful resolution of certain
issues is less likely. As a result, in September 2001, Consumers reserved an
additional $12 million, including interest, to fully reflect the financial
impacts of the initial decision. Consumers expects that its reserve levels for
future transmission service will also be in compliance with the PFD until an
order from the FERC is received.
In 1996, Consumers and its wholesale customers entered into five-year
contracts that fixed the portion of nuclear decommissioning costs that were
expected to end in 2001 associated with these customers. Since that time, the
total estimated decommissioning costs for Big Rock increased substantially over
the estimates used to calculate the decommissioning costs attributed to
wholesale customers. As a result of a reduction in decommissioning trust
earnings in August 2001, along with the higher estimated costs of
decommissioning, Consumers, in September 2001, expensed approximately $5 million
related to this issue to recognize the unrecoverable portion of Big Rock
decommissioning costs associated with these customers.
Panhandle recorded a lower of cost or market adjustment of $7 million in
the third quarter of 2001, reducing its current gas inventory to market value.
Loss contracts, reduced asset valuations and other charges recognized by
CMS Energy business segments during the third quarter of 2001 are as follows:
Business Segment Pre-tax impact After-tax impact
- ---------------- -------------- ----------------
In millions
Valuation Losses:
Natural Gas Transmission $ 36 $ 24
Independent Power Production 178 138
Oil and Gas Exploration & Production 49 32
Corporate 14 9
---- ----
Total Valuation Losses 277 203
---- ----
Loss Contracts:
Consumers Electric Utility 126 82
Independent Power Production 200 130
---- ----
Total Loss Contracts 326 212
---- ----
Subtotal: 603 415
---- ----
Other Charges:
Consumers Electric Utility 18 11
Panhandle 7 4
---- ----
Grand Total $628 $430
---- ----
CMS-31
4: UNCERTAINTIES
CONSUMERS' ELECTRIC UTILITY CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Consumers is subject to costly and
increasingly stringent environmental regulations. Consumers expects that the
cost of future environmental compliance, especially compliance with clean air
laws, will be significant.
In 1997, the EPA introduced new regulations regarding the standard for
ozone and particulate-related emissions that were the subject of litigation. The
United States Supreme Court determined that the EPA has the power to revise the
standards but that the EPA implementation plan was not lawful. In 1998, the EPA
Administrator issued final regulations requiring the state of Michigan to
further limit nitrogen oxide emissions. The EPA has also issued additional final
regulations regarding nitrogen oxide emissions that require certain generators,
including some of Consumers electric generating facilities, to achieve the same
emissions rate as that required by the 1998 plan. These regulations will require
Consumers to make significant capital expenditures estimated between $470
million and $560 million, calculated in year 2001 dollars. Consumers anticipates
that it will incur these capital expenditures between 2000 and 2004. As of
September 2001, Consumers has incurred $251 million in capital expenditures to
comply with these regulations.
At some point after 2004, if new environmental standards for
multi-pollutants become effective, Consumers may need additional capital
expenditures to comply with the standards. Consumers is unable to estimate the
additional capital expenditures required until the proposed standards are
further defined.
Beginning January 2004, an annual return of and on these capital
expenditures above depreciation levels are expected to be recoverable, subject
to an MPSC prudence hearing, in future rates.
These and other required environmental expenditures may have a material
adverse effect upon our financial condition and results of operations.
Cleanup and Solid Waste - Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. Consumers does,
however, believe that these costs are recoverable in rates under current
ratemaking policies.
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $2 million and $9 million. As of
September 30, 2001, Consumers had accrued the minimum amount of the range for
its estimated Superfund liability.
In October 1998, during routine maintenance activities, Consumers
identified PCB as a component in certain paint, grout and sealant materials at
the Ludington Pumped Storage Facility. Consumers removed and replaced part of
the PCB material. In April 2000, Consumers proposed a plan to deal with the
remaining materials and is awaiting a response from the EPA.
CMS-32
CONSUMERS' ELECTRIC UTILITY RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan Legislature passed
electric utility restructuring legislation known as the Customer Choice Act.
This act: 1) permits all customers to exercise choice of electric generation
suppliers by January 1, 2002; 2) cuts residential electric rates by five
percent; 3) freezes all electric rates through December 31, 2003, and
establishes a rate cap for residential customers through at least December 31,
2005, and a rate cap for small commercial and industrial customers through at
least December 31, 2004; 4) allows for the use of low-cost Securitization bonds
to refinance Stranded Costs as a means of offsetting the earnings impact of the
five percent residential rate reduction; 5) establishes a market power test that
may require the transfer of control of a portion of generation resources in
excess of that required to serve firm retail sales requirements (a requirement
with which Consumers is in compliance); 6) requires Michigan utilities to join a
FERC-approved RTO or divest their interest in transmission facilities to an
independent transmission owner; 7) requires the joint expansion of available
transmission capability by Consumers, Detroit Edison and American Electric Power
by at least 2,000 MW by June 5, 2002; 8) allows for the deferred recovery of an
annual return of and on capital expenditures in excess of depreciation levels
incurred during and before the rate cap period; and 9) allows for the recovery
of Stranded Costs and implementation costs incurred as a result of the passage
of the act. Consumers is highly confident that it will meet the conditions of
items 5 and 7 above, prior to the earliest rate cap termination dates specified
in the act. Failure to do so would result in an extension of the rate caps to as
late as December 31, 2013. As of September 30, 2001, Consumers spent $25 million
on the required expansion of transmission capabilities. Consumers anticipates it
will spend an additional $13 million in 2001 and 2002, until Consumers sells
METC to MTH, as discussed below under "Transmission Business".
In July 2000, in accordance with the Customer Choice Act, Consumers filed
an application with the MPSC seeking approval to issue Securitization bonds.
Securitization typically involves the issuance of asset backed bonds with a
higher credit rating than conventional utility corporate financing. In October
2000 and January 2001, the MPSC issued a financing order and a final financing
order, respectively. In January 2001, Consumers accepted the MPSC's final
financing order. Although the Michigan Attorney General appealed the financing
order after Consumers accepted the order, the Attorney General did not appeal
the order to the Michigan Supreme Court after the Michigan Court of Appeals
unanimously affirmed the MPSC's order in July 2001.
The orders authorize Consumers to securitize approximately $469 million in
qualified costs, which were primarily regulatory assets plus recovery of the
Securitization expenses. Securitization is expected to result in offsetting
substantially all of the revenue impact of the five percent residential rate
reduction of approximately $22 million in 2000 and $49 million on an annual
basis thereafter, that Consumers was required to implement by the Customer
Choice Act. Actual cost savings from Securitization depends upon the level of
debt or equity securities ultimately retired, the amortization schedule for the
securitized qualified costs and the interest rates of the retired debt
securities and the Securitization bonds. The orders direct Consumers to apply
any cost savings in excess of the five percent residential rate reduction to
rate reductions for non-residential and retail open access customers after the
bonds are sold. Excess savings are currently estimated to be approximately $13
million annually.
In November 2001, Consumers Funding LLC, a special purpose subsidiary of
Consumers formed to issue the bonds, issued $469 million of Securitization
bonds, Series 2001-1. The Securitization bonds mature at different times over a
period of up to 14 years and have an average interest rate of 5.3 percent.
Consumers and Consumers Funding LLC will recover the repayment of
principal, interest and other expenses relating to the issuance of the bonds
through a securitization charge and a tax charge beginning in December
CMS-33
2001. These charges are subject to an annual true-up until one year prior to the
last expected bond maturity date, October 20, 2015, and no more than quarterly
thereafter. Current electric rates will not increase for most of Consumers'
electric customers under the MPSC's order. Funds collected will be remitted to
the trustee for the Securitization bonds and are not available to Consumers'
creditors.
Beginning January 1, 2001, the amortization of the approved regulatory
assets being securitized as qualified costs is being deferred, which effectively
offsets the loss in revenue resulting from the five percent residential rate
reduction. In December 2001, the amortization will be reestablished based on a
schedule that is the same as the recovery of the principal amounts of the
securitized qualified costs. The amortization amount is expected to be
approximately $31 million in 2002 and the securitized assets will be fully
amortized by the end of 2015.
In September 1999, Consumers began implementing a plan for electric retail
customer open access. In 1998, Consumers submitted this plan to the MPSC and in
March 1999 the MPSC issued orders that generally supported the plan. The
Customer Choice Act states that orders issued by the MPSC before the date of
this act that 1) allow electric customers to choose their supplier, 2) authorize
recovery of net stranded costs and implementation costs, and 3) confirm any
voluntary commitments of electric utilities, are in compliance with this act and
enforceable by the MPSC. In September 2000, as required by the MPSC, Consumers
filed tariffs governing its retail open access program and addressed revisions
appropriate to comply with the Customer Choice Act. Consumers cannot predict how
the MPSC will modify the tariff or enforce the existing restructuring orders.
POWER COSTS: During periods when electric demand is high, the cost of
purchasing energy on the spot market can be substantial. To reduce Consumers'
exposure to the fluctuating cost of electricity, and to ensure adequate supply
to meet demand, Consumers intends to maintain sufficient generation and to
purchase electricity from others to create a power reserve, also called a
reserve margin, of approximately 15 percent. The reserve margin provides
Consumers with additional power above its anticipated peak power demands. It
also allows Consumers to provide reliable service to its electric service
customers and to protect itself against unscheduled plant outages and
unanticipated demand. As it has in previous summers, Consumers is planning for a
reserve margin of 15 percent for the summers 2002 and 2003. The actual reserve
margin needed will depend primarily on summer weather conditions, the level of
retail open access requirements being served by others during the summer, and
any unscheduled plant outages. The existing retail open access plan allows other
electric service providers with the opportunity to serve up to 750 MW of nominal
retail open access requirements. As of October 2001, alternative electric
service providers are providing service to 223 MW of retail open access
requirements. In June 2001, an unscheduled plant outage commenced at Palisades
that will affect future power costs. Consumers has secured additional power and
expects to have sufficient power to meet its customers' needs. For further
information, refer to the "Nuclear Matters" section of this note.
To reduce the risk of high energy prices during peak demand periods and to
achieve its reserve margin target, Consumers employs a strategy of purchasing
electricity call option contracts for the physical delivery of electricity
during the months of June through September. The cost of these electricity call
option contracts for summer 2001 was approximately $61 million. Consumers
expects to use a similar strategy in the future, but cannot predict the cost of
this strategy at this time. As of September 30, 2001, Consumers had purchased or
had commitments to purchase electricity call option contracts partially covering
the estimated reserve margin requirements for summers 2002 through 2008, at a
recognized cost of $73 million, of which $27 million pertains to 2002.
In 1996, as a result of efforts to move the electric industry in Michigan
to competition, Detroit Edison gave Consumers the required four-year contractual
notice of its intent to terminate the agreements under which the
CMS-34
companies jointly operate the MEPCC. Detroit Edison and Consumers negotiated to
restructure and continue certain parts of the MEPCC control area and joint
transmission operations, but expressly excluded any merchant operations
(electricity purchasing, sales, and dispatch operations). The former joint
merchant operations began operating independently on April 1, 2001. The
termination of joint merchant operations with Detroit Edison has opened Detroit
Edison and Consumers to wholesale market competition as individual companies.
Consumers cannot predict the long term financial impact of terminating these
joint merchant operations with Detroit Edison.
Prior to 1998, the PSCR process provided for the reconciliation of actual
power supply costs with power supply revenues. This process assured recovery of
all reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost of fuel, interchange power and purchased power. In
1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR
process through December 31, 2001. Under the suspension, the MPSC would not
grant adjustment of customer rates through 2001. As a result of the rate freeze
imposed by the Customer Choice Act, the current rates will remain in effect
until at least December 31, 2003. Therefore, changes in power supply costs as a
result of fluctuating energy prices will not be reflected in rates during the
rate freeze period.
Consumers is authorized by the FERC to sell power at wholesale prices that
are either 1) no greater than its cost-based rates or 2) at market price. In
authorizing sales at market prices, the FERC considers several factors,
including the extent to which the seller possesses "market power" as a result of
the seller's dominance of generation resources and surplus generation resources
in adjacent wholesale markets. In order to continue to be authorized to sell at
market prices, Consumers filed a market dominance analysis in October 2001. In
September 2001, the FERC staff issued a report suggesting that the FERC may
reconsider the method it currently uses to evaluate market power assessments for
electric generators. If the FERC determines that this method is not sufficient,
Consumers cannot be certain at this time if it will be granted authorization to
continue to sell wholesale power at market-based prices and may be limited to
charging prices no greater than its cost-based rates. A decision on reliance of
the current assessment method is not expected for several months.
TRANSMISSION BUSINESS: In 1999, the FERC issued Order No. 2000, that
strongly encouraged utilities like Consumers to either transfer operating
control of their transmission facilities to an RTO, or sell their transmission
facilities to an independent company. In addition, in June 2000, the Michigan
legislature passed Michigan's Customer Choice Act, which contains a requirement
that utilities transfer the operating authority of transmission facilities to an
independent company by December 31, 2001.
In 1999, Consumers and four other electric utility companies joined
together to form a coalition known as the Alliance Companies for the purpose of
creating a FERC-approved RTO. In October 2000, Consumers filed a request with
the FERC to transfer ownership and control of its transmission facilities to a
wholly owned subsidiary, METC. This request was granted in January 2001. In
December 2000, the MPSC issued an order authorizing an anticipated sale or
ownership transfer of Consumers' transmission facilities. On April 1, 2001, the
transfer of the electric transmission facilities to METC took place.
In October 2001, in compliance with Michigan's Customer Choice Act, and in
conformance with FERC Order No. 2000, Consumers executed an agreement to sell
METC for approximately $290 million to MTH, an independent limited partnership
whose general partner is a subsidiary of Trans-Elect, Inc. Proceeds from the
sale of METC will be used to improve Consumers' balance sheet. MTH and Consumers
are currently seeking to satisfy the conditions of closing including approval of
the transaction from the FERC. Consumers will continue to own and operate the
system until all approvals are received and the sale is final. Regulatory
CMS-35
approvals and operational transfer are expected to take place in the second
quarter of 2002; however, Consumers can make no assurances as to when or if the
transaction will be completed. METC will continue to maintain the system under a
long-term contract with MTH.
Consumers chose to sell its transmission facilities as a form of compliance
with Michigan's Customer Choice Act and FERC Order No. 2000 rather than own and
invest in an asset which it can not control. As a result of the sale of its
transmission facilities, Consumers anticipates that after tax earnings will be
reduced by approximately $6 million and $14 million in 2002 and 2003,
respectively. Through 2005, Consumers' total revenues should not be materially
affected from the sale of METC due to frozen retail rates.
Under the agreement with MTH, transmission rates charged to Consumers'
bundled electric customers will be frozen at current levels until December 31,
2005 and will be subject to FERC ratemaking thereafter. MTH will complete the
capital program to expand the transmission system's capability to import power
into Michigan, as required by the Customer Choice Act.
In June 2001, the Michigan South Central Power Agency and the Michigan
Public Power Agency filed suit against Consumers and METC in a Michigan circuit
court. The suit sought to prevent the sale or transfer of transmission
facilities without first binding a successor to honor the municipal agencies'
ownership interests, contractual agreements and rights that preceded the
transfer of the transmission facilities to METC. In August 2001, the parties
reached two settlements that would either fully or partially resolve this
litigation. The settlements were approved by the Michigan circuit court and are
contingent upon the approval by the FERC and certain other contingencies. The
circuit court has retained jurisdiction over the matter.
ELECTRIC PROCEEDINGS: In 1997, ABATE filed a complaint with the MPSC. The
complaint alleged that Consumers' electric earnings are more than its authorized
rate of return and sought an immediate reduction in Consumers' electric rates
that approximated $189 million annually. As a result of the rate freeze imposed
by the Customer Choice Act, the MPSC issued an order in June 2000 dismissing the
ABATE complaint. In July 2000, ABATE filed a rehearing petition with the MPSC,
which was denied in October 2001.
In March 2000 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $30 million
and $25 million, incurred in 1999 and 2000, respectively. In July 2001,
Consumers received a final order that granted recovery of $25 million of
restructuring implementation costs for 1999. The MPSC disallowed recovery of $5
million, based upon a conclusion that this amount did not represent incremental
costs. The MPSC also ruled that it reserved the right to undertake another
review of the total 1999 restructuring implementation costs depending upon the
progress and success of the retail open access program. In addition, the MPSC
ruled that due to the rate freeze imposed by the Customer Choice Act, it was
premature to establish a cost recovery method for the allowable costs. Consumers
expects to receive a final order for the 2000 cost in early 2002. Consumers
believes these costs are fully recoverable in accordance with the Customer
Choice Act; however, Consumers cannot predict the amounts the MPSC will approve
as recoverable costs.
Also, in July 2001, Consumers received an order from the MPSC that proposed
electric distribution performance standards applicable to electric distribution
companies operating in Michigan. The proposed performance standards would
establish standards related to outage restoration, safety, and customer
relations. Failure to meet the proposed performance standards would result in
customer credits. Consumers has submitted comments to the MPSC. Consumers cannot
predict the outcome of the proposed performance standards.
CMS-36
In 1996, Consumers filed with the FERC and self-implemented OATT
transmission rates. Certain intervenors contested these rates, and hearings were
held before an ALJ in 1998. During 1999, the ALJ rendered an initial decision,
which if upheld by the FERC, would ultimately reduce Consumers' OATT rates and
require Consumers to refund, with interest, any over-collections for past
services. Consumers, since that time has been reserving a portion of revenues
billed to customers under these OATT rates. At the time of the initial decision,
the company believed that certain issues would be decided in Consumers' favor,
and that a relatively quick order would be issue by the FERC regarding this
matter. However, due to changes in regulatory interpretations Consumers believes
that a successful resolution of certain issues is less likely. As a result, in
September 2001, Consumers reserved an additional $12 million, including
interest, to fully reflect the financial impacts of the initial decision.
Consumers expects that its reserve levels for future transmission service will
also be in compliance with the initial decision until an order from the FERC is
received.
OTHER CONSUMERS' ELECTRIC UTILITY UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and
operates the MCV Facility, contracted to sell electricity to Consumers for a
35-year period beginning in 1990 and to supply electricity and steam to Dow.
Consumers, through two wholly owned subsidiaries, holds the following assets
related to the MCV Partnership and MCV Facility: 1) CMS Midland owns a 49
percent general partnership interest in the MCV Partnership; and 2) CMS Holdings
holds, through FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings
Nine Months Ended
September 30
-------------------
2001 2000
---- ----
In Millions
Pretax operating income $31 $35
Income taxes and other 9 11
--- ---
Net income $22 $24
--- ---
Power Purchases from the MCV Partnership - Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA requires Consumers to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, the MPSC has also permitted
Consumers to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However,
due to the current freeze of Consumers' retail rates that the Customer Choice
Act requires, the capacity charge for the 325 MW is now frozen at 3.17 cents per
kWh. After September 2007, the PPA's terms require Consumers to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.
In 1992, Consumers recognized a loss for the present value of the estimated
future underrecoveries of power
CMS-37
costs under the PPA based on MPSC cost recovery orders. Consumers continually
evaluates the adequacy of the PPA liability for future underrecoveries. These
evaluations consider management's assessment of operating levels at the MCV
Facility through 2007 along with certain other factors including MCV related
costs that are included in Consumers' frozen retail rates. During the third
quarter of 2001, in connection with Consumers' strategic planning process,
management reviewed the PPA liability assumptions related to increased expected
long-term dispatch of the MCV Facility and increased MCV related costs. As a
result, in September 2001, Consumers increased the PPA liability by $126
million. Management believes that, following the increase, the PPA liability
adequately reflects the PPA's future affect on Consumers. At September 30, 2001
and 2000, the remaining after-tax present value of the estimated future PPA
liability associated with the loss totaled $122 million and $55 million,
respectively. For further discussion on the impact of the frozen PSCR, see
"Electric Rate Matters" in this Note.
In March 1999, Consumers and the MCV Partnership reached an agreement
effective January 1, 1999, that capped availability payments to the MCV
Partnership at 98.5 percent. If the MCV Facility generates electricity at the
maximum 98.5 percent level during the next five years, Consumers' after-tax cash
underrecoveries associated with the PPA could be as follows:
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
In Million
Estimated cash underrecoveries at 98.5%, net of tax $37 $38 $37 $36 $35
In February 1998, the MCV Partnership appealed the January 1998 and
February 1998 MPSC orders related to electric utility restructuring. At the same
time, MCV Partnership filed suit in the United States District Court in Grand
Rapids seeking a declaration that the MPSC's failure to provide Consumers and
MCV Partnership a certain source of recovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court granted MCV Partnership's
motion for summary judgment. The Court permanently prohibited enforcement of the
restructuring orders in any manner that denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or that
precludes the MCV Partnership from recovering the avoided cost rate. The MPSC
appealed the Court's order to the 6th Circuit Court of Appeals in Cincinnati. In
June 2001, the 6th Circuit overturned the lower court's order and dismissed the
case against the MPSC. The appellate court determined that the case was
premature and concluded that the qualifying facilities needed to wait until 2008
for an actual factual record to develop before bringing claims against the MPSC
in federal court. The MCV Partnership has requested rehearing of the appellate
court's order.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Consumers
expenses interest on leased nuclear fuel as it is incurred. Under current
federal law, as a federal court decision confirmed, the DOE was to begin
accepting deliveries of spent nuclear fuel for disposal by January 31, 1998. For
fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel
expense, recovers these costs through electric rates, and then remits them to
the DOE quarterly. Consumers elected to defer payment for disposal of spent
nuclear fuel burned before April 7, 1983. As of September 30, 2001, Consumers
has a recorded liability to the DOE of $135 million, including interest, which
is payable upon the first delivery of spent nuclear fuel to the DOE. Consumers
recovered through electric rates the amount of this liability, excluding a
portion of interest. In 1997, the DOE declared that it would not begin to accept
spent nuclear fuel deliveries in 1998. Also in 1997, a federal court affirmed
the DOE's duty to take delivery of spent fuel. Subsequent litigation in which
Consumers and certain other utilities participated has not been successful in
producing more specific relief for the DOE's failure to comply.
CMS-38
In July 2000, the DOE reached a settlement agreement with another utility
to address the DOE's delay in accepting spent fuel. The DOE may use that
settlement xagreement as a framework that it could apply to other nuclear power
plants; however, certain other utilities are challenging the validity of such
settlement. Consumers is evaluating this matter further. Additionally, 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 fuel. Consumers is evaluating those rulings and their
applicability to its contracts with the DOE.
NUCLEAR MATTERS: In May 2001, Palisades received its annual performance
review in which the NRC stated that Palisades operated in a manner that
preserved public health and safety. The NRC classified all inspection findings
to have very low safety significance. At the time of the annual performance
review, the NRC had planned to conduct only baseline inspections at the facility
through May 31, 2002. The NRC, however, is currently conducting an inspection to
oversee the Palisades unplanned outage, which is discussed in more detail below.
The amount of spent nuclear fuel discharged from the reactor to date
exceeds Palisades' temporary on-site storage pool capacity. Consequently,
Consumers is using NRC-approved steel and concrete vaults, commonly known as
"dry casks", for temporary on-site storage. As of September 30, 2001, Consumers
had loaded 18 dry storage casks with spent nuclear fuel at Palisades. Palisades
will need to load additional casks by 2004 in order to continue operation.
Palisades currently has three additional empty storage-only casks on-site, with
storage pad capacity for up to seven additional loaded casks. Consumers
anticipates, however, that licensed transportable casks, for additional storage,
will be available prior to 2004.
Consumers maintains insurance against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
facilities. Consumers also maintains coverage for replacement power costs during
prolonged accidental outages at Palisades. Insurance would not cover such costs
during the first 12 weeks of any outage, but would cover most of such costs
during the next 52 weeks of the outage, followed by reduced coverage to 80
percent for 110 additional weeks. The nature of the current Palisades outage,
however, is not likely to be an insured event. If certain covered losses occur
at its own or other nuclear plants similarly insured, Consumers could be
required to pay maximum assessments of $12.8 million in any one year to NEIL;
$88 million per occurrence under the nuclear liability secondary financial
protection program, limited to $10 million per occurrence in any year; and $6
million if nuclear workers claim bodily injury from radiation exposure.
Consumers considers the possibility of these assessments to be remote.
In February 2000, Consumers submitted an analysis to the NRC that shows
that the NRC's screening criteria for reactor vessel embrittlement at Palisades
will not be reached until 2014. On December 14, 2000, the NRC issued an
amendment revising the operating license for Palisades extending the expiration
date to March 2011, with no restrictions related to reactor vessel
embrittlement.
In April 2001, Consumers received approval from the NRC to amend the
license of the Palisades nuclear plant to transfer plant operating authority to
NMC. The formal operating authority transfer from Consumers to NMC took place in
May 2001. Consumers will retain ownership of Palisades, its 789 MW output, the
spent fuel on site, and ultimate responsibility for the safe operation,
maintenance and decommissioning of the plant. Under this agreement, salaried
Palisades' employees became NMC employees on July 1, 2001. Union employees will
work under the supervision of NMC pursuant to their existing labor contract as
Consumers' employees. Consumers will benefit by consolidating expertise and
controlling costs and resources among all of the nuclear plants being operated
on behalf of the five NMC member companies. With Consumers as a partner, NMC
currently has responsibility for operating eight units with 4,500 MW of
generating capacity in Wisconsin, Minnesota, Iowa and Michigan. As a result of
the equity ownership in NMC, Consumers may be exposed to
CMS-39
additional financial impacts.
On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. There was no risk to
the public or workers. In August 2001, Consumers completed an expanded
inspection that included all similar control rod drive assemblies and elected to
completely replace the defective components immediately, as opposed to partially
repairing the component followed eventually by complete replacement during a
future outage. The Company adopted this approach because it provides more
certainty of schedule for return to service, greater regulatory acceptability,
and avoids future plant outage time and associated replacement power costs.
Installation of the new components is expected to be completed in December 2001,
with the plant expected to return to service in January 2002. Consumers cannot,
however, make any assurances as to the date on which the new components will be
installed or the plant will return to service. Consumers estimates capital
expenditures for the components and their installation to be approximately $25
to $30 million.
From the start of the June 20th outage through the end of 2001, the impact
on net income of replacement power and maintenance costs associated with the
outage is currently estimated to be approximately $.49 per share of CMS Energy
Common Stock. An additional month of incremental replacement power and
maintenance costs would impact net income by approximately an additional $.06 to
$.07 per share of CMS Energy Common Stock. However, replacement power and
maintenance costs in early 2002, if any, would be offset by the postponement of
a previously scheduled refueling outage in 2002, which is now not needed until
2003. Consumers expects to have sufficient power at all times to meet its load
requirements from its other plants or purchase arrangements.
NUCLEAR DECOMMISSIONING: In 1996, Consumers and its wholesale customers
entered into five-year contracts that fixed the portion of nuclear
decommissioning costs that were expected to end in 2001 associated with these
customers. Since that time, the total estimated decommissioning costs for Big
Rock increased substantially over the estimates used to calculate the
decommissioning costs attributed to wholesale customers. As a result of a
reduction in decommissioning trust earnings in August 2001, along with the
higher estimated costs of decommissioning, Consumers, in September 2001,
expensed approximately $5 million related to this issue to recognize the
unrecoverable portion of Big Rock decommissioning costs associated with these
customers.
CONSUMERS' GAS UTILITY CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
sites that formerly housed manufactured gas plant facilities, including those in
which it has a partial or no current ownership interest. Consumers has completed
initial investigations at the 23 sites. On sites where Consumers has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Consumers has estimated its costs related to further investigation
and remedial action for all 23 sites using the Gas Research
Institute-Manufactured Gas Plant Probabilistic Cost Model. Using this model,
Consumers estimates the total costs to be between $82 million and $113 million.
These estimates are based on discounted 2001 costs. As of September 30, 2001,
Consumers has an accrued liability of $60 million, (net of $22 million of
expenditures incurred to date), and a regulatory asset of $71 million. Any
significant change in assumptions, such as remediation techniques, nature and
extent of contamination, and legal and regulatory requirements, could affect the
estimate of remedial action costs for the sites. The MPSC currently allows
Consumers to recover $1 million of manufactured gas plant facilities
environmental clean-up costs annually. Consumers defers and
CMS-40
amortizes, over a period of ten years, manufactured gas plant facilities
environmental clean-up costs above the amount currently being recovered in
rates. Additional rate recognition of amortization expense cannot begin until
after a prudence review in a future general gas rate case. Consumers' current
general gas rate case considers the prudence of manufactured gas plant
facilities environmental clean-up expenditures for years 1998 through 2002.
CONSUMERS' GAS UTILITY RATE MATTERS
GAS RESTRUCTURING: From April 1, 1998 to March 31, 2001, Consumers
conducted an experimental gas customer choice pilot program which froze gas
distribution and GCR rates through the period. On April 1, 2001, a permanent gas
customer choice program commenced under which Consumers returned to a GCR
mechanism that allows it to recover from its bundled customers all prudently
incurred costs to purchase the natural gas commodity and transport it to
Consumers' facilities.
GAS COST RECOVERY: As part of a settlement agreement approved by the MPSC
in July 2001, Consumers agreed not to exceed a ceiling price of $4.69 per mcf of
natural gas under the GCR factor mechanism through March 2002. This agreement is
not expected to affect Consumers' earnings outlook because Consumers charges
customers the amount that it pays for natural gas in the reconciliation process.
In December 2000, Consumers initiated the negotiations, requesting a ceiling
price of $5.69 per mcf. The settlement reflects the decreasing prices in the
natural gas market. The settlement does not affect Consumers' June 2001 request
to the MPSC for the gas service rate increase. The MPSC also approved a
methodology to adjust for market price increases quarterly without returning to
the MPSC for approval.
GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a gas service rate increase. If the MPSC approves Consumers' request,
then Consumers could bill an additional amount of approximately $6.50 per month,
representing a 10% increase in the typical residential customer's average
monthly bill. Consumers is seeking a 12.25% authorized return on equity.
Contemporaneously with this filing, Consumers has requested partial and
immediate relief in the amount of $33 million. The relief is primarily for
higher carrying costs on more expensive natural gas inventory than is currently
included in rates and actual earnings below the authorized return. In October
2001, Consumers revised its filing to reflect lower operating costs and is now
requesting a $133 million gas service rate increase.
PANHANDLE MATTERS
REGULATORY MATTERS: In conjunction with a FERC order issued in September
1997, FERC required certain natural gas producers to refund previously collected
Kansas ad-valorem taxes to interstate natural gas pipelines, including
Panhandle. FERC ordered these pipelines to refund these amounts to their
customers. The pipelines must make all payments in compliance with prescribed
FERC requirements. In June 2001, Panhandle filed a proposed settlement with the
FERC which is supported by most of the customers and affected producers. That
settlement was approved by the Commission in October 2001. At September 30, 2001
and December 31, 2000, Panhandle's Accounts Receivable included $63 million and
$59 million, respectively, due from natural gas producers, and Other Current
Liabilities included $63 million and $59 million, respectively, for related
obligations. The settlement provides for a reduction in these balances resulting
in an amount due from natural gas producers of $33 million and an amount due to
jurisdictional customers of $29 million. These adjustments will be recorded in
the fourth quarter.
In March 2001, Trunkline received FERC approval to abandon 720 miles of its
26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. This filing is in conjunction with a plan for Centennial Pipeline to
convert the line from natural gas transmission service to a refined products
pipeline by January 2002.
CMS-41
Panhandle owns a one-third interest in the venture along with TEPPCO Partners
L.P. and Marathon Ashland Petroleum L.L.C. Effective April 2001, the 26-inch
pipeline was conveyed to Centennial and the book value of the asset, including
related goodwill, is now reflected in Investments on the Consolidated Balance
Sheet.
In July 2001, Panhandle filed a settlement with customers on Order 637
matters to resolve matters including capacity release and imbalance penalties,
among others. On October 12, 2001 FERC issued an order approving the settlement,
with modifications. This order is pending potential requests for rehearing.
Management believes that this matter will not have a material adverse effect on
consolidated results of operations or financial position.
In August 2001, an offer of settlement of Trunkline LNG rates sponsored
jointly by Trunkline LNG, BG LNG Services and Duke LNG Sales was filed with the
FERC and was approved on October 11, 2001. The settlement will take effect in
January 2002. This will result in reduced revenues from 2001 levels but less
volatility due to the 22-year contract with BG LNG Services.
ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken clean-up
programs at these sites. The contamination resulted from the past use of
lubricants in compressed air systems containing PCBs and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle
communicated with the EPA and appropriate state regulatory agencies on these
matters. Under the terms of the sale of Panhandle to CMS Energy, a subsidiary of
Duke Energy is obligated to complete the Panhandle clean-up programs at certain
agreed-upon sites and to indemnify against certain future environmental
litigation and claims. Panhandle expects these clean-up programs to continue
through 2001. The Illinois EPA included Panhandle Eastern Pipe Line and
Trunkline, together with other non-affiliated parties, in a cleanup of former
waste oil disposal sites in Illinois. Prior to a partial cleanup by the EPA, a
preliminary study estimated the cleanup costs at one of the sites to be between
$5 million and $15 million. The State of Illinois contends that Panhandle
Eastern Pipe Line's and Trunkline's share for the costs of assessment and
remediation of the sites, based on the volume of waste sent to the facilities,
is 17.32 percent. Management believes that the costs of cleanup, if any, will
not have a material adverse impact on Panhandle's financial position, liquidity,
or results of operations.
OTHER UNCERTAINTIES
CMS GENERATION-OXFORD TIRE RECYCLING: In 1999, the California Regional
Water Control Board of the State of California named CMS Generation as a
potentially responsible party for the cleanup of the waste from a fire that
occurred in September 1999 at the Filbin tire pile. The tire pile was maintained
as fuel for an adjacent power plant owned by Modesto Energy Limited Partnership.
Oxford Tire Recycling of Northern California, Inc., a subsidiary of CMS
Generation until 1995, owned the Filbin tire pile. CMS Generation has not owned
an interest in Oxford Tire Recycling of Northern California, Inc. or Modesto
Energy Limited Partnership since 1995. In 2000, the California Attorney General
filed a complaint against the potentially responsible parties for cleanup of the
site and assessed penalties for violation of the California Regional Water
Control Board order. We have reached a settlement with the state, pursuant to
which we must pay $6 million, $2 million of which we have already paid. The
court has entered a Good Faith Settlement Order and we remitted payment.
In connection with this fire, several class action lawsuits were filed
claiming that the fire resulted in damage to the class and that management of
the site caused the fire. CMS Generation believes these cases are without merit
and intends to vigorously defend against them. CMS Generation's primary
insurance carrier has agreed
CMS-42
to defend and indemnify CMS Generation for a portion of defense costs up to the
policy limits. We are currently in settlement negotiations regarding the private
toxic tort lawsuit.
DEARBORN INDUSTRIAL GENERATION: In October 2001, Duke/Fluor Daniel (DFD)
presented DIG with a change order to their construction contract and filed an
action in Michigan state court claiming damages in the amount of $110 million,
plus interest and costs, which DFD states represents the cumulative amount owed
by DIG for delays DFD believes DIG caused and for prior change orders that DIG
previously rejected. DFD also filed a construction lien for the $110 million.
DIG, in addition to drawing down on the three letters of credit totaling $30
million that it obtained from DFD, will be asserting additional claims against
DFD. CMS Energy believes the claims are without merit and will continue to
vigorously contest them, but any change order costs ultimately paid would be
capitalized as a project construction cost.
Ford Motor Company and Rouge Steel Company, the customers of the DIG
facility, continue to be in discussion with DIG regarding several commercial
issues that have arisen between the parties.
CMS OIL AND GAS: In 1999, a former subsidiary of CMS Oil and Gas, Terra
Energy Ltd., was sued by Star Energy, Inc. and White Pines Enterprises LLC in
the 13th Judicial Circuit Court in Antrim County, Michigan, on grounds, among
others, that Terra violated oil and gas lease and other agreements by failing to
drill wells it had committed to drill. Among the defenses asserted by Terra were
that the wells were not required to be drilled and the claimant's sole remedy
was termination of the oil and gas lease. During the trial, the judge declared
the lease terminated in favor of White Pines. The jury then awarded Star Energy
and White Pines $8 million in damages. Terra has filed an appeal. CMS Energy
believes Terra has meritorious grounds for either reversal of the judgment or
reduction of damages. CMS Energy has an indemnification obligation in favor of
the purchaser of its Michigan properties with respect to this litigation.
OTHER: CMS Energy and Enterprises, including subsidiaries, have guaranteed
payment of obligations, through letters of credit and surety bonds, of
unconsolidated affiliates and related parties approximating $768 million as of
September 30, 2001.
Additionally, Enterprises, in the ordinary course of business, has
guarantees in place for contracts of CMS MST that contain certain schedule and
performance requirements. As of September 30, 2001, the actual amount of
financial exposure covered by these guarantees was $726 million. This amount
excludes the guarantees associated with CMS MST's natural gas sales arrangements
totaling $291 million, which are recorded as liabilities on the Consolidated
Balance Sheet at September 30, 2001. Management monitors and approves these
obligations and believes it is unlikely that CMS Energy or Enterprises would be
required to perform or otherwise incur any material losses associated with the
above obligations.
Certain CMS Gas Transmission and CMS Generation affiliates in Argentina
received notice from various Argentine provinces claiming stamp taxes and
associated penalties and interest arising from various gas transportation
transactions. Although these claims total approximately $75 million, the
affiliates and CMS Energy believe the claims are without merit and will continue
to vigorously contest them.
In March 2000, Adams Affiliates, Inc. and Cottonwood Partnership (prior
majority owners of Continental Natural Gas) initiated arbitration proceedings
through the American Arbitration Association against CMS
CMS-43
Energy. The plaintiffs claim, in connection with an Agreement and Plan of Merger
among CMS Energy, CMS Merging Corporation, Continental Natural Gas and the
plaintiffs, damages for breach of warranty, implied duty of good faith,
violation of the Michigan Uniform Securities Act, and common law fraud and
negligent misrepresentation. The plaintiffs allege $13 million of compensatory
damages and $26 million in exemplary damages. CMS Energy filed a response
denying all the claims made by the plaintiffs and asserting several
counterclaims. Arbitration on this matter was completed in July 2001. The
parties submitted post-hearing briefs to the Arbitrator in September 2001. We
expect, but cannot assure, that the Arbitrator will reach a decision during the
fourth quarter of 2001. CMS Energy believes the claims are without merit and
will continue to vigorously defend against them, but cannot predict the outcome
of this matter.
CMS Generation does not currently expect to incur significant capital costs
at its power facilities for compliance with current U.S. environmental
regulatory standards.
In addition to the matters disclosed in this Note, Consumers, Panhandle 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.
CMS Energy has accrued estimated losses for certain contingencies discussed
in this Note. Resolution of these contingencies is not expected to have a
material adverse impact on CMS Energy's financial position, liquidity, or
results of operations.
CAPITAL EXPENDITURES: CMS Energy estimates capital expenditures, including
investments in unconsolidated subsidiaries and new lease commitments, of $1.365
billion for 2001, $1.025 billion for 2002 and $930 million for 2003. The amounts
for 2002 and 2003 exclude expenditures associated with a potential LNG terminal
expansion. The expansion expenditures, estimated at $25 million in 2002 and $90
million in 2003, are currently expected to be funded through a joint venture via
loans or equity contributions from Panhandle or equity investors or by third
party financings acceptable to the lenders of the joint venture.
5: SHORT-TERM AND LONG-TERM FINANCINGS, AND CAPITALIZATION
CMS ENERGY: CMS Energy's $750 million Senior Credit Facilities consist of a
$450 million one-year revolving credit facility, maturing in June 2002 and a
$300 million three-year revolving credit facility, maturing in June 2004 (Senior
Credit Facilities). Additionally, CMS Energy has unsecured lines of credit in an
aggregate amount of $37 million. As of September 30, 2001, $430 million was
outstanding under the Senior Credit Facilities, including $5 million letters of
credit, and $25 million was outstanding under the unsecured lines of credit.
At September 30, 2001, CMS Energy had $31 million Series A GTNs, $18
million Series B GTNs, $58 million Series C GTNs, $173 million Series D GTNs,
$391 million Series E GTNs and $232 million Series F GTNs issued and outstanding
with weighted average interest rates of 7.5 percent, 7.6 percent, 7.6 percent,
7.1 percent, 7.8 percent and 8.3 percent, respectively.
In February 2001, CMS Energy sold 10 million shares of CMS Energy Common
Stock. CMS Energy used the net proceeds of approximately $296 million to repay
borrowings under the Senior Credit Facility.
In March 2001, CMS Energy sold $350 million aggregate principal amount of
8.50 percent senior notes due 2011. Net proceeds from the sale were
approximately $337 million. CMS Energy used the net proceeds to reduce
borrowings under the Senior Credit Facility and for general corporate purposes.
CMS-44
In July 2001, CMS Energy sold $269 million aggregate principal amount of
8.9 percent senior notes due 2008. Net proceeds from the sale of approximately
$262 million were used to repay the $250 million aggregate principal amount of
8.0 percent Reset Put Securities due 2011, which were called at par by Banc of
America Securities LLC, and to pay the related call option of approximately $12
million.
In July 2001, CMS Energy called $240 million of GTNs at interest rates
ranging from 7.75% to 8.375% using funds available under CMS Energy's Senior
Credit Facilities at a lower borrowing cost.
Pursuant to outstanding authorization by the Board of Directors to
repurchase shares of CMS Energy Common Stock from time to time, in open market
or private transactions, as of September 30, 2001, CMS Energy repurchased
approximately 232 thousand shares for $5 million.
MANDATORILY REDEEMABLE PREFERRED SECURITIES: CMS Energy and Consumers each
have wholly-owned statutory business trusts that are consolidated with the
respective parent company. CMS Energy and Consumers created their respective
trusts for the sole purpose of issuing Trust Preferred Securities. In each case,
the primary asset of the trust is a note or debenture of the parent company. The
terms of the Trust Preferred Security parallel the terms of the related parent
company note or debenture. The terms, rights and obligations of the Trust
Preferred Security and related note or debenture are also defined in the related
indenture through which the note or debenture was issued, the parent guarantee
of the related Trust Preferred Security and the declaration of trust for the
particular trust. All of these documents together with their related note or
debenture and Trust Preferred Security constitute a full and unconditional
guarantee by the parent company of the trust's obligations under the Trust
Preferred Security. In addition to the similar provisions previously discussed,
specific terms of the securities follow:
Amount Outstanding
---------------------------------------------
September 30 December 31 September 30 Earliest
Rate(%) 2001 2000 2000 Maturity Redemption
-------- ------------ ----------- ------------ -------- ----------
In Millions
CMS Energy Trust and Securities
CMS Energy Trust I (a) 7.75 $173 $173 $173 2027 2001
CMS Energy Trust II (b) 8.75 301 301 301 2004 -
CMS Energy Trust III (c) 7.25 220 220 220 2004 -
---- ---- ---- ---- ---- ----
Total Amount Outstanding $694 $694 $694
---- ---- ----
- ------------
(a) Represents Quarterly Income Preferred Securities that are convertible into
1.2255 shares of CMS Energy Common Stock (equivalent to a conversion price
of $40.80). CMS Energy may cause conversion rights to expire on or after
July 2001.
(b) Represents Adjustable Convertible Preferred Securities that include 0.125
percent annual contract payments for the stock purchase contract that
obligates the holder to purchase not more than 1.2121 and not less than
.7830 shares of CMS Energy Common Stock in July 2002.
(c) Represents Premium Equity Participating Security Units in which holders are
obligated to purchase a variable number of shares of CMS Energy Common
Stock by August 2003.
CMS-45
Amount Outstanding
---------------------------------------------
September 30 December 31 September 30 Earliest
Rate 2001 2000 2000 Maturity Redemption
---- ------------ ----------- ------------ -------- ----------
In Millions
Consumers Energy Trust and Securities
Consumers Power Company Financing I,
Trust Originated Preferred Securities 8.36% $100 $100 $100 2015 2000
Consumers Energy Company Financing II,
Trust Originated Preferred Securities 8.20% 120 120 120 2027 2002
Consumers Energy Company Financing III,
Trust Originated Preferred Securities 9.25% 175 175 175 2029 2004
Consumers Energy Company Financing IV,
Trust Originated Preferred Securities 9.00% 125 - - 2031 2006
---- ---- ---- ---- ---- ----
Total Amount Outstanding $520 $395 $395
---- ---- ----
CONSUMERS: At September 30, 2001, Consumers had FERC authorization to issue
or guarantee through June 2002, up to $900 million of short-term securities
outstanding at any one time. Consumers also had remaining FERC authorization to
issue through June 2002 up to $250 million and $125 million of long-term
securities for refinancing or refunding purposes and for general corporate
purposes, respectively.
In August 2001, Consumers filed an amendment with the FERC to request
authorization of an additional $500 million of long-term securities for general
corporate purposes and up to an additional $500 million of long term First
Mortgage Bonds to be issued solely as security for the long-term securities.
Further, in October 2001, FERC granted Consumers' August 2001 request for
authorization of an additional $500 million of short-term debt so that $1.4
billion may be outstanding at any one time and up to $500 million in of First
Mortgage Bonds to be issued as collateral for the outstanding short-term
securities.
Consumers has an unsecured $300 million credit facility maturing in July
2002 and unsecured lines of credit aggregating $215 million. These facilities
are available to finance seasonal working capital requirements and to pay for
capital expenditures between long-term financings. At September 30, 2001, a
total of $153 million was outstanding at a weighted average interest rate of 3.5
percent, compared with $430 million outstanding at September 30, 2000, at a
weighted average interest rate of 7.4 percent.
Consumers currently has in place a $325 million trade receivables sale
program. At September 30, 2001 and 2000, receivables sold under the program
totaled $325 million and $307 million, respectively. Accounts receivable and
accrued revenue in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.
In September 2001, Consumers sold $350 million aggregate principal amount
of 6.25 percent senior notes, maturing in September 2006. Net proceeds from the
sale were $347 million. Consumers used the net proceeds to reduce borrowings on
various lines of credit and on a revolving credit facility.
Under the provisions of its Articles of Incorporation, Consumers had $240
million of unrestricted retained earnings available to pay common dividends at
September 30, 2001 and in September 2001, Consumers declared a $55 million
common dividend payable in November 2001.
CMS OIL AND GAS: CMS Oil and Gas has a $150 million floating rate revolving
credit facility that matures in May 2002. At September 30, 2001, the amount
utilized under the credit facility was $110 million.
CMS-46
6: EARNINGS PER SHARE AND DIVIDENDS
Basic and diluted earnings per share are based on the weighted average
number of shares of common stock and potential common stock outstanding during
the period. Potential common stock, for purposes of determining diluted earnings
per share, includes the effects of dilutive stock options and convertible
securities. The effect of such potential common stock is computed using the
treasury stock method or the if-converted method, as applicable.
The following table presents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations.
COMPUTATION OF EARNINGS PER SHARE:
Three Months
Ended September 30
-------------------------
2001 2000(a)
---- -------
In Millions, Except Per Share Amounts
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income $(569) $53
----- ---
Net Income Attributable to Common Stock:
CMS Energy - Basic $(569) $53
Add conversion of 7.75% Trust
Preferred Securities (net of tax) - (c) 2
----- ---
CMS Energy - Diluted $(569) $55
----- ---
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares - Basic 132.6 109.9
Add conversion of 7.75% Trust
Preferred Securities - (c) 4.2
Options-Treasury Shares - .3
----- ---
Average Shares - Diluted 132.6 114.4
----- ---
EARNINGS PER AVERAGE COMMON SHARE
Basic $ (4.29) $ .49
Diluted $ (4.29) $ .49
----- ---
Nine Months
Ended September 30
-------------------------
2001 2000(b)
---- -------
In Millions, Except Per Share Amounts
NET INCOME APPLICABLE TO BASIC AND DILUTED EPS
Consolidated Net Income $(407) $207
Net Income Attributable to Common Stock:
CMS Energy - Basic $(407) $207
Add conversion of 7.75% Trust
Preferred Securities (net of tax) - (c) 7
CMS Energy - Diluted $(407) $214
CMS-47
Nine Months
Ended September 30
-------------------------
2001 2000(b)
---- -------
In Millions, Except Per Share Amounts
AVERAGE COMMON SHARES OUTSTANDING
APPLICABLE TO BASIC AND DILUTED EPS
CMS Energy:
Average Shares - Basic 130.0 111.1
Add conversion of 7.75% Trust
Preferred Securities - (c) 4.2
Options-Treasury Shares - .2
Average Shares - Diluted 130.0 115.5
EARNINGS PER AVERAGE COMMON SHARE
Basic $(3.13) $1.86
Diluted $(3.13) $1.85
- ------------
(a) For the three months ended September 30, 2000, the accounting change for
crude oil inventories decreased net income by $2 million, or $.02 per basic
and diluted share.
(b) For the nine months ended September 30, 2000, the accounting change for
crude oil inventories decreased net income by $9 million, or $.08 per basic
and diluted share.
(c) The effects of converting the 7.75% Trust Preferred Securities were not
included in the 2001 computation of diluted earnings per share because to
do so would have been antidilutive.
In February, May, and August 2001, CMS Energy paid dividends of $.365 per
share on CMS Energy Common Stock. In September 2001, the Board of Directors
declared a quarterly dividend of $.365 per share on CMS Energy Common Stock,
payable in November 2001.
7: RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS
The overall goal of the CMS Energy risk management policy is to analyze and
manage individual business unit commodity exposures in order to take advantage
of the presence of internal hedge opportunities within its diversified business
units. CMS Energy and its subsidiaries, primarily through CMS MST, utilize a
variety of derivative instruments (derivatives) for both trading and non-trading
purposes. These derivatives include futures contracts, swaps, options and
forward contracts with external parties to manage exposure to fluctuations in
commodity prices, interest rates and foreign exchange rates. To qualify for
hedge accounting, derivatives must meet the following criteria: i) the item to
be hedged exposes the enterprise to price, interest or exchange rate risk; and
ii) the derivative reduces that exposure and is designated as a hedge.
Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. CMS Energy minimizes such risk by performing financial credit
reviews using, among other things, publicly available credit ratings of such
counterparties. No material nonperformance is expected.
IMPLEMENTATION OF SFAS NO. 133: Effective January 1, 2001, CMS Energy
adopted SFAS No. 133. CMS Energy reflected the difference between the fair
market value and the recorded book value of the derivative instruments as a
cumulative effect type adjustment to accumulated other comprehensive income. CMS
Energy will reclassify the gains and losses on the derivative instruments that
are reported in accumulated other comprehensive income as earnings in the
periods in which earnings are impacted by the variability of the cash flows of
the hedged item. The ineffective portion, if any, of all hedges will be
recognized in current period earnings. CMS Energy determines fair market value
based upon mathematical models using current and historical pricing data.
CMS-48
CMS Energy believes that the majority of its non-trading derivative
contracts, power purchase agreements and gas transportation contracts qualify
for the normal purchases and sales exception of SFAS No. 133 and therefore,
would not be recognized at fair value on the balance sheet. CMS Energy does,
however, use certain derivative instruments to limit its exposures to commodity
price risk, interest rate risk, and currency exchange risk. The interest rate
and foreign exchange contracts meet the requirements for hedge accounting under
SFAS No. 133 and CMS Energy recorded the changes in the fair value of these
contracts in accumulated other comprehensive income on the balance sheet.
The financial statement impact of recording the SFAS No. 133 transition
adjustment on January 1, 2001 is as follows:
In Millions
-----------
Fair value of derivative assets $35
Fair value of derivative liabilities 14
Increase in accumulated other comprehensive income, net of tax 13
Upon initial adoption of the standard, CMS Energy recorded a $13 million,
net of tax, cumulative effect adjustment to accumulated other comprehensive
income. This adjustment relates to the difference between the fair value and
recorded book value of contracts related to gas options, gas fuel swap
contracts, and interest rate swap contracts that qualified for cash flow hedge
accounting prior to the initial adoption of SFAS No. 133 and Consumers'
proportionate share of the effects of adopting SFAS No. 133 related to its
equity investment in the MCV Partnership. This amount will reduce, or be charged
to cost of gas, cost of power, interest expense, or other operating revenue
respectively, when the related hedged transaction occurs. Based on the pretax
amount recorded in accumulated other comprehensive income on the January 1, 2001
transition date, Consumers recorded $12 million as a reduction to the cost of
gas, $1 million as a reduction to the cost of power, and $2 million as an
increase in interest expense for the nine months ended September 30, 2001.
Consumers does not expect to reclassify any additional amounts from the
cumulative effect adjustment to earnings that would affect the cost of gas, the
cost of power, interest expense, or other operating revenue during the next 12
months. As of September 30, 2001, Consumers had a total of $9 million, net of
tax, recorded as an unrealized loss in other comprehensive income related to its
proportionate share of the effects of derivative accounting related to its
equity investment in the MCV Partnership. Consumers expects to reclassify this
loss as a decrease to other operating revenue during the next 12 months, if this
value is sustained. CMS Energy recorded $8 million as additional interest
expense during the first nine months of 2001, $4 million was recognized during
the third quarter.
On January 1, 2001, upon initial adoption of the standard, derivative and
hedge accounting for certain utility industry contracts, particularly electric
call option contracts and option-like contracts, and contracts subject to
Bookouts was uncertain. Consumers accounted for these types of contracts as
derivatives that qualified for the normal purchase exception of SFAS No. 133
and, therefore, did not record these contracts on the balance sheet at fair
value. In June 2001, the FASB issued guidance that effectively resolved most of
these matters as of July 1, 2001. Consumers evaluated its option and option-like
contracts and determined that the majority of these contracts qualify for the
normal purchase exception of SFAS No. 133, however, certain electricity option
contracts are required to be accounted for as derivatives. On July 1, 2001, upon
initial adoption of the standard for these contracts, Consumers recorded a $3
million, net of tax, cumulative effect adjustment as a decrease to accumulated
other comprehensive income. This adjustment relates to the difference between
the current fair value and the recorded book value of these electricity option
contracts. The adjustment to accumulated other comprehensive income relates to
electricity option contracts that qualified for cash flow hedge accounting prior
to the initial adoption of SFAS No. 133. After July 1, 2001, these contracts
will not qualify for hedge accounting under SFAS No. 133 and, therefore,
Consumers will record any change in fair value subsequent to July 1, 2001
directly in earnings, which could cause earnings volatility. The initial
CMS-49
amount recorded in other comprehensive income will be reclassified to earnings
as the forecasted future transaction occurs or the option expires. As of
September 30, 2001, $2 million, net of tax, was reclassified to earnings as part
of cost of power. The remainder is expected to be reclassified to earnings in
the third quarter of 2002.
In October 2001, the FASB issued further clarifying guidance regarding
derivative accounting for electricity call option contracts and option-like
contracts. The clarifying guidance amends the criteria to be used to determine
if derivative accounting is required. Consumers is in the process of
re-evaluating its electricity option and option-like contracts in order to
determine if additional contracts will require derivative accounting. The
effective date of this change is January 1, 2002. Consumers is currently
studying the financial effects of the adoption of SFAS No. 133 for these
contracts but has yet to quantify these effects.
In addition, in October 2001, the FASB issued final guidance regarding
derivative accounting for certain fuel supply contracts with quantity
variability. Under the final guidance, effective April 1, 2002, certain
contracts would not qualify for the normal purchase exception of SFAS No. 133
and would require derivative accounting. Consumers initially believed that its
fuel supply contracts qualified for the normal purchase exception of SFAS No.
133 and has not, therefore, recorded these contracts on the balance sheet at
fair value. Consumers is in the process of reviewing its fuel supply contracts
in accordance with the final guidance.
COMMODITY DERIVATIVES (NON-TRADING): CMS Energy accounts for its
non-trading activities as cash flow hedges and, as such, defers any changes in
market value and gains and losses resulting from settlements until the hedged
transaction is complete. If there was a material lack of correlation between the
changes in the market value of the commodity price contracts and the market
price ultimately received for the hedged item, the open commodity price
contracts would be marked-to-market and gains and losses would be recognized in
the income statement. At September 30, 2001, these commodity derivatives
extended for periods up to 5 years.
CMS Energy had unrealized net losses of $32 million at September 30, 2001,
related to non-trading activities. The determination of unrealized net gains and
losses represents management's best estimate of prices including the use of
exchange and other third party quotes, time value and volatility factors in
estimating fair value. Accordingly, the unrealized net losses at September 30,
2001 are not necessarily indicative of the amounts CMS Energy could realize in
the current market.
Consumers' electric business uses purchased electricity call option
contracts to meet its regulatory obligation to serve, which requires providing a
physical supply of energy to customers, and to manage energy cost and to ensure
a reliable source of capacity during periods of peak demand. On January 1, 2001,
upon initial adoption of SFAS No. 133, accounting for these contracts was
uncertain. Consumers accounted for these types of contracts as derivatives that
qualified for the normal purchase exception of SFAS No. 133 and, therefore, did
not record the fair value of these contracts on the balance sheet. In June 2001,
the FASB issued guidance that effectively resolved the accounting for these
contracts as of July 1, 2001. Consumers evaluated its option and option-like
contracts and determined that the majority of these contracts qualify for the
normal purchase exception of SFAS No. 133, however, certain electricity option
contracts are required to be accounted for as derivatives. On July 1, 2001, upon
initial adoption of the standard for these contracts, Consumers recorded a $3
million, net of tax, cumulative effect adjustment as a decrease to accumulated
other comprehensive income, and an immaterial loss to earnings. This adjustment
relates to the difference between the current fair value and the recorded book
value of these electricity option contracts. The adjustment to accumulated other
comprehensive income relates to electricity option contracts that qualified for
cash flow hedge accounting prior to the initial adoption of SFAS No. 133. After
July 1, 2001, these contracts will not qualify for hedge accounting under SFAS
No. 133 and, therefore, Consumers will record any change in fair value
subsequent to July 1, 2001 directly in earnings, which could cause earnings
volatility. The majority of these contracts
CMS-50
expired in the third quarter 2001 and the remaining contracts will expire in
2002. The initial amount recorded in other comprehensive income will be
reclassified to earnings as the forecasted future transaction occurs or the
option expires. As of September 30, 2001, $2 million, net of tax, was
reclassified to earnings as part of cost of power. The remainder is expected to
be reclassified to earnings in the third quarter 2002.
In October 2001, the FASB issued further clarifying guidance regarding
derivative accounting for electricity call option contracts and option-like
contracts. The clarifying guidance amends the criteria to be used to determine
if derivative accounting is required. CMS Energy is in the process of
re-evaluating its electricity option and option-like contracts in order to
determine if additional contracts will require derivative accounting. The
effective date of this change is January 1, 2002. CMS Energy is currently
studying the financial effects of the adoption of SFAS No. 133 for these
contracts but has yet to quantify these effects.
In addition, in October 2001, the FASB issued final guidance regarding
derivative accounting for certain fuel supply contracts with quantity
variability. Under the final guidance, effective April 1, 2002, certain
contracts would not qualify for the normal purchase exception of SFAS No. 133
and would require derivative accounting. CMS Energy initially believed that its
fuel supply contracts qualified for the normal purchase exception of SFAS No.
133 and has not, therefore, recorded these contracts on the balance sheet at
fair value. CMS Energy is in the process of reviewing its fuel supply contracts
in accordance with the final guidance. CMS Energy is currently studying the
financial effects of the adoption of SFAS No. 133 for these contracts and has
yet to quantify these effects.
Consumers' electric business also uses purchased gas call option and gas
swap contracts to hedge against price risk due to the fluctuations in the market
price of gas used as fuel for generation of electricity. These contracts are
financial contracts that will be used to offset increases in the price of
probable forecasted gas purchases. These contracts are designated as cash flow
hedges and, therefore, Consumers will record any change in the fair value of
these contracts in other comprehensive income until the forecasted transaction
occurs. Once the forecasted gas purchases occurs, the net gain or loss on these
contracts will be reclassified to earnings and recorded as part of the cost of
power. These contracts have been highly effective in achieving offsetting cash
flows of future gas purchases, and no component of the gain or loss was excluded
from the assessment of the hedge's effectiveness. As a result, no net gain or
loss has been recognized in earnings as a result of hedge ineffectiveness as of
September 30, 2001. At September 30, 2001, Consumers had a derivative liability
with a fair value of $.4 million. These contracts expire in 2001, and Consumers
expects to reclassify, in 2001, a $.7 million decrease in fair value to earnings
as an increase to power costs, if this fair value is sustained. The ultimate
fair value of these derivative assets is dependent upon market conditions
related to the derivative instruments.
COMMODITY DERIVATIVES (TRADING): CMS Energy, through its subsidiary CMS
MST, engages in trading activities. CMS MST manages any open positions within
certain guidelines that limit its exposure to market risk and requires timely
reporting to management of potential financial exposure. These guidelines
include statistical risk tolerance limits using historical price movements to
calculate daily value at risk measurements. CMS MST's trading activities are
accounted for under the mark-to-market method of accounting. Under
mark-to-market accounting, energy trading contracts are reflected at fair market
value, net of reserves, with unrealized gains and losses recorded as an asset or
liability in the consolidated balance sheets. These assets and liabilities are
affected by the timing of settlements related to these contracts, current-period
changes from newly originated transactions and the impact of price movements.
Changes are recognized as revenues in the consolidated statements of income in
the period in which the changes occur. Market prices used to value outstanding
financial instruments reflect management's consideration of, among other things,
closing exchange and over-the-counter quotations. In certain of these markets,
long-term contract commitments may extend beyond the period in which market
quotations for such contracts are available. The lack of long-term pricing
CMS-51
liquidity requires the use of mathematical models to value these commitments
under the accounting method employed. These mathematical models utilize
historical market data to forecast future elongated pricing curves, which are
used to value the commitments that reside outside of the liquid market
quotations. Realized cash returns on these commitments may vary, either
positively or negatively, from the results estimated through application of
forecasted pricing curves generated through application of the mathematical
model. CMS Energy believes that its mathematical models utilize state-of-the-art
technology, pertinent industry data and prudent discounting in order to forecast
certain elongated pricing curves. These market prices are adjusted to reflect
the potential impact of liquidating the company's position in an orderly manner
over a reasonable period of time under present market conditions.
In connection with the market valuation of its energy commodity contracts,
CMS Energy maintains certain reserves for a number of risks associated with
these future commitments. Among others, these include reserves for credit risks
based on the financial condition of counterparties. Counterparties in its
trading portfolio consist principally of financial institutions and major energy
trading companies. The creditworthiness of these counterparties may impact
overall exposure to credit risk, either positively or negatively; however, with
regard to its counterparties, CMS Energy maintains credit policies that
management believes minimize overall credit risk. Determination of the credit
quality of its counterparties is based upon a number of factors, including
credit ratings, financial condition, and collateral requirements. When
applicable, CMS Energy employs standardized agreements that allow for netting of
positive and negative exposures associated with a single counterparty. Based on
these policies, its current exposures and its credit reserves, CMS Energy does
not anticipate a material adverse effect on its financial position or results of
operations as a result of counterparty nonperformance.
At September 30, 2001, CMS MST has recorded an asset of $70 million, net of
reserves, related to the unrealized mark-to-market gains on existing
arrangements. For the three and nine months ended September 30, 2001, CMS MST
reflected $10 million and $54 million, respectively, of mark-to-market revenues,
net of reserves, primarily from newly originated long-term power sales contracts
and wholesale gas trading transactions.
FLOATING TO FIXED INTEREST RATE SWAPS: CMS Energy and its subsidiaries
enter into floating to fixed interest rate swap agreements to reduce the impact
of interest rate fluctuations. These swaps are designated as cash flow hedges
and the difference between the amounts paid and received under the swaps is
accrued and recorded as an adjustment to interest expense over the term of the
agreement. Notional amounts reflect the volume of transactions but do not
represent the amount exchanged by the parties to the financial instruments.
Accordingly, notional amounts do not necessarily reflect CMS Energy's exposure
to credit or market risks. As of September 30, 2001, the weighted average
interest rate associated with outstanding swaps was approximately 6.5 percent.
Floating to Fixed Notional Maturity Fair Unrealized
Interest Rate Swaps Amount Date Value Gain (Loss)
- ------------------- -------- -------- ----- -----------
In Millions
September 30, 2001 $569 2001-06 $(15) $2
September 30, 2000 $1,719 2000-06 $(4) $(3)
FIXED TO FLOATING INTEREST RATE SWAPS: CMS Energy monitors its debt
portfolio mix of fixed and variable rate instruments and from time to time
enters into fixed to floating rate swaps to maintain the optimum mix of fixed
and floating rate debt. These swaps are designated as fair value hedges and any
gains or losses in the fair value are amortized to earnings after the
termination of the hedge instrument over the remaining life of the hedged item.
Notional amounts reflect the volume of transactions but do not represent the
amount exchanged
CMS-52
by the parties to the financial instruments. Accordingly, notional amounts do
not necessarily reflect CMS Energy's exposure to credit or market risks. As of
September 30, 2001, the weighted average interest rate associated with
outstanding swaps was approximately 6.8 percent.
Floating to Fixed Notional Maturity Fair Unrealized
Interest Rate Swaps Amount Date Value Gain (Loss)
- ------------------- -------- -------- ----- -----------
In Millions
September 30, 2001 $850 2003-06 $1 $1
September 30, 2000 -- -- -- --
FOREIGN EXCHANGE DERIVATIVES: CMS Energy uses forward exchange and option
contracts to hedge certain receivables, payables, long-term debt and equity
value relating to foreign investments. The purpose of CMS Energy's foreign
currency hedging activities is to protect the company from the risk that U.S.
dollar net cash flows resulting from sales to foreign customers and purchases
from foreign suppliers and the repayment of non-U.S. dollar borrowings as well
as equity reported on the company's balance sheet, may be adversely affected by
changes in exchange rates. These contracts do not subject CMS Energy to risk
from exchange rate movements because gains and losses on such contracts offset
losses and gains, respectively, on assets and liabilities being hedged. The
estimated fair value of the foreign exchange and option contracts at September
30, 2001 and 2000 was $18 million and $(24) million, respectively; which
represents the amount CMS Energy would receive or (pay) upon settlement. The
impacts of the hedges of the net investments in foreign operations are reflected
in other comprehensive income as a component of the foreign currency translation
adjustment. For the first nine months of 2001, the adjustment for hedging was
$11 million of the total net foreign currency translation adjustment of $(64)
million. CMS Energy did not incur any significant gain or loss as a result of
exchange rate fluctuations during the third quarter of 2001 related to hedges of
US dollar denominated debt that did not qualify as net investment hedges, and
consequently, were marked-to-market through earnings.
Foreign exchange contracts outstanding as of September 30, 2001 had a total
notional amount of $223 million, which is related to CMS Energy's investments in
Argentina. The Argentine contracts mature at various times during 2001 and 2002.
The foreign exchange contracts related to Brazilian and Australian investments
that were in place at the end of the second quarter, expired during the third
quarter and were not replaced.
The notional amount of the outstanding foreign exchange contracts at
September 30, 2000 was $601 million consisting of $1 million, $150 million and
$450 million for Australian, Brazilian and Argentine, respectively.
FINANCIAL INSTRUMENTS: The carrying amounts of cash, short-term investments
and current liabilities approximate their fair values due to their short-term
nature. The estimated fair values of long-term investments are based on quoted
market prices or, in the absence of specific market prices, on quoted market
prices of similar investments or other valuation techniques. Judgment may also
be required to interpret market data to develop certain estimates of fair value.
Accordingly, the estimates determined as of September 30, 2001 and 2000 are not
necessarily indicative of the amounts that may be realized in current market
exchanges. The carrying amounts of all long-term investments in financial
instruments, except as shown below, approximate fair value.
CMS-53
As of September 30
---------------------------------------------------------------------------
2001 2000
----------------------------------- -----------------------------------
Carrying Fair Unrealized Carrying Fair Unrealized
Cost Value Gain (Loss) Cost Value Gain (Loss)
-------- ------- ----------- -------- ------- -----------
In Millions
Long-Term Debt (a) $7,827 $7,720 $(107) $7,246 $6,987 $(259)
Preferred Stock and
Trust Preferred Securities $1,257 $1,162 $(95) $1,133 $1,025 $(108)
- ------------
(a) Settlement of long-term debt is generally not expected until maturity.
8: REPORTABLE SEGMENTS
CMS Energy operates principally in the following six reportable segments:
electric utility; gas utility; independent power production; oil and gas
exploration and production; natural gas transmission; and marketing, services
and trading.
CMS Energy's reportable segments are strategic business units organized and
managed by the nature of the products and services each provides. Management
evaluates performance based on the pretax operating income of each segment. The
electric utility segment consists of regulated activities associated with the
generation, transmission and distribution of electricity in the state of
Michigan through its subsidiary, Consumers Energy. The gas utility segment
consists of regulated activities associated with the transportation, storage and
distribution of natural gas in the state of Michigan through its subsidiary,
Consumers Energy. Independent power production invests in, acquires, develops,
constructs and operates non-utility power generation plants in the United States
and abroad. The oil and gas exploration and production segment conducts oil and
gas exploration and development operations in the United States, primarily the
Permian Basin in Texas and the Powder River Basin in Wyoming and in the
countries of Cameroon, Colombia, Congo, Tunisia and Venezuela. Natural gas
transmission owns, develops, and manages domestic and international natural gas
facilities. The marketing, services and trading segment provides gas, oil, and
electric marketing, risk management and energy management services to
industrial, commercial, utility and municipal energy users throughout the United
States and abroad. Revenues from a land development business fall below the
quantitative thresholds for reporting and have never met any of the quantitative
thresholds for determining reportable segments.
The accounting policies of each reportable segment are the same as those
described in the summary of significant accounting policies contained in CMS
Energy's 2000 Form 10-K. The Consolidated Statements of Income show operating
revenue and pretax operating income by reportable segment. Intersegment sales
and transfers are accounted for at current market prices and are eliminated in
consolidated pretax operating income by segment.
The only material changes in assets during the first nine months of 2001 is
that management has decided to discontinue operation of the international energy
distribution segment. For more detailed information, see Note 2, Discontinued
Operations. Also, Consumers Energy announced the sale of their transmission
facilities to Trans-Elect under the requirements of Michigan Public Act 141.
FERC approval to complete the sale to Trans-Elect is expected in the first
quarter of 2002.
CMS-54
9: LEASES
In April 2001, Consumers Campus Holdings, entered into a lease agreement
for the construction of an office building to be used as the main headquarters
for Consumers in Jackson, Michigan. Consumers' current headquarters building
leases expire in June 2003. The lessor has committed to fund up to $70 million
for construction of the building. Consumers is acting as the construction agent
of the lessor for this project. The agreement is a seven-year lease term with
payments commencing upon completion of construction, which is projected for
March of 2003. Consumers Campus Holdings has the right to acquire the property
at any time during the life of the agreement. At the end of the lease term,
Consumers Campus Holdings has the option to renew the lease, purchase the
property, or return the property and assist the lessor in the sale of the
building. The return option obligates Consumers Campus Holdings to pay the
lessor an amount equal to the outstanding debt associated with the building.
This lease is classified as an operating lease. Estimated minimum lease
commitments, assuming an investment of $70 million, based on LIBOR at inception
of the lease, under this non-cancelable operating lease would be approximately
$5 million each year from 2003 through 2007 and a total of $52 million for the
remainder of the lease. Actual lease payments will depend upon final total
construction costs and LIBOR rates.
CMS-55
Report of Independent Public Accountants
To CMS Energy Corporation:
We have reviewed the accompanying consolidated balance sheets of CMS ENERGY
CORPORATION (a Michigan corporation) and subsidiaries as of September 30, 2001
and 2000, and the related consolidated statements of income and common
stockholders' equity for the three-month and nine-month periods then ended and
related consolidated statements of cash flows for the nine-month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of CMS Energy
Corporation and subsidiaries as of December 31, 2000, and, in our report dated
February 2, 2001, we expressed an unqualified opinion on that statement. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2000, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Arthur Andersen LLP
Detroit, Michigan,
October 31, 2001.
CMS-56
CONSUMERS ENERGY COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Consumers, a subsidiary of CMS Energy, a holding company, is an electric
and gas utility company that provides service to customers in Michigan's Lower
Peninsula. Consumers' customer base includes a mix of residential, commercial
and diversified industrial customers, the largest segment of which is the
automotive industry.
This MD&A refers to, and in some sections specifically incorporates by
reference, Consumers' Condensed Notes to Consolidated Financial Statements and
should be read in conjunction with such Consolidated Financial Statements and
Notes. This Form 10-Q and other written and oral statements that Consumers may
make contain forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. Consumers' intentions with the use of the words,
"anticipates," "believes," "estimates," "expects," "intends," and "plans," and
variations of such words and similar expressions, are solely to identify
forward-looking statements that involve risk and uncertainty. These
forward-looking statements are subject to various factors that could cause
Consumers' actual results to differ materially from the results anticipated in
such statements. Consumers has 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 such statements. Consumers does,
however, discuss certain risk factors, uncertainties and assumptions in this
Management's Discussion and Analysis in the section entitled "CMS Energy,
Consumers and Panhandle Forward-Looking Statements Cautionary Factors" in
Consumers' 2000 Form 10-K Item 1 and in various public filings it periodically
makes with the SEC. Consumers designed this discussion of potential risks and
uncertainties, which is by no means comprehensive, to highlight important
factors that may impact Consumers' outlook. This Form 10-Q also describes
material contingencies in Consumers Notes to Consolidated Financial Statements,
and Consumers encourages its readers to review these Notes.
RESULTS OF OPERATIONS
CONSUMERS CONSOLIDATED EARNINGS
SEPTEMBER 30
---------------------------------------
2001 2000 CHANGE
---- ---- ------
IN MILLIONS
Three months ended $(74) $ 63 $(137)
Nine months ended 57 172 (115)
==== ==== =====
For the three months ended September 30, 2001, net income available to the
common stockholder decreased $137 million from the comparable period in 2000.
The earnings decrease reflects an $82 million after tax loss related to
Consumers' Power Purchase Agreement with the MCV. This loss reflects
management's current assessment of increased operating levels at the MCV
Facility after the current frozen PSCR factor expires. Additionally, energy
payments to the MCV during the frozen PSCR period are now expected to be higher
than originally anticipated. These factors required Consumers to recognize an
additional loss related to the MCV PPA. The earnings decrease also reflects
increased replacement power costs that cannot be recovered from customers during
the frozen PSCR period. The increase in replacement power costs was due, in
large part, to a continuing unscheduled outage at Palisades. The Palisades
outage will continue through the fourth quarter, thereby, materially affecting
the fourth quarter results. It is anticipated, however, that Palisades will
return to service in January 2002. For the nine months ended September 30, 2001,
net income decreased $115 million from the comparable period in
CE-1
2000. The earnings decrease primarily reflects the losses and unrecoverable
costs referenced above, partially offset by the recording of a $29 million,
after tax, regulatory obligation related to gas prices in the second quarter of
2000. For further information, see the Electric and Gas Utility Results of
Operations sections and Note 2, Uncertainties.
ELECTRIC UTILITY RESULTS OF OPERATIONS
ELECTRIC PRETAX OPERATING INCOME:
SEPTEMBER 30
------------------------------------------
2001 2000 CHANGE
---- ---- ------
IN MILLIONS
Three months ended $(62) $118 $(180)
Nine months ended 157 342 (185)
==== ==== =====
For the three months ended September 30, 2001, electric pretax operating
income decreased $180 million from the comparable period in 2000. The earnings
decrease reflects a $126 million loss related to Consumers' Power Purchase
Agreement with the MCV and increased replacement power costs, discussed in the
consolidated earnings section, partially offset by higher electric deliveries to
higher margin customers. For the nine months ended September 30, 2001, electric
pretax operating income decreased $185 million from the comparable period in
2000. The earnings decrease reflects the above referenced loss related to the
MCV along with the increase in power costs, also partially offset by higher
electric deliveries to higher margin customers. The following table quantifies
these impacts on pretax operating income:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
CHANGE COMPARED TO PRIOR YEAR 2001 VS 2000 2001 VS 2000
- ----------------------------- ------------------ ------------------
IN MILLIONS
Electric deliveries $ 19 $ 21
Power supply costs and related production revenue (68) (71)
Rate decrease 0 (17)
Non-commodity revenue (13) (4)
Other operating expenses 8 12
Loss on MCV Power Purchases (126) (126)
----- -----
Total change $(180) $(185)
===== =====
ELECTRIC DELIVERIES: For the three months ended September 30, 2001,
electric deliveries including intersystem volumes were 11.0 billion kWh, an
increase of 0.3 billion kWh or 3.0 percent from the comparable period in 2000.
Total electric deliveries increased primarily due to higher residential and
commercial usage. For the nine months ended September 30, 2001, electric
deliveries were 30.2 billion kWh, which is a slight decrease from the comparable
period in 2000. Although total deliveries were below the 2000 level, current
year increased deliveries to the higher margin residential and commercial
sectors more than offset the impact of reductions to the lower margin industrial
sector.
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POWER SUPPLY COSTS:
SEPTEMBER 30
----------------------------------------
2001 2000 CHANGE
------ ---- ------
IN MILLIONS
Three months ended $ 444 $355 $ 89
Nine months ended 1,050 949 101
====== ==== ====
For the three and nine months ended September 30, 2001, power supply costs
increased $89 million and $101 million, respectively, from the comparable period
in 2000, primarily due to higher interchange power purchases. Consumers had to
purchase greater quantities of higher-priced external power primarily because of
decreased internal generation resulting from unscheduled outages. Further, the
continuing unscheduled outage at Palisades materially affected third quarter
results because of the necessity to utilize higher cost internal generation and
purchase replacement power.
GAS UTILITY RESULTS OF OPERATIONS
GAS PRETAX OPERATING INCOME:
SEPTEMBER 30
--------------------------------------
2001 2000 CHANGE
---- ---- ------
IN MILLIONS
Three months ended $(1) $ 9 $(10)
Nine months ended 81 44 37
=== === ====
For the three months ended September 30, 2001, gas pretax operating income
decreased by $10 million. The earnings decrease is primarily the result of
higher operation and maintenance costs and lower gas deliveries due to the
economic slowdown. For the nine months ended September 30, 2001, gas pretax
operating income increased by $37 million, primarily the result of the recording
of a $45 million regulatory obligation related to gas prices in the second
quarter of 2000. The following table quantifies these impacts on pretax
operating income.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
CHANGE COMPARED TO PRIOR YEAR 2001 VS 2000 2001 VS 2000
- ----------------------------- ------------------ ------------------
IN MILLIONS
Gas deliveries $ (1) $ 7
Gas commodity costs and related revenue (3) 38
Gas wholesale and retail services 1 7
Operation and maintenance expense (8) (15)
General taxes and depreciation expense 1 0
---- ----
Total change $(10) $ 37
==== ====
GAS DELIVERIES: For the three months ended September 30, 2001, gas system
deliveries, including miscellaneous transportation volumes totaled 42 bcf, a
decrease of 3 bcf or 7 percent from the comparable period in 2000. During the
third quarter of 2001, the decreased deliveries reflect a reduction in demand
due to decelerated economic activity. For the nine months ended September 30,
2001, gas system deliveries, including miscellaneous transportation totaled 258
bcf, a decrease of 15 bcf or 5.2 percent from the comparable period in 2000.
Although deliveries were below the 2000 level, year to date deliveries to
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the higher margin residential and commercial sectors more than offset the impact
of reductions to the lower margin industrial sector.
COST OF GAS SOLD:
SEPTEMBER 30
--------------------------------------
2001 2000 CHANGE
---- ---- ------
IN MILLIONS
Three months ended $ 72 $ 60 $ 12
Nine months ended 562 450 112
==== ==== ====
For the three months ended September 30, 2001, the cost of gas sold
increased due to higher gas prices. During the third quarter of 2001, these
higher gas costs were partially offset by decreased sales due to reduced
economic demand. For the nine months ended September 30, 2001, higher gas prices
through the first three quarters contributed to the increased cost of gas sold.
CAPITAL RESOURCES AND LIQUIDITY
CASH POSITION, INVESTING AND FINANCING
OPERATING ACTIVITIES: Consumers derives cash from operating activities
involving the sale and transportation of natural gas and the generation,
transmission, distribution and sale of electricity. For the first nine months of
2001 and 2000, cash from operations totaled $321 million and $352 million,
respectively. The $31 million decrease resulted primarily from a $250 million
use of cash to increase natural gas inventories, offset by a $157 million
increase in cash collected from customers and related parties and a $62 million
of other temporary changes in working capital items due to timing of cash
receipts and payments. Consumers primarily uses cash derived from operating
activities to maintain and expand electric and gas systems, to retire portions
of long-term debt, and to pay dividends.
INVESTING ACTIVITIES: For the first nine months of 2001 and 2000, cash used
for investing activities totaled $511 million and $394 million, respectively.
The change of $117 million is primarily the result of a $151 million increase in
capital expenditures, primarily to comply with the Clean Air Act.
FINANCING ACTIVITIES: For the first nine months of 2001 and 2000, cash
provided by financing activities totaled $193 million and $33 million,
respectively. The change of $160 million is primarily the result of $121 million
net proceeds from the sale of Trust Originated Preferred Securities, $352
million net proceeds from Senior notes and $150 million cash infusion from CMS
Energy, offset by a $463 million net decrease in notes payable.
In November 2001, Consumers Funding LLC, a special purpose subsidiary of
Consumers, issued $469 million of Securitization bonds. For further information,
see Note 2, Uncertainties, Electric Rate Matters.
OTHER: Consumers has credit facilities, lines of credit and a trade
receivable sale program in place as anticipated sources of funds to fulfill its
currently expected capital expenditures. For detailed information about this
source of funds, see Note 3, Short-Term Financing and Capitalization.
In April 2001, Consumers Campus Holdings, a wholly owned subsidiary of
Consumers, entered into a $70 million operating lease agreement for the
construction of an office building to be used as the main headquarters for
Consumers in Jackson, Michigan. The seven-year agreement, with payments
commencing upon completion of construction, includes options to renew the lease,
purchase the property under the lease, or return the property at the end of the
lease term and assist the lessor in remarketing the
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building. Lease payments will be determined based on LIBOR rates and the total
cost of the construction, which is projected to be completed on or before March
2003. For further information on the lease agreement, see Note 4, Leases.
OUTLOOK
CAPITAL EXPENDITURES OUTLOOK
Over the next three years, Consumers estimates the following capital
expenditures, including new lease commitments, by expenditure type and by
business segments. Consumers prepares these estimates for planning purposes and
may revise them.
YEARS ENDED DECEMBER 31
------------------------------
2001 2002 2003
---- ---- ----
IN MILLIONS
Construction $692 $601 $548
Nuclear fuel lease 16 27 0
Capital leases other than nuclear fuel 27 27 22
---- ---- ----
$735 $655 $570
==== ==== ====
Electric utility operations(a)(b) $590 $480 $405
Gas utility operations(a) 145 175 165
---- ---- ----
$735 $655 $570
==== ==== ====
- ------------
(a) These amounts include an attributed portion of Consumers' anticipated
capital expenditures for plant and equipment common to both the electric
and gas utility businesses.
(b) These amounts include estimates for capital expenditures that may be
required by recent revisions to the Clean Air Act's national air quality
standards. For further information see Note 2, Uncertainties.
ELECTRIC BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers expects electric system
deliveries (including both full service sales and delivery service to customers
who choose to buy generation service from an alternate energy supplier) to grow
at an average rate of approximately two percent per year based primarily on a
steadily growing customer base. This growth rate reflects a long-range expected
trend of growth. Growth from year to year may vary from this trend due to
customer response to abnormal weather conditions and changes in economic
conditions including utilization and expansion of manufacturing facilities.
COMPETITION AND REGULATORY RESTRUCTURING: Regulatory changes and other
developments have resulted and will continue to result in increased competition
in the electric business. Generally, increased competition threatens Consumers'
market share and can reduce profit margins.
Consumers has in the last several years experienced and expects to continue
to experience a significant increase in competition for generation services with
the introduction of retail direct access in the State of Michigan. Under
Michigan's Customer Choice Act, effective in June 2000, all electric customers
will have the choice of electric generation suppliers by January 1, 2002.
The Customer Choice Act imposes certain rate caps that could result in
Consumers being unable to collect
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customer rates sufficient to fully recover its cost of conducting business. Some
of these costs may be wholly or partially beyond Consumers' ability to control.
In particular, if Consumers needs to purchase power from wholesale suppliers at
market-based prices during the period when retail rates are frozen or capped,
the rate caps imposed by the Customer Choice Act may make it difficult for
Consumers to purchase the power at prices that it could recover in the rates it
charges its customers. As a result, it is not certain that Consumers can
maintain its profit margins in its electric utility business during the rate
freeze.
In December 2000, as a result of electric restructuring, the MPSC issued a
new code of conduct that applies to electric utilities and alternative energy
suppliers. The code of conduct seeks to prevent cross-subsidization, information
sharing and preferential treatment between a utility's regulated and unregulated
services. The new code of conduct is broadly written, and as a result could
affect Consumers' retail gas business, the marketing of unregulated services and
equipment to customers in Michigan, and internal transfer pricing between
Consumers' departments and affiliates. The new code of conduct was recently
reaffirmed after hearing without substantial modification, and is scheduled to
be effective at the end of 2001. Consumers anticipates that it will appeal MPSC
orders related to the code of conduct and seek a stay of its effective date. In
addition, Consumers anticipates that it will seek waivers to the code of conduct
with respect to utility activities that may be prohibited by the new code of
conduct. The full impact of the new code of conduct on Consumers' business will
remain uncertain until the MPSC or appellate courts issue definitive rulings in
regard to the implementation issues.
Several years prior to the enactment of the Customer Choice Act, in
response to industry restructuring efforts, Consumers entered into multi-year
electric supply contracts with some of its largest industrial customers to
provide power to some of their facilities. The MPSC approved those contracts as
part of its phased introduction to competition. During the period from 2001
through 2005, either Consumers or these industrial customers can terminate or
restructure some of these contracts. As of September 2001, neither Consumers nor
any of its industrial customers have terminated or restructured any of these
contracts. These contracts involve approximately 600 MW of customer power supply
requirements. Consumers cannot predict the ultimate financial impact of changes
related to these power supply contracts.
Uncertainty exists with respect to the enactment of federal electric
industry restructuring legislation. A variety of bills introduced in Congress in
recent years have sought to change existing federal regulation of the industry,
and recently the House of Representatives passed a bill that is currently before
the Senate. If the federal government enacts legislation restructuring the
electric industry, then that legislation could potentially affect or even
supercede state regulation.
In part because of certain policy pronouncements by the FERC, Consumers
joined the Alliance RTO. In January 2001, the FERC granted Consumers'
application to transfer ownership and control of its transmission facilities to
a wholly owned subsidiary, METC. On April 1, 2001, Consumers transferred the
transmission facilities to METC. In October 2001, Consumers announced an
agreement to sell METC to MTH, an independent limited partnership whose general
partner is a subsidiary of Trans-Elect, Inc. METC will continue to own and
operate the system until the companies meet all conditions of closing, including
approval of the transaction from the FERC. Regulatory approvals and operational
transfer are expected to take place in the second quarter of 2002; however,
Consumers can make no assurances as to when or if the transaction will be
completed. For further information, see Note 2, Uncertainties, "Electric Rate
Matters - Transmission Business", incorporated by reference herein.
Consumers cannot predict the outcome of these electric
industry-restructuring issues on its financial position, liquidity, or results
of operations.
RATE MATTERS: Prior to the enactment of the Customer Choice Act, there were
several pending rate issues that could have affected Consumers' electric
business. As a result of the passage of this legislation, the MPSC dismissed
certain rate proceedings and a complaint filed by ABATE seeking a reduction in
rates.
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ABATE filed a petition for rehearing with the MPSC, which was denied in October
2001.
For further information and material changes relating to the rate matters
and restructuring of the electric utility industry, see Note 1, Corporate
Structure and Summary of Significant Accounting Policies, and Note 2,
Uncertainties, "Electric Rate Matters - Electric Restructuring" and "Electric
Rate Matters - Electric Proceedings," incorporated by reference herein.
NUCLEAR MATTERS: In June 2001, an unplanned outage began at Palisades that
negatively affected, and will continue to negatively affect, power costs through
fourth quarter 2001. On June 20, 2001, the Palisades reactor was shut down so
technicians could inspect a small steam leak on a control rod drive assembly.
There was no risk to the public or workers. In August 2001, Consumers completed
an expanded inspection that included all similar control rod drive assemblies
and elected to completely replace the defective components immediately, as
opposed to partially repairing the components now followed eventually by
complete replacement during a future outage. The Company adopted this approach
because it provides more certainty of schedule for return to service, greater
regulatory acceptability, and avoids future plant outage time and associated
replacement power costs. Installation of the new components is expected to be
completed in December 2001, with the plant expected to return to service in
January 2002. Consumers cannot, however, make any assurances as to the date on
which the new components will be installed or the plant will return to service.
For further information and material changes relating to nuclear matters, see
Note 2, Uncertainties, "Other Electric Uncertainties - Nuclear Matters."
UNCERTAINTIES: Several electric business trends or uncertainties may affect
Consumers' financial results and condition. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing electric operations. Such trends and
uncertainties include: 1) capital expenditures and increased operating expenses
for compliance with the Clean Air Act; 2) environmental liabilities arising from
various federal, state and local environmental laws and regulations, including
potential liability or expenses relating to the Michigan Natural Resources and
Environmental Protection Acts and Superfund; 3) uncertainties relating to the
storage and ultimate disposal of spent nuclear fuel and the successful operation
of the Palisades plant by NMC; 4) electric industry restructuring, including: a)
how the MPSC ultimately calculates the amount of Stranded Costs and the related
true-up adjustments and the manner in which the true-up operates; b) the ability
to recover fully the cost of doing business under the rate caps; c) the ability
to meet peak electric demand requirements at a reasonable cost and without
market disruption and initiatives undertaken to reduce exposure to energy price
increases; d) the restructuring of the MEPCC and the termination of joint
merchant operations with Detroit Edison; e) the ability to sell wholesale power
at market based rates; f) the effect of the transfer of Consumers transmission
facilities to METC and its successful disposition or integration into an RTO;
and g) the MPSC adoption of proposed electric distribution performance standards
requiring customer credits for prolonged outages; 5) the power outage at
Palisades and the incremental cost of replacement power and maintenance; and 6)
the effects of derivative accounting and potential earnings volatility. For
detailed information about these trends or uncertainties, see Note 2,
Uncertainties, incorporated by reference herein.
GAS BUSINESS OUTLOOK
GROWTH: Over the next five years, Consumers anticipates gas deliveries,
including gas customer choice deliveries (excluding transportation to the MCV
Facility and off-system deliveries), to grow at an average of about one percent
per year based primarily on a steadily growing customer base. Actual gas
deliveries in future periods may be affected by abnormal weather, alternative
energy costs, changes in competitive conditions, and the level of natural gas
consumption per customer.
During the spring and summer months of 2001, Consumers purchased natural
gas for inventory to meet anticipated future customer needs during the winter
heating season. Consumers anticipates that it will
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incur financing costs on these natural gas purchases that are higher than the
costs recovered in current rates.
UNCERTAINTIES: Several gas business trends or uncertainties may affect
Consumers' financial results and conditions. These trends or uncertainties have,
or Consumers reasonably expects could have, a material impact on net sales,
revenues, or income from continuing gas operations. Such trends and
uncertainties include: 1) potential environmental costs at a number of sites,
including sites formerly housing manufactured gas plant facilities; 2) future
gas industry restructuring initiatives; 3) implementation of the permanent gas
customer choice program for all gas retail customers; 4) any initiatives
undertaken to protect customers against gas price increases; and 5) market and
regulatory responses to increases in gas costs. For detailed information about
these uncertainties, see Note 2, Uncertainties, incorporated by reference
herein.
OTHER OUTLOOK
Since the September 11, 2001 terrorists attack in the United States,
Consumers has increased security at all facilities and infrastructure, and will
continue to evaluate security on an ongoing basis. Consumers may be required to
comply with potential federal and state regulatory security measures. As a
result, Consumers anticipates increased operating costs related to security
after September 11, 2001 that could be significant. Consumers cannot quantify
these costs at this time but would plan to seek recovery from its customers.
Consumers offers a variety of energy-related services to electric and gas
customers that focus on appliance maintenance, home safety, commodity choice and
assistance to customers purchasing heating, ventilation and air conditioning
equipment. Consumers continues to look for additional growth opportunities in
energy-related services for Consumers' customers.
In July 2001, the MPSC directed gas utilities under its jurisdiction to
prepare and file an unbundled cost of service study. The purpose of the study is
to allow parties to advocate or oppose the unbundling of the following services:
metering, billing information, transmission, balancing, storage, backup and
peaking, and customer turn-on and turn-off services. Unbundled services could be
separated from future rates and the services could be provided by an approved
third party. Consumers was directed to make this filing in connection with its
June 2001 request for a gas service rate increase and Consumers has complied
with this request.
OTHER MATTERS
NEW ACCOUNTING STANDARDS
In July 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that entities account for all business combinations
initiated after June 30, 2001, under the purchase method and prohibits the use
of the pooling-of-interests method. The adoption of SFAS No. 141, effective July
1, 2001, will result in Consumers accounting for any future business
combinations under the purchase method of accounting, but not change the method
of accounting used in previous business combinations.
SFAS No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. As of January 1, 2002, the amortization of
goodwill ceases upon adoption of the standard. The provisions of SFAS No. 142
require adoption for calendar year entities. Upon adoption, Consumers will no
longer amortize its existing goodwill. Consumers does not expect that the
provisions of SFAS No.
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142 will have a material impact on Consumers' consolidated results of operations
or financial position.
In August 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, effective January 1, 2003. The standard requires entities to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred. When the liability is initially recorded, the entity
would capitalize an offsetting amount by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value while the capitalized cost is depreciated over the useful life of the
related asset. Consumers is currently studying the new standard but has yet to
quantify the effects of adoption on its financial statements.
In October 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which replaces SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and
APB No. 30, Reporting Results of Operations-Reporting the Effects of Disposal of
a Segment of a Business.
SFAS No. 144 requires long-lived assets to be measured at the lower of
either the carrying amount or of the fair value less the cost to sell, whether
reported in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value or
include amounts for operating losses that have not yet occurred.
SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The adoption of SFAS No.
144, effective January 1, 2002, will result in Consumers accounting for any
future impairment or disposal of long-lived assets under the provisions of SFAS
No. 144, but will not change the accounting used for previous asset impairments
or disposals.
In October 2001, the FASB also issued clarifying guidance for Derivative
Implementation Issue No. C15, Scope Exceptions: Normal Purchases and Normal
Sales Exception for Option-Type Contracts and Forward Contracts in Electricity,
and final guidance for Derivative Implementation Issue No. C16, Scope
Exceptions: Applying the Normal Purchases and Normal Sales Exception to
Contracts That Combine a Forward Contract and a Purchased Option Contract. These
issues could have a significant impact upon the implementation of derivative
accounting for certain contracts, and are effective January 1, 2002 and April 1,
2002, respectively. For further information about the potential effect, see Note
1, Corporate Structure and Summary of Significant Accounting Policies,
"Implementation of New Accounting Standards" and Note 2, Uncertainties, Other
Electric Uncertainties, "Derivative Activities".
DERIVATIVES AND HEDGES
MARKET RISK INFORMATION: Consumers is exposed to market risks including,
but not limited to, changes in interest rates, commodity prices, and equity
security prices in which Consumers holds less than a 20 percent interest.
Consumers' derivative activities are subject to the direction of an executive
oversight committee consisting of designated members of senior management and a
risk committee, consisting of business unit managers. The role of the risk
committee is to review the corporate commodity position and ensure that net
corporate exposures are within the economic risk tolerance levels established by
Consumers' Board of Directors. Management employs established policies and
procedures to manage its risks associated with market fluctuations, including
the use of various derivative instruments such as futures, swaps, options and
forward contracts. Management believes that an opposite movement of the value of
the hedged risk would offset any losses incurred on derivative instruments used
to hedge that risk. Consumers enters into all derivative financial instruments
for purposes other than trading.
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In accordance with SEC disclosure requirements, Consumers performs
sensitivity analyses to assess the potential loss in fair value, cash flows and
earnings based upon a hypothetical 10 percent adverse change in market rates or
prices. Consumers determines fair value based upon mathematical models using
current and historical pricing data. Management does not believe that
sensitivity analyses alone provides an accurate or reliable method for
monitoring and controlling risks. Therefore, Consumers relies on the experience
and judgment of its senior management to revise strategies and adjust positions,
as they deem necessary. Losses in excess of the amounts determined in
sensitivity analyses could occur if market rates or prices exceed the ten
percent shift used for the analyses.
EQUITY SECURITY PRICE RISK: Consumers has a less than 20 percent equity
investment in CMS Energy. At September 30, 2001 and 2000, a hypothetical 10
percent adverse change in market price would have resulted in an $8 million and
$10 million change in its equity investment, respectively. This instrument is
currently marked-to-market through equity. Consumers believes that such an
adverse change would not have a material effect on its consolidated financial
position, results of operation or cash flows.
INTEREST RATE RISK: Consumers is exposed to interest rate risk resulting
from the issuance of fixed-rate debt and variable-rate debt, and from interest
rate swap and rate lock agreements. Consumers uses a combination of fixed-rate
and variable-rate debt, as well as interest rate swaps and rate locks to manage
and mitigate interest rate risk exposure when it deems it appropriate, based
upon market conditions. These strategies attempt to provide and maintain the
lowest cost of capital. As of September 30, 2001, Consumers had entered into
fixed-to-floating interest rate swap agreements for a notional amount of $400
million and floating-to-fixed interest rate swap agreements for a notional
amount of $150 million. As of September 30, 2001 and 2000, Consumers had
outstanding $1.373 billion and $851 million of variable-rate debt, including
variable rate swaps, respectively. At September 30, 2001 and 2000, assuming a
hypothetical 10 percent adverse change in market interest rates, Consumers'
exposure to earnings, before tax on its variable rate debt, would be $4 million
and $6 million, respectively. As of September 30, 2001 and 2000, Consumers had
outstanding long-term fixed-rate debt including fixed-rate swaps of $2.158
billion and $2.360 billion, respectively, with a fair value of $2.525 billion
and $2.262 billion, respectively. As of September 30, 2001 and 2000, assuming a
hypothetical 10 percent adverse change in market rates, Consumers would have an
exposure of $143 million and $131 million to the fair value of these
instruments, respectively, if it had to refinance all of its long-term
fixed-rate debt. Consumers does not intend to refinance its fixed-rate debt in
the near term and believes that any adverse change in debt price and interest
rates would not have a material effect on either its consolidated financial
position, results of operation or cash flows. For further discussion, see Note
3, Short-Term Financings and Capitalization, "Derivative Activities"
COMMODITY MARKET RISK: Consumers enters into, for purposes other than
trading, electricity and gas fuel call options and swap contracts to protect
against risk due to fluctuations in the market price of these commodities and to
ensure a reliable source of capacity to meet its customers' electric needs.
As of September 30, 2001, the fair value based on quoted future market
prices of electricity-related option and swap contracts was $14 million.
Assuming a hypothetical 10 percent adverse change in market prices, the
potential reduction in fair value associated with these contracts would be $4
million. As of September 30, 2001, Consumers had an asset of $73 million as a
result of premiums incurred for electricity call option contracts. Consumers'
maximum exposure associated with the call option contracts is limited to the
premiums paid. For further discussion on commodity derivatives see "Derivative
Activities" under Note 2, Uncertainties, Other Electric Uncertainties and Other
Gas Uncertainties.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ---------------------
2001 2000 2001 2000
----- ----- ------ ------
IN MILLIONS
OPERATING REVENUE
Electric $ 739 $ 715 $2,028 $2,002
Gas 149 142 928 765
Other 11 17 36 41
----- ----- ------ ------
899 874 2,992 2,808
----- ----- ------ ------
OPERATING EXPENSES
Operation
Fuel for electric generation 102 94 250 240
Purchased power - related parties 155 127 399 417
Purchased and interchange power 187 134 401 292
Cost of gas sold 72 60 562 450
Loss on MCV power purchases 126 - 126 -
Other 154 134 456 398
----- ----- ------ ------
796 549 2,194 1,797
Maintenance 41 38 146 130
Depreciation, depletion and amortization 71 96 242 312
General taxes 44 49 142 148
----- ----- ------ ------
952 732 2,724 2,387
----- ----- ------ ------
PRETAX OPERATING INCOME (LOSS)
Electric (62) 118 157 342
Gas (1) 9 81 44
Other 10 15 30 35
----- ----- ------ ------
(53) 142 268 421
----- ----- ------ ------
OTHER INCOME (DEDUCTIONS)
Dividends and interest from affiliates 2 2 6 7
Accretion income - - - 2
Accretion expense (2) (2) (6) (6)
Other, net - 1 2 3
----- ----- ------ ------
- 1 2 6
----- ----- ------ ------
INTEREST CHARGES
Interest on long-term debt 35 35 111 105
Other interest 14 12 35 29
Capitalized interest (1) (2) (5) (2)
----- ----- ------ ------
48 45 141 132
----- ----- ------ ------
NET INCOME (LOSS) BEFORE INCOME TAXES (101) 98 129 295
INCOME TAXES (BENEFITS) (39) 26 41 96
----- ----- ------ ------
NET INCOME (LOSS) (62) 72 88 199
PREFERRED STOCK DIVIDENDS - - 1 1
PREFERRED SECURITIES DISTRIBUTIONS 12 9 30 26
----- ----- ------ -------
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDER $ (74) $ 63 $ 57 $ 172
===== ===== ====== =======
The accompanying condensed notes are an integral part of these statements.
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CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
---------------------
2001 2000
---- -----
IN MILLIONS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 88 $ 199
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization (includes nuclear
decommissioning of $5 and $29 respectively) 242 312
Loss on MCV power purchases 126 -
Accounts receivable 251 94
Capital lease and other amortization 16 23
Deferred income taxes and investment tax credit 1 (22)
Regulatory obligation - gas choice (16) 27
Undistributed earnings of related parties (25) (28)
Inventories (340) (90)
Changes in other assets and liabilities (22) (163)
---- ----
Net cash provided by operating activities 321 352
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (excludes assets placed under capital lease) (495) (344)
Cost to retire property, net (73) (78)
Investment in Electric Restructuring Implementation Plan (9) (20)
Investments in nuclear decommissioning trust funds (5) (29)
Proceeds from nuclear decommissioning trust funds 21 28
Associated company preferred stock redemption 50 49
---- ----
Net cash used in investing activities (511) (394)
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes payable, net (247) 216
Payment of common stock dividends (134) (126)
Preferred securities distributions (30) (26)
Payment of capital lease obligations (17) (23)
Retirement of bonds and other long-term debt (2) (7)
Payment of preferred stock dividends - (1)
Proceeds from senior notes & bank loans 352 -
Proceeds from CMS Energy cash infusion 150 -
Proceeds from preferred securities 121 -
---- ----
Net cash provided by (used in) financing activities 193 33
---- ----
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH INVESTMENTS 3 (9)
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD 21 18
---- ----
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 24 $ 9
==== ====
Other cash flow activities and non-cash investing and financing activities were:
Cash transactions
Interest paid (net of amounts capitalized) $129 $122
Income taxes paid (net of refunds) 36 110
Non-cash transactions
Nuclear fuel placed under capital lease $ 13 $ 3
Other assets placed under capital leases 15 10
==== ====
- ------------
All highly liquid investments with an original maturity of three months or less
are considered cash equivalents.
The accompanying condensed notes are an integral part of these statements.
CE-13
CONSUMERS ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
2001 2000 2000
------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
IN MILLIONS
ASSETS
PLANT (AT ORIGINAL COST)
Electric $ 7,513 $7,241 $7,146
Gas 2,566 2,503 2,529
Other 16 23 25
------- ------ ------
10,095 9,767 9,700
Less accumulated depreciation, depletion and amortization 5,873 5,768 5,818
------- ------ ------
4,222 3,999 3,882
Construction work-in-progress 416 279 294
------- ------ ------
4,638 4,278 4,176
------- ------ ------
INVESTMENTS
Stock of affiliates 54 86 73
First Midland Limited Partnership 249 245 241
Midland Cogeneration Venture Limited Partnership 296 290 273
------- ------ ------
599 621 587
------- ------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 24 21 9
Accounts receivable and accrued revenue, less allowances
of $3, $3 and $3, respectively 22 225 4
Accounts receivable - related parties 13 111 66
Inventories at average cost
Gas in underground storage 603 271 301
Materials and supplies 70 66 64
Generating plant fuel stock 50 46 48
Prepaid property taxes 86 136 83
Regulatory assets 19 19 25
Deferred income taxes - 2 2
Other 12 13 15
------- ------ ------
899 910 617
------- ------ ------
NON-CURRENT ASSETS
Regulatory assets
Securitization costs 710 709 -
Postretirement benefits 214 232 317
Abandoned Midland Project 12 22 28
Unamortized nuclear costs - 6 476
Other 89 87 116
Nuclear decommissioning trust funds 568 611 617
Other 265 297 198
1,858 1,964 1,752
------- ------ ------
TOTAL ASSETS $ 7,994 $7,773 $7,132
======= ====== ======
CE-14
SEPTEMBER 30 DECEMBER 31 SEPTERMBER 30
2001 2000 2000
------------ ----------- -------------
(UNAUDITED) (UNAUDITED)
IN MILLIONS
STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock $ 841 $ 841 $ 841
Paid-in capital 796 646 646
Revaluation capital (4) 33 26
Retained earnings since December 31, 1992 373 506 531
------ ------ ------
2,006 2,026 2,044
Preferred stock 44 44 44
Company-obligated mandatorily redeemable preferred securities
of subsidiaries (a) 520 395 395
Long-term debt 2,452 2,110 2,009
Non-current portion of capital leases 53 49 81
------ ------ ------
5,075 4,624 4,573
------ ------ ------
CURRENT LIABILITIES
Current portion of long-term debt and capital leases 251 231 80
Notes payable 155 403 430
Accounts payable 258 254 186
Accrued taxes 115 247 106
Accounts payable - related parties 78 67 61
Deferred income taxes 17 - -
Other 319 253 235
------ ------ ------
1,193 1,455 1,098
------ ------ ------
NON-CURRENT LIABILITIES
Deferred income taxes 668 716 651
Postretirement benefits 294 366 385
Regulatory liabilities for income taxes, net 270 246 86
Power purchases - MCV Partnership 175 54 37
Deferred investment tax credit 104 109 119
Other 215 203 183
------ ------ ------
1,726 1,694 1,461
------ ------ ------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 2)
TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $7,994 $7,773 $7,132
====== ====== ======
- ------------
(a) See Note 3, Short-Term Financings and Capitalization
The accompanying condensed notes are an integral part of these balance sheets.
CE-15
CONSUMERS ENERGY COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
2001 2000 2001 2000
------ ------ ------ ------
IN MILLIONS
COMMON STOCK
At beginning and end of period(a) $ 841 $ 841 $ 841 $ 841
OTHER PAID-IN CAPITAL
At beginning of period 646 645 646 645
Stockholder's contribution 150 - 150 -
Miscellaneous - 1 - 1
------ ------ ------ ------
At beginning of period 796 646 796 646
------ ------ ------ ------
REVALUATION CAPITAL
Investments
At beginning of period 26 19 33 37
Unrealized gain (loss) on investments(b) (15) 7 (22) (11)
------ ------ ------ ------
At end of period 11 26 11 26
------ ------ ------ ------
Derivative Instruments
At beginning of period(c) (10) - 18 -
Unrealized gain (loss) on derivative instruments(b) (9) - (30) -
Reclassification adjustments included in net income(b) 4 - (3) -
------ ------ ------ ------
At end of period (15) - (15) -
------ ------ ------ ------
RETAINED EARNINGS
At beginning of period 541 485 506 485
Net income (62) 72 88 199
Cash dividends declared- Common Stock (94) (17) (190) (126)
Cash dividends declared- Preferred Stock - - (1) (1)
Preferred securities distributions (12) (9) (30) (26)
------ ------ ------ ------
At end of period 373 531 373 531
------ ------ ------ ------
TOTAL COMMON STOCKHOLDER'S EQUITY $2,006 $2,044 $2,006 $2,044
====== ====== ====== ======
- ------------
(a) Number of shares of common stock outstanding was 84,108,789 for all periods
presented.
(b) Disclosure of Comprehensive Income:
Revaluation capital
Investments
Unrealized gain (loss) on investments, net of tax of
$8, $(4), $12 and $6, respectively $(15) $ 7 $(22) $(11)
Derivative Instruments
Unrealized gain (loss) on derivative instruments,
net of tax of $4, $- , $15 and $-, respectively (9) - (30) -
Reclassification adjustments included in net income,
net of tax of $(2), $-, $2 and $- , respectively 4 - (3) -
Net income (62) 72 88 199
---- ---- ---- ----
Total Comprehensive Income $(82) $ 79 $ 33 $188
==== ==== ==== ====
(c) Nine Months Ended 2001 is the cumulative effect of change in accounting
principle, as of 1/1/01 and 7/1/01, net of $(9) tax (Note 1)
THE ACCOMPANYING CONDENSED NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
CE-16
CONSUMERS ENERGY COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These interim Consolidated Financial Statements have been prepared by
Consumers and reviewed by the independent public accountant in accordance with
SEC rules and regulations. As such, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles 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 necessary to assure the fair presentation
of financial position, results of operations and cash flows for the periods
presented. The Condensed Notes to Consolidated Financial Statements and the
related Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained in the Consumers Form 10-K for the year ended December 31, 2000, which
includes the Reports of Independent Public Accountants. 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 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE: Consumers, a subsidiary of CMS Energy, a holding
company, is an electric and gas utility company that provides service to
customers in Michigan's Lower Peninsula. Consumers' customer base includes a mix
of residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry.
BASIS OF PRESENTATION: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
UTILITY REGULATION: Consumers accounts for the effects of regulation based
on the regulated utility accounting standard SFAS No. 71, Accounting for the
Effects of Certain Types of Regulation. As a result, the actions of regulators
affect when Consumers recognizes revenues, expenses, assets and liabilities.
In March 1999, Consumers received MPSC electric restructuring orders.
Consistent with these orders, Consumers discontinued application of SFAS No. 71
for the energy supply portion of its business in the first quarter of 1999
because Consumers expected to implement retail open access for its electric
customers in September 1999. Discontinuation of SFAS No. 71 for the energy
supply portion of Consumers' business resulted in Consumers reducing the
carrying value of its Palisades plant-related assets by approximately $535
million and establishing a regulatory asset for a corresponding amount, which is
now included as a component of securitization assets. According to current
accounting standards, Consumers can continue to carry its energy supply-related
regulatory assets if legislation or an MPSC rate order allows the collection of
cash flows to recover these regulatory assets from its regulated transmission
and distribution customers. As of September 30, 2001, Consumers had a net
investment in energy supply facilities of $1.284 billion included in electric
plant and property. See Note 2, Uncertainties, "Electric Rate Matters - Electric
Restructuring."
REPORTABLE SEGMENTS: Consumers has two reportable segments: electric and
gas. The electric segment consists of activities associated with the generation,
transmission and distribution of electricity. The gas segment consists of
activities associated with the transportation, storage and distribution of
natural gas. Consumers' reportable segments are domestic strategic business
units organized and managed by the nature of
CE-17
the product and service each provides. The accounting policies of the segments
are the same as those described in Consumers' 2000 Form 10-K. Consumers'
management evaluates performance based on pretax operating income. The
Consolidated Statements of Income show operating revenue and pretax operating
income by reportable segment. Intersegment sales and transfers are accounted for
at current market prices and are eliminated in consolidated pretax operating
income by segment.
RISK MANAGEMENT ACTIVITIES AND DERIVATIVES TRANSACTIONS: Consumers'
derivative activities are subject to the direction of an executive oversight
committee consisting of designated members of senior management and a risk
committee, consisting of business unit managers. The role of the risk committee
is to review the corporate debt or commodity position and ensure that net
corporate exposures are within the economic risk tolerance levels established by
Consumers' Board of Directors. Consumers and its subsidiaries use derivative
instruments, including swaps and options, as hedges to manage exposure to
variability in expected future cash flows attributable to fluctuations in
interest rates and commodity prices. To qualify for hedge accounting, the
hedging relationship must be formally documented, be highly effective in
achieving offsetting cash flows of the hedged risk, and the forecasted
transaction must be probable. If a derivative instrument is terminated early
because it is probable that a forecasted transaction will not occur, any gain or
loss as of such date is immediately recognized in earnings. If a derivative is
terminated early for other economic reasons, any gain or loss as of the
termination date is deferred and recorded when the forecasted transaction
affects earnings.
Derivative instruments contain credit risk if the counterparties, including
financial institutions and energy marketers, fail to perform under the
agreements. Consumers minimizes such risk by performing financial credit reviews
using, among other things, publicly available credit ratings of such
counterparties. Consumers considers the risk of nonperformance by the
counterparties remote. For further discussion see "Implementation of New
Accounting Standards" below, "Derivative Activities" under Note 2,
Uncertainties, Other Electric Uncertainties and Other Gas Uncertainties and Note
3, Short-Term Financing and Capitalization, "Derivative Activities".
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS: Effective January 1, 2001,
Consumers adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities as amended and interpreted. SFAS No. 133 requires Consumers
to recognize at fair value, all contracts that meet the definition of a
derivative instrument on the balance sheet as either assets or liabilities. This
standard also requires Consumers to record all changes in fair value directly in
earnings, or other comprehensive income if the derivative meets certain
qualifying hedge criteria. Consumers determines fair value based upon
mathematical models using current and historical pricing data.
Consumers believes that the majority of its contracts qualify for the
normal purchases and sales exception pursuant to SFAS No. 133 and, therefore,
are not subject to derivative accounting. Consumers does, however, use certain
contracts that qualify as derivative instruments to limit its exposure to
electricity and gas commodity price risk and interest rate risk.
On January 1, 2001, upon initial adoption of the standard, Consumers
recorded a $21 million, net of tax, cumulative effect adjustment as an increase
to accumulated other comprehensive income. This adjustment relates to the
difference between the current fair value and recorded book value of contracts
related to gas options, gas fuel swap contracts, and interest rate swap
contracts that qualified for cash flow hedge accounting prior to the initial
adoption of SFAS No. 133 and Consumers' proportionate share of the effects of
adopting SFAS No. 133 related to its equity investment in the MCV Partnership.
This amount will reduce, or be charged to cost of gas, cost of power, interest
expense, or other operating revenue, respectively, when the related hedged
transaction occurs. Based on the pretax amount recorded in accumulated other
comprehensive income on the January 1, 2001 transition date, Consumers recorded
$12 million as a reduction to the cost of gas, $1 million as a reduction to the
cost of power, and $2 million as an increase in interest expense for the nine
months ended September 30, 2001. Consumers does not expect to reclassify any
additional amounts from
CE-18
the cumulative effect adjustment to earnings that would affect the cost of gas,
the cost of power, interest expense, or other operating revenue during the next
12 months.
As of September 30, 2001, Consumers had a total of $9 million, net of tax,
recorded as an unrealized loss in other comprehensive income related to its
proportionate share of the effects of derivative accounting related to its
equity investment in the MCV Partnership. Consumers expects to reclassify this
loss as a decrease to other operating revenue during the next 12 months, if this
value is sustained.
On January 1, 2001, upon initial adoption of the standard, derivative and
hedge accounting for certain utility industry contracts, particularly electric
call option contracts and option-like contracts, and contracts subject to
Bookouts was uncertain. Consumers accounted for these types of contracts as
derivatives that qualified for the normal purchase exception of SFAS No. 133
and, therefore, did not record these contracts on the balance sheet at fair
value. In June 2001, the FASB issued guidance that effectively resolved most of
these matters as of July 1, 2001. Consumers evaluated its option and option-like
contracts and determined that the majority of these contracts qualify for the
normal purchase exception of SFAS No. 133, however, certain electricity option
contracts are required to be accounted for as derivatives. On July 1, 2001, upon
initial adoption of the standard for these contracts, Consumers recorded a $3
million, net of tax, cumulative effect adjustment as a decrease to accumulated
other comprehensive income. This adjustment relates to the difference between
the current fair value and the recorded book value of these electricity option
contracts. The adjustment to accumulated other comprehensive income relates to
electricity option contracts that qualified for cash flow hedge accounting prior
to the initial adoption of SFAS No. 133. After July 1, 2001, these contracts
will not qualify for hedge accounting under SFAS No. 133 and, therefore,
Consumers will record any change in fair value subsequent to July 1, 2001
directly in earnings, which could cause earnings volatility. The initial amount
recorded in other comprehensive income will be reclassified to earnings as the
forecasted future transaction occurs or the option expires. As of September 30,
2001, $2 million, net of tax, was reclassified to earnings as part of cost of
power. The remainder is expected to be reclassified to earnings in the third
quarter of 2002.
In October 2001, the FASB issued further clarifying guidance regarding
derivative accounting for electricity call option contracts and option-like
contracts. The clarifying guidance amends the criteria to be used to determine
if derivative accounting is required. Consumers is in the process of
re-evaluating its electricity option and option-like contracts in order to
determine if additional contracts will require derivative accounting. The
effective date of this change is January 1, 2002. Consumers is currently
studying the financial effects of the adoption of SFAS No. 133 for these
contracts, but has yet to quantify these effects.
In addition, in October 2001, the FASB issued final guidance regarding
derivative accounting for certain fuel supply contracts with quantity
variability. Under the final guidance, effective April 1, 2002, certain
contracts would not qualify for the normal purchase exception of SFAS No. 133
and would require derivative accounting. Consumers initially believed that its
fuel supply contracts qualified for the normal purchase exception of SFAS No.
133 and has not, therefore, recorded these contracts on the balance sheet at
fair value. Consumers is in the process of reviewing its fuel supply contracts
in accordance with the final guidance.
The ultimate financial statement impact of adopting SFAS No. 133 depends
upon clarification of the above issues. Consumers is currently studying the
recent changes, but has yet to quantify these effects. For further discussion of
derivative activities, see "Derivative Activities" under Note 2, Uncertainties,
Other Electric Uncertainties and Other Gas Uncertainties and Note 3, Short-Term
Financings and Capitalization.
CE-19
2: UNCERTAINTIES
ELECTRIC CONTINGENCIES
ELECTRIC ENVIRONMENTAL MATTERS: Consumers is subject to costly and
increasingly stringent environmental regulations. Consumers expects that the
cost of future environmental compliance, especially compliance with clean air
laws, will be significant.
In 1997, the EPA introduced new regulations regarding the standard for
ozone and particulate-related emissions that were the subject of litigation. The
United States Supreme Court determined that the EPA has the power to revise the
standards but that the EPA implementation plan was not lawful. In 1998, the EPA
Administrator issued final regulations requiring the state of Michigan to
further limit nitrogen oxide emissions. The EPA has also issued additional final
regulations regarding nitrogen oxide emissions that require certain generators,
including some of Consumers electric generating facilities, to achieve the same
emissions rate as that required by the 1998 plan. These regulations will require
Consumers to make significant capital expenditures estimated between $470
million and $560 million, calculated in year 2001 dollars. Consumers anticipates
that it will incur these capital expenditures between 2000 and 2004. As of
September 2001, Consumers has incurred $251 million in capital expenditures to
comply with these regulations.
At some point after 2004, if new environmental standards for
multi-pollutants become effective, Consumers may need additional capital
expenditures to comply with the standards. Consumers is unable to estimate the
additional capital expenditures required until the proposed standards are
further defined.
Beginning January 2004, an annual return of and on these capital
expenditures above depreciation levels are expected to be recoverable, subject
to an MPSC prudence hearing, in future rates.
These and other required environmental expenditures may have a material
adverse effect upon our financial condition and results of operations.
Cleanup and Solid Waste - Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. Consumers does,
however, believe that these costs are recoverable in rates under current
ratemaking policies.
Consumers is a potentially responsible party at several contaminated sites
administered under Superfund. Superfund liability is joint and several. Along
with Consumers, many other creditworthy, potentially responsible parties with
substantial assets cooperate with respect to the individual sites. Based upon
past negotiations, Consumers estimates that its share of the total liability for
the known Superfund sites will be between $2 million and $9 million. As of
September 30, 2001, Consumers had accrued the minimum amount of the range for
its estimated Superfund liability.
In October 1998, during routine maintenance activities, Consumers
identified PCB as a component in certain paint, grout and sealant materials at
the Ludington Pumped Storage Facility. Consumers removed and replaced part of
the PCB material. In April 2000, Consumers proposed a plan to deal with the
remaining materials and is awaiting a response from the EPA.
ELECTRIC RATE MATTERS
ELECTRIC RESTRUCTURING: In June 2000, the Michigan Legislature passed
electric utility restructuring legislation known as the Customer Choice Act.
This act: 1) permits all customers to exercise choice of electric generation
suppliers by January 1, 2002; 2) cuts residential electric rates by five
percent; 3) freezes all electric rates
CE-20
through December 31, 2003, and establishes a rate cap for residential customers
through at least December 31, 2005, and a rate cap for small commercial and
industrial customers through at least December 31, 2004; 4) allows for the use
of low-cost Securitization bonds to refinance Stranded Costs as a means of
offsetting the earnings impact of the five percent residential rate reduction;
5) establishes a market power test that may require the transfer of control of a
portion of generation resources in excess of that required to serve firm retail
sales requirements (a requirement with which Consumers is in compliance); 6)
requires Michigan utilities to join a FERC-approved RTO or divest their interest
in transmission facilities to an independent transmission owner; 7) requires the
joint expansion of available transmission capability by Consumers, Detroit
Edison and American Electric Power by at least 2,000 MW by June 5, 2002; 8)
allows for the deferred recovery of an annual return of and on capital
expenditures in excess of depreciation levels incurred during and before the
rate cap period; and 9) allows for the recovery of Stranded Costs and
implementation costs incurred as a result of the passage of the act. Consumers
is highly confident that it will meet the conditions of items 5 and 7 above,
prior to the earliest rate cap termination dates specified in the act. Failure
to do so would result in an extension of the rate caps to as late as December
31, 2013. As of September 30, 2001, Consumers spent $25 million on the required
expansion of transmission capabilities. Consumers anticipates it will spend an
additional $13 million in 2001 and 2002, until Consumers sells METC to MTH, as
discussed below under "Transmission Business".
In July 2000, in accordance with the Customer Choice Act, Consumers filed
an application with the MPSC seeking approval to issue Securitization bonds.
Securitization typically involves the issuance of asset backed bonds with a
higher credit rating than conventional utility corporate financing. In October
2000 and January 2001, the MPSC issued a financing order and a final financing
order, respectively. In January 2001, Consumers accepted the MPSC's final
financing order. Although the Michigan Attorney General appealed the financing
order after Consumers accepted the order, the Attorney General did not appeal
the order to the Michigan Supreme Court after the Michigan Court of Appeals
unanimously affirmed the MPSC's order in July 2001.
The orders authorize Consumers to securitize approximately $469 million in
qualified costs, which were primarily regulatory assets plus recovery of the
Securitization expenses. Securitization is expected to result in offsetting the
majority of the revenue impact of the five percent residential rate reduction of
approximately $22 million in 2000 and $49 million on an annual basis thereafter,
that Consumers was required to implement by the Customer Choice Act. Actual cost
savings from Securitization depends upon the level of debt or equity securities
ultimately retired, the amortization schedule for the securitized qualified
costs and the interest rates of the retired debt securities and the
Securitization bonds. The orders direct Consumers to apply any cost savings in
excess of the five percent residential rate reduction to rate reductions for
non-residential and retail open access customers after the bonds are sold.
Excess savings are currently estimated to be approximately $13 million annually.
In November 2001, Consumers Funding LLC, a special purpose subsidiary of
Consumers formed to issue the bonds, issued $469 million of Securitization
bonds, Series 2001-1. The Securitization bonds mature at different times over a
period of up to 14 years and have an average interest rate of 5.3 percent.
Consumers and Consumers Funding LLC will recover the repayment of
principal, interest and other expenses relating to the issuance of the bonds
through a securitization charge and a tax charge beginning in December 2001.
These charges are subject to an annual true-up until one year prior to the last
expected bond maturity date, October 20, 2015, and no more than quarterly
thereafter. Current electric rates will not increase for most of Consumers'
electric customers under the MPSC's order. Funds collected will be remitted to
the trustee for the Securitization bonds and are not available to Consumers'
creditors.
Beginning January 1, 2001, the amortization of the approved regulatory
assets being securitized as qualified costs is being deferred, which effectively
offsets the loss in revenue resulting from the five percent residential
CE-21
rate reduction. In December 2001, the amortization will be reestablished based
on a schedule that is the same as the recovery of the principal amounts of the
securitized qualified costs. The amortization amount is expected to be
approximately $31 million in 2002 and the securitized assets will be fully
amortized by the end of 2015.
In September 1999, Consumers began implementing a plan for electric retail
customer open access. In 1998, Consumers submitted this plan to the MPSC and in
March 1999 the MPSC issued orders that generally supported the plan. The
Customer Choice Act states that orders issued by the MPSC before the date of
this act that 1) allow electric customers to choose their supplier, 2) authorize
recovery of net stranded costs and implementation costs, and 3) confirm any
voluntary commitments of electric utilities, are in compliance with this act and
enforceable by the MPSC. In September 2000, as required by the MPSC, Consumers
filed tariffs governing its retail open access program and addressed revisions
appropriate to comply with the Customer Choice Act. Consumers cannot predict how
the MPSC will modify the tariff or enforce the existing restructuring orders.
POWER COSTS: During periods when electric demand is high, the cost of
purchasing energy on the spot market can be substantial. To reduce Consumers'
exposure to the fluctuating cost of electricity, and to ensure adequate supply
to meet demand, Consumers intends to maintain sufficient generation and to
purchase electricity from others to create a power reserve, also called a
reserve margin, of approximately 15 percent. The reserve margin provides
Consumers with additional power above its anticipated peak power demands. It
also allows Consumers to provide reliable service to its electric service
customers and to protect itself against unscheduled plant outages and
unanticipated demand. As it has in previous summers, Consumers is planning for a
reserve margin of 15 percent for the summers 2002 and 2003. The actual reserve
margin needed will depend primarily on summer weather conditions, the level of
retail open access requirements being served by others during the summer, and
any unscheduled plant outages. The existing retail open access plan allows other
electric service providers with the opportunity to serve up to 750 MW of nominal
retail open access requirements. As of October 2001, alternative electric
service providers are providing service to 223 MW of retail open access
requirements. In June 2001, an unscheduled plant outage commenced at Palisades
that will affect future power costs. Consumers has secured additional power and
expects to have sufficient power to meet its customers' needs. For further
information, refer to the "Nuclear Matters" section of this note.
To reduce the risk of high energy prices during peak demand periods and to
achieve its reserve margin target, Consumers employs a strategy of purchasing
electricity call option contracts for the physical delivery of electricity
during the months of June through September. The cost of these electricity call
option contracts for summer 2001 was approximately $61 million. Consumers
expects to use a similar strategy in the future, but cannot predict the cost of
this strategy at this time. As of September 30, 2001, Consumers had purchased or
had commitments to purchase electricity call option contracts partially covering
the estimated reserve margin requirements for summers 2002 through 2008, at a
recognized cost of $73 million, of which $27 million pertains to 2002.
In 1996, as a result of efforts to move the electric industry in Michigan
to competition, Detroit Edison gave Consumers the required four-year contractual
notice of its intent to terminate the agreements under which the companies
jointly operate the MEPCC. Detroit Edison and Consumers negotiated to
restructure and continue certain parts of the MEPCC control area and joint
transmission operations, but expressly excluded any merchant operations
(electricity purchasing, sales, and dispatch operations). The former joint
merchant operations began operating independently on April 1, 2001. The
termination of joint merchant operations with Detroit Edison has opened Detroit
Edison and Consumers to wholesale market competition as individual companies.
Consumers cannot predict the long term financial impact of terminating these
joint merchant operations with Detroit Edison.
CE-22
Prior to 1998, the PSCR process provided for the reconciliation of actual
power supply costs with power supply revenues. This process assured recovery of
all reasonable and prudent power supply costs actually incurred by Consumers,
including the actual cost of fuel, interchange power and purchased power. In
1998, as part of the electric restructuring efforts, the MPSC suspended the PSCR
process through December 31, 2001. Under the suspension, the MPSC would not
grant adjustment of customer rates through 2001. As a result of the rate freeze
imposed by the Customer Choice Act, the current rates will remain in effect
until at least December 31, 2003. Therefore, changes in power supply costs as a
result of fluctuating energy prices will not be reflected in rates during the
rate freeze period.
Consumers is authorized by the FERC to sell power at wholesale prices that
are either 1) no greater than its cost-based rates or 2) at market price. In
authorizing sales at market prices, the FERC considers several factors,
including the extent to which the seller possesses "market power" as a result of
the seller's dominance of generation resources and surplus generation resources
in adjacent wholesale markets. In order to continue to be authorized to sell at
market prices, Consumers filed a market dominance analysis in October 2001. In
September 2001, the FERC staff issued a report suggesting that the FERC may
reconsider the method it currently uses to evaluate market power assessments
for electric generators. If the FERC determines that this method is not
sufficient, Consumers cannot be certain at this time if it will be granted
authorization to continue to sell wholesale power at market-based prices and may
be limited to charging prices no greater than its cost-based rates. A decision
on reliance of the current assessment method is not expected for several months.
TRANSMISSION BUSINESS: In 1999, the FERC issued Order No. 2000, that
strongly encouraged utilities like Consumers to either transfer operating
control of their transmission facilities to an RTO, or sell their transmission
facilities to an independent company. In addition, in June 2000, the Michigan
legislature passed Michigan's Customer Choice Act, which contains a requirement
that utilities transfer the operating authority of transmission facilities to an
independent company by December 31, 2001.
In 1999, Consumers and four other electric utility companies joined
together to form a coalition known as the Alliance Companies for the purpose
of creating a FERC-approved RTO. In October 2000, Consumers filed a request
with the FERC to transfer ownership and control of its transmission facilities
to a wholly owned subsidiary, METC. This request was granted in January 2001.
In December 2000, the MPSC issued an order authorizing an anticipated sale or
ownership transfer of Consumers' transmission facilities. On April 1, 2001,
the transfer of the electric transmission facilities to METC took place.
In October 2001, in compliance with Michigan's Customer Choice Act, and in
conformance with FERC Order No. 2000, Consumers executed an agreement to sell
METC for approximately $290 million to MTH, an independent limited partnership
whose general partner is a subsidiary of Trans-Elect, Inc. Proceeds from the
sale of METC will be used to improve Consumers' balance sheet. MTH and Consumers
are currently seeking to satisfy the conditions of closing including approval of
the transaction from the FERC. Consumers will continue to own and operate the
system until all approvals are received and the sale is final. Regulatory
approvals and operational transfer are expected to take place in the second
quarter of 2002; however, Consumers can make no assurances as to when or if the
transaction will be completed. METC will continue to maintain the system under a
long-term contract with MTH.
Consumers chose to sell its transmission facilities as a form of compliance
with Michigan's Customer Choice Act and FERC Order No. 2000 rather than own and
invest in an asset which it can not control. As a result of the sale of its
transmission facilities, Consumers anticipates that after tax earnings will be
reduced by approximately $6 million and $14 million in 2002 and 2003,
respectively. Through 2005, Consumers' total revenues should not be materially
affected from the sale of METC due to frozen retail rates.
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Under the agreement with MTH, transmission rates charged to Consumers'
bundled electric customers will be frozen at current levels until December 31,
2005 and will be subject to FERC ratemaking thereafter. MTH will complete the
capital program to expand the transmission system's capability to import power
into Michigan, as required by the Customer Choice Act.
In June 2001, the Michigan South Central Power Agency and the Michigan
Public Power Agency filed suit against Consumers and METC in a Michigan circuit
court. The suit sought to prevent the sale or transfer of transmission
facilities without first binding a successor to honor the municipal agencies'
ownership interests, contractual agreements and rights that preceded the
transfer of the transmission facilities to METC. In August 2001, the parties
reached two settlements that would either fully or partially resolve this
litigation. The settlements were approved by the Michigan circuit court and are
contingent upon the approval by the FERC and certain other contingencies. The
circuit court has retained jurisdiction over the matter.
ELECTRIC PROCEEDINGS: In 1997, ABATE filed a complaint with the MPSC. The
complaint alleged that Consumers' electric earnings are more than its authorized
rate of return and sought an immediate reduction in Consumers' electric rates
that approximated $189 million annually. As a result of the rate freeze imposed
by the Customer Choice Act, the MPSC issued an order in June 2000 dismissing the
ABATE complaint. In July 2000, ABATE filed a rehearing petition with the MPSC,
which was denied in October 2001.
In March 2000 and 2001, Consumers filed applications with the MPSC for the
recovery of electric utility restructuring implementation costs of $30 million
and $25 million, incurred in 1999 and 2000, respectively. In July 2001,
Consumers received a final order that granted recovery of $25 million of
restructuring implementation costs for 1999. The MPSC disallowed recovery of $5
million, based upon a conclusion that this amount did not represent incremental
costs. The MPSC also ruled that it reserved the right to undertake another
review of the total 1999 restructuring implementation costs depending upon the
progress and success of the retail open access program. In addition, the MPSC
ruled that due to the rate freeze imposed by the Customer Choice Act, it was
premature to establish a cost recovery method for the allowable costs. Consumers
expects to receive a final order for the 2000 cost in early 2002. Consumers
believes these costs are fully recoverable in accordance with the Customer
Choice Act; however, Consumers cannot predict the amounts the MPSC will approve
as recoverable costs.
Also, in July 2001, Consumers received an order from the MPSC that proposed
electric distribution performance standards applicable to electric distribution
companies operating in Michigan. The proposed performance standards would
establish standards related to outage restoration, safety, and customer
relations. Failure to meet the proposed performance standards would result in
customer credits. Consumers has submitted comments to the MPSC. Consumers cannot
predict the outcome of the proposed performance standards.
In 1996, Consumers filed with the FERC and self-implemented OATT
transmission rates. Certain intervenors contested these rates, and hearings were
held before an ALJ in 1998. During 1999, the ALJ rendered an initial decision,
which if upheld by the FERC, would ultimately reduce Consumers' OATT rates and
require Consumers to refund, with interest, any over-collections for past
services. Consumers, since that time has been reserving a portion of revenues
billed to customers under these OATT rates. At the time of the initial decision,
the company believed that certain issues would be decided in Consumers' favor,
and that a relatively quick order would be issued by the FERC regarding this
matter. However, due to changes in regulatory interpretations, Consumers
believes that a successful resolution of certain issues is less likely. As a
result, in September 2001, Consumers reserved an additional $12 million,
including interest, to fully reflect the financial impacts of the initial
decision. Consumers expects that its reserve levels for future transmission
service will also be in compliance with the initial decision until an order from
the FERC is received.
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OTHER ELECTRIC UNCERTAINTIES
THE MIDLAND COGENERATION VENTURE: The MCV Partnership, which leases and operates
the MCV Facility, contracted to sell electricity to Consumers for a 35-year
period beginning in 1990 and to supply electricity and steam to Dow. Consumers,
through two wholly owned subsidiaries, holds the following assets related to the
MCV Partnership and MCV Facility: 1) CMS Midland owns a 49 percent general
partnership interest in the MCV Partnership; and 2) CMS Holdings holds, through
FMLP, a 35 percent lessor interest in the MCV Facility.
Summarized Statements of Income for CMS Midland and CMS Holdings
Nine Months Ended
September 30
-------------------
2001 2000
---- ----
In Millions
Pretax operating income $31 $35
Income taxes and other 9 11
--- ---
Net income $22 $24
--- ---
Power Purchases from the MCV Partnership - Consumers' annual obligation to
purchase capacity from the MCV Partnership is 1,240 MW through the termination
of the PPA in 2025. The PPA requires Consumers to pay, based on the MCV
Facility's availability, a levelized average capacity charge of 3.77 cents per
kWh, a fixed energy charge, and a variable energy charge based primarily on
Consumers' average cost of coal consumed for all kWh delivered. Since January 1,
1993, the MPSC has permitted Consumers to recover capacity charges averaging
3.62 cents per kWh for 915 MW, plus a substantial portion of the fixed and
variable energy charges. Since January 1, 1996, the MPSC has also permitted
Consumers to recover capacity charges for the remaining 325 MW of contract
capacity with an initial average charge of 2.86 cents per kWh increasing
periodically to an eventual 3.62 cents per kWh by 2004 and thereafter. However,
due to the current freeze of Consumers' retail rates that the Customer Choice
Act requires, the capacity charge for the 325 MW is now frozen at 3.17 cents per
kWh. After September 2007, the PPA's terms require Consumers to pay the MCV
Partnership capacity and energy charges that the MPSC has authorized for
recovery from electric customers.
In 1992, Consumers recognized a loss for the present value of the estimated
future underrecoveries of power costs under the PPA based on MPSC cost recovery
orders. Consumers continually evaluates the adequacy of the PPA liability for
future underrecoveries. These evaluations consider management's assessment of
operating levels at the MCV Facility through 2007 along with certain other
factors including MCV related costs that are included in Consumers' frozen
retail rates. During the third quarter of 2001, in connection with Consumers'
strategic planning process, management reviewed the PPA liability assumptions
related to increased expected long-term dispatch of the MCV Facility and
increased MCV related costs. As a result, in September 2001, Consumers increased
the PPA liability by $126 million. Management believes that, following the
increase, the PPA liability adequately reflects the PPA's future affect on
Consumers. At September 30, 2001 and 2000, the remaining after-tax present value
of the estimated future PPA liability associated with the loss totaled $122
million and $55 million, respectively. For further discussion on the impact of
the frozen PSCR, see "Electric Rate Matters" in this Note.
In March 1999, Consumers and the MCV Partnership reached an agreement
effective January 1, 1999, that capped availability payments to the MCV
Partnership at 98.5 percent. If the MCV Facility generates electricity at the
maximum 98.5 percent level during the next five years, Consumers' after-tax cash
underrecoveries associated with the PPA could be as follows:
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2001 2002 2003 2004 2005
---- ---- ---- ---- ----
In Millions
Estimated cash underrecoveries at 98.5%, net of tax $37 $38 $37 $36 $35
In February 1998, the MCV Partnership appealed the January 1998 and
February 1998 MPSC orders related to electric utility restructuring. At the same
time, MCV Partnership filed suit in the United States District Court in Grand
Rapids seeking a declaration that the MPSC's failure to provide Consumers and
MCV Partnership a certain source of recovery of capacity payments after 2007
deprived MCV Partnership of its rights under the Public Utilities Regulatory
Policies Act of 1978. In July 1999, the District Court granted MCV Partnership's
motion for summary judgment. The Court permanently prohibited enforcement of the
restructuring orders in any manner that denies any utility the ability to
recover amounts paid to qualifying facilities such as the MCV Facility or that
precludes the MCV Partnership from recovering the avoided cost rate. The MPSC
appealed the Court's order to the 6th Circuit Court of Appeals in Cincinnati. In
June 2001, the 6th Circuit overturned the lower court's order and dismissed the
case against the MPSC. The appellate court determined that the case was
premature and concluded that the qualifying facilities needed to wait until 2008
for an actual factual record to develop before bringing claims against the MPSC
in federal court. The MCV Partnership has requested rehearing of the appellate
court's order.
NUCLEAR FUEL COST: Consumers amortizes nuclear fuel cost to fuel expense
based on the quantity of heat produced for electric generation. Consumers
expenses interest on leased nuclear fuel as it is incurred. Under current
federal law, as a federal court decision confirmed, the DOE was to begin
accepting deliveries of spent nuclear fuel for disposal by January 31, 1998. For
fuel used after April 6, 1983, Consumers charges disposal costs to nuclear fuel
expense, recovers these costs through electric rates, and then remits them to
the DOE quarterly. Consumers elected to defer payment for disposal of spent
nuclear fuel burned before April 7, 1983. As of September 30, 2001, Consumers
has a recorded liability to the DOE of $135 million, including interest, which
is payable upon the first delivery of spent nuclear fuel to the DOE. Consumers
recovered through electric rates the amount of this liability, excluding a
portion of interest. In 1997, the DOE declared that it would not begin to accept
spent nuclear fuel deliveries in 1998. Also in 1997, a federal court affirmed
the DOE's duty to take delivery of spent fuel. Subsequent litigation in which
Consumers and certain other utilities participated has not been successful in
producing more specific relief for the DOE's failure to comply.
In July 2000, the DOE reached a settlement agreement with another utility
to address the DOE's delay in accepting spent fuel. The DOE may use that
settlement agreement as a framework that it could apply to other nuclear power
plants; however, certain other utilities are challenging the validity of such
settlement. Consumers is evaluating this matter further. Additionally, 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 fuel. Consumers is evaluating those rulings and their
applicability to its contracts with the DOE.
NUCLEAR MATTERS: In May 2001, Palisades received its annual performance
review in which the NRC stated that Palisades operated in a manner that
preserved public health and safety. The NRC classified all inspection findings
to have very low safety significance. At the time of the annual performance
review, the NRC had planned to conduct only baseline inspections at the facility
through May 31, 2002. The NRC, however, is currently conducting an inspection to
oversee the Palisades unplanned outage, which is discussed in more detail below.
The amount of spent nuclear fuel discharged from the reactor to date
exceeds Palisades' temporary on-site storage pool capacity. Consequently,
Consumers is using NRC-approved steel and concrete vaults, commonly known as
"dry casks", for temporary on-site storage. As of September 30, 2001, Consumers
had loaded 18 dry
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storage casks with spent nuclear fuel at Palisades. Palisades will need to load
additional casks by 2004 in order to continue operation. Palisades currently has
three additional empty storage-only casks on-site, with storage pad capacity for
up to seven additional loaded casks. Consumers anticipates, however, that
licensed transportable casks, for additional storage, will be available prior to
2004.
Consumers maintains insurance against property damage, debris removal,
personal injury liability and other risks that are present at its nuclear
facilities. Consumers also maintains coverage for replacement power costs during
prolonged accidental outages at Palisades. Insurance would not cover such costs
during the first 12 weeks of any outage, but would cover most of such costs
during the next 52 weeks of the outage, followed by reduced coverage to 80
percent for 110 additional weeks. The nature of the current Palisades outage,
however, is not likely to be an insured event. If certain covered losses occur
at its own or other nuclear plants similarly insured, Consumers could be
required to pay maximum assessments of $12.8 million in any one year to NEIL;
$88 million per occurrence under the nuclear liability secondary financial
protection program, limited to $10 million per occurrence in any year; and $6
million if nuclear workers claim bodily injury from radiation exposure.
Consumers considers the possibility of these assessments to be remote.
In February 2000, Consumers submitted an analysis to the NRC that shows
that the NRC's screening criteria for reactor vessel embrittlement at Palisades
will not be reached until 2014. On December 14, 2000, the NRC issued an
amendment revising the operating license for Palisades extending the expiration
date to March 2011, with no restrictions related to reactor vessel
embrittlement.
In April 2001, Consumers received approval from the NRC to amend the
license of the Palisades nuclear plant to transfer plant operating authority to
NMC. The formal operating authority transfer from Consumers to NMC took place in
May 2001. Consumers will retain ownership of Palisades, its 789 MW output, the
spent fuel on site, and ultimate responsibility for the safe operation,
maintenance and decommissioning of the plant. Under this agreement, salaried
Palisades' employees became NMC employees on July 1, 2001. Union employees will
work under the supervision of NMC pursuant to their existing labor contract as
Consumers' employees. Consumers will benefit by consolidating expertise and
controlling costs and resources among all of the nuclear plants being operated
on behalf of the five NMC member companies. With Consumers as a partner, NMC
currently has responsibility for operating eight units with 4,500 MW of
generating capacity in Wisconsin, Minnesota, Iowa and Michigan. As a result of
the equity ownership in NMC, Consumers may be exposed to additional financial
impacts.
On June 20, 2001, the Palisades reactor was shut down so technicians could
inspect a small steam leak on a control rod drive assembly. There was no risk to
the public or workers. In August 2001, Consumers completed an expanded
inspection that included all similar control rod drive assemblies and elected to
completely replace the defective components immediately, as opposed to partially
repairing the component followed eventually by complete replacement during a
future outage. The Company adopted this approach because it provides more
certainty of schedule for return to service, greater regulatory acceptability,
and avoids future plant outage time and associated replacement power costs.
Installation of the new components is expected to be completed in December 2001,
with the plant expected to return to service in January 2002. Consumers cannot,
however, make any assurances as to the date on which the new components will be
installed or the plant will return to service. Consumers estimates capital
expenditures for the components and their installation to be approximately $25
to $30 million.
From the start of the June 20th outage through the end of 2001, the impact on
net income of replacement power and maintenance costs associated with the outage
is currently estimated to be approximately $65 million. An additional month of
incremental replacement power and maintenance costs would impact net income by
approximately an additional $8 to $10 million. However, replacement power and
maintenance costs in early 2002, if any, would be offset by the postponement of
a previously scheduled refueling outage in 2002, which is now not needed until
2003. Consumers expects to have sufficient power at all times to meet its load
CE-27
requirements from its other plants or purchase arrangements.
NUCLEAR DECOMMISSIONING: In 1996, Consumers and its wholesale customers
entered into five-year contracts that fixed the portion of nuclear
decommissioning costs that were expected to end in 2001 associated with these
customers. Since that time, the total estimated decommissioning costs for Big
Rock increased substantially over the estimates used to calculate the
decommissioning costs attributed to wholesale customers. As a result of a
reduction in decommissioning trust earnings in August 2001, along with the
higher estimated costs of decommissioning, Consumers, in September 2001,
expensed approximately $5 million related to this issue to recognize the
unrecoverable portion of Big Rock decommissioning costs associated with these
customers.
CAPITAL EXPENDITURES: Consumers estimates electric capital expenditures,
including new lease commitments and environmental costs under the Clean Air Act,
of $590 million for 2001, $480 million for 2002, and $405 million for 2003. For
further information, see the Capital Expenditures Outlook section in the MD&A.
DERIVATIVE ACTIVITIES: Consumers' electric business uses purchased
electricity call option contracts to meet its regulatory obligation to serve,
which requires providing a physical supply of energy to customers, and to manage
energy cost and to ensure a reliable source of capacity during periods of peak
demand. On January 1, 2001, upon initial adoption of SFAS No. 133, accounting
for these contracts was uncertain. Consumers accounted for these types of
contracts as derivatives that qualified for the normal purchase exception of
SFAS No. 133 and, therefore, did not record the fair value of these contracts on
the balance sheet. In June 2001, the FASB issued guidance that effectively
resolved the accounting for these contracts as of July 1, 2001. Consumers
evaluated its option and option-like contracts and determined that the majority
of these contracts qualify for the normal purchase exception of SFAS No. 133,
however, certain electricity option contracts are required to be accounted for
as derivatives. On July 1, 2001, upon initial adoption of the standard for these
contracts, Consumers recorded a $3 million, net of tax, cumulative effect
adjustment as a decrease to accumulated other comprehensive income. This
adjustment relates to the difference between the current fair value and the
recorded book value of these electricity option contracts. The adjustment to
accumulated other comprehensive income relates to electricity option contracts
that qualified for cash flow hedge accounting prior to the initial adoption of
SFAS No. 133. After July 1, 2001, these contracts will not qualify for hedge
accounting under SFAS No. 133 and, therefore, Consumers will record any change
in fair value subsequent to July 1, 2001 directly in earnings, which could
cause earnings volatility. The majority of these contracts expired in the third
quarter 2001 and the remaining contracts will expire in 2002. The initial
amount recorded in other comprehensive income will be reclassified to earnings
as the forecasted future transaction occurs or the option expires. As of
September 30, 2001, $2 million, net of tax, was reclassified to earnings as
part of cost of power. The remainder is expected to be reclassified to earnings
in the third quarter 2002.
In October 2001, the FASB issued further clarifying guidance regarding
derivative accounting for electricity call option contracts and option-like
contracts. The clarifying guidance amends the criteria to be used to determine
if derivative accounting is required. Consumers is in the process of
re-evaluating its electricity option and option-like contracts in order to
determine if additional contracts will require derivative accounting. The
effective date of this change is January 1, 2002. Consumers is currently
studying the financial effects of the adoption of SFAS No. 133 for these
contracts, but has yet to quantify these effects.
In addition, in October 2001, the FASB issued final guidance regarding
derivative accounting for certain fuel supply contracts with quantity
variability. Under the final guidance, certain contracts would not qualify for
the normal purchase exception of SFAS No. 133 and would require derivative
accounting. Consumers initially believed that its fuel supply contracts
qualified for the normal purchase exception of SFAS No. 133 and has not,
therefore, recorded these contracts on the balance sheet at fair value.
Consumers is in the process of reviewing its fuel supply contracts in accordance
with the final guidance. The effective date of this change is
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April 1, 2002. Consumers is currently studying the financial effects of the
adoption of SFAS No. 133 for these contracts, but has yet to quantify these
effects.
Consumers' electric business also uses purchased gas call option and gas
swap contracts to hedge against price risk due to the fluctuations in the market
price of gas used as fuel for generation of electricity. These contracts are
financial contracts that will be used to offset increases in the price of
probable forecasted gas purchases. These contracts are designated as cash flow
hedges and, therefore, Consumers will record any change in the fair value of
these contracts in other comprehensive income until the forecasted transaction
occurs. Once the forecasted gas purchases occurs, the net gain or loss on these
contracts will be reclassified to earnings and recorded as part of the cost of
power. These contracts have been highly effective in achieving offsetting cash
flows of future gas purchases, and no component of the gain or loss was excluded
from the assessment of the hedge's effectiveness. As a result, no net gain or
loss has been recognized in earnings as a result of hedge ineffectiveness as of
September 30, 2001. At September 30, 2001, Consumers had a derivative liability
with a fair value of $.4 million. These contracts expire in 2001, and Consumers
expects to reclassify, in 2001, a $.7 million decrease in fair value to earnings
as an increase to power costs, if this fair value is sustained. The ultimate
fair value of these derivative assets is dependent upon market conditions
related to the derivative instruments.
GAS CONTINGENCIES
GAS ENVIRONMENTAL MATTERS: Under the Michigan Natural Resources and
Environmental Protection Act, Consumers expects that it will ultimately incur
investigation and remedial action costs at a number of sites. These include 23
sites that formerly housed manufactured gas plant facilities, including those in
which it has a partial or no current ownership interest. Consumers has completed
initial investigations at the 23 sites. On sites where Consumers has received
site-wide study plan approvals, it will continue to implement these plans. It
will also work toward closure of environmental issues at sites as studies are
completed. Consumers has estimated its costs related to further investigation
and remedial action for all 23 sites using the Gas Research
Institute-Manufactured Gas Plant Probabilistic Cost Model. Using this model,
Consumers estimates the total costs to be between $82 million and $113 million.
These estimates are based on discounted 2001 costs. As of September 30, 2001,
Consumers has an accrued liability of $60 million, (net of $22 million of
expenditures incurred to date), and a regulatory asset of $71 million. Any
significant change in assumptions, such as remediation techniques, nature and
extent of contamination, and legal and regulatory requirements, could affect the
estimate of remedial action costs for the sites. The MPSC currently allows
Consumers to recover $1 million of manufactured gas plant facilities
environmental clean-up costs annually. Consumers defers and amortizes, over a
period of ten years, manufactured gas plant facilities environmental clean-up
costs above the amount currently being recovered in rates. Additional rate
recognition of amortization expense cannot begin until after a prudence review
in a future general gas rate case. Consumers' current general gas rate case
considers the prudence of manufactured gas plant facilities environmental
clean-up expenditures for years 1998 through 2002.
GAS RATE MATTERS
GAS RESTRUCTURING: From April 1, 1998 to March 31, 2001, Consumers
conducted an experimental gas customer choice pilot program which froze gas
distribution and GCR rates through the period. On April 1, 2001, a permanent gas
customer choice program commenced under which Consumers returned to a GCR
mechanism that allows it to recover from its bundled customers all prudently
incurred costs to purchase the natural gas commodity and transport it to
Consumers' facilities.
GAS COST RECOVERY: As part of a settlement agreement approved by the MPSC
in July 2001, Consumers agreed not to exceed a ceiling price of $4.69 per mcf of
natural gas under the GCR factor mechanism through March 2002. This agreement is
not expected to affect Consumers' earnings outlook because Consumers
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charges customers the amount that it pays for natural gas in the reconciliation
process. In December 2000, Consumers initiated the negotiations, requesting a
ceiling price of $5.69 per mcf. The settlement reflects the decreasing prices in
the natural gas market. The settlement does not affect Consumers' June 2001
request to the MPSC for the gas service rate increase. The MPSC also approved a
methodology to adjust for market price increases quarterly without returning to
the MPSC for approval.
GAS RATE CASE: In June 2001, Consumers filed an application with the MPSC
seeking a gas service rate increase. If the MPSC approves Consumers' request,
then Consumers could bill an additional amount of approximately $6.50 per month,
representing a 10% increase in the typical residential customer's average
monthly bill. Consumers is seeking a 12.25% authorized return on equity.
Contemporaneously with this filing, Consumers has requested partial and
immediate relief in the amount of $33 million. The relief is primarily for
higher carrying costs on more expensive natural gas inventory than is currently
included in rates and actual earnings below the authorized return. In October
2001, Consumers revised its filing to reflect lower operating costs and is now
requesting a $133 million gas service rate increase.
OTHER GAS UNCERTAINTIES
CAPITAL EXPENDITURES: Consumers estimates gas capital expenditures,
including new lease commitments, of $145 million for 2001, $175 million for
2002, and $165 million for 2003. For further information, see the Capital
Expenditures Outlook section in the MD&A.
OTHER UNCERTAINTIES
In addition to the matters disclosed in this note, Consumers and certain of
its subsidiaries 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.
Consumers has accrued estimated losses for certain contingencies discussed
in this note. Resolution of these contingencies is not expected to have a
material adverse impact on Consumers' financial position, liquidity, or results
of operations.
3: SHORT-TERM FINANCINGS AND CAPITALIZATION
AUTHORIZATION: At September 30, 2001, Consumers had FERC authorization to
issue or guarantee through June 2002, up to $900 million of short-term
securities outstanding at any one time. Consumers also had remaining FERC
authorization to issue through June 2002 up to $250 million and $125 million of
long-term securities for refinancing or refunding purposes and for general
corporate purposes, respectively.
In August 2001, Consumers filed an amendment with the FERC to request
authorization of an additional $500 million of long term securities for general
corporate purposes and up to an additional $500 million of long term First
Mortgage Bonds to be issued solely as security for the long term securities.
Further, in October 2001, FERC granted Consumers' August 2001 request for
authorization of an additional $500 million of short-term debt so that $1.4
billion may be outstanding at any one time and up to $500 million in of First
Mortgage Bonds to be issued as collateral for the outstanding short-term
securities.
SHORT-TERM FINANCINGS: Consumers has an unsecured $300 million credit
facility maturing in July 2002 and unsecured lines of credit aggregating $215
million. These facilities are available to finance seasonal working capital
requirements and to pay for capital expenditures between long-term financings.
At September 30,
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2001, a total of $153 million was outstanding at a weighted average interest
rate of 3.5 percent, compared with $430 million outstanding at September 30,
2000, at a weighted average interest rate of 7.4 percent.
Consumers currently has in place a $325 million trade receivables sale
program. At September 30, 2001 and 2000, receivables sold under the program
totaled $325 million and $307 million, respectively. Accounts receivable and
accrued revenue in the Consolidated Balance Sheets have been reduced to reflect
receivables sold.
LONG-TERM FINANCINGS: In September 2001, Consumers sold $350 million
aggregate principal amount of 6.25 percent senior notes, maturing in September
2006. Net proceeds from the sale were $347 million. Consumers used the net
proceeds to reduce borrowings on various lines of credit and on a revolving
credit facility.
MANDATORILY REDEEMABLE PREFERRED SECURITIES: Consumers has wholly-owned
statutory business trusts that are consolidated within its financial statements.
Consumers created these trusts for the sole purpose of issuing Trust Preferred
Securities. The primary asset of the trusts is a note or debenture of Consumers.
The terms of the Trust Preferred Security parallel the terms of the related
Consumers' note or debenture. The term, rights and obligations of the Trust
Preferred Security and related note or debenture are also defined in the related
indenture through which the note or debenture was issued, Consumers' guarantee
of the related Trust Preferred Security and the declaration of trust for the
particular trust. All of these documents together with their related note or
debenture and Trust Preferred Security constitute a full and unconditional
guarantee by Consumers of the trust's obligations under the Trust Preferred
Security. In addition to the similar provisions previously discussed, specific
terms of the securities follow:
Trust and Securities Amount Outstanding
- -------------------- ---------------------------------------
September 30 December 31 September 30 Earliest
Rate 2001 2000 2000 Maturity Redemption
----- ------------ ----------- ------------ -------- ----------
In Millions
Consumers Power Company Financing I,
Trust Originated Preferred Securities 8.36% $100 $100 $100 2015 2000
Consumers Energy Company Financing II,
Trust Originated Preferred Securities 8.20% 120 120 120 2027 2002
Consumers Energy Company Financing III,
Trust Originated Preferred Securities 9.25% 175 175 175 2029 2004
Consumers Energy Company Financing IV,
Trust Originated Preferred Securities 9.00% 125 - - 2031 2006
---- ---- ----
Total $520 395 $395
==== ==== ====
OTHER: Under the provisions of its Articles of Incorporation , Consumers
had $240 million of unrestricted retained earnings available to pay common
dividends at September 30, 2001 and in September 2001, Consumers declared a $55
million common dividend payable in November 2001.
DERIVATIVE ACTIVITIES: Consumers uses interest-rate swaps to hedge the risk
associated with forecasted interest payments on variable rate debt. These
interest rate swaps are designated as cash flow hedges. As such, Consumers will
record any change in the fair value of these contracts in other comprehensive
income unless the swap is sold. These swaps fix the interest rate on $150
million of variable rate debt, and expire in December 2001 and 2002. As of
September 30, 2001, these interest rate swaps had a negative fair value of $4
million. This amount, if sustained, will be reclassified to earnings when the
swaps are settled on a monthly basis.
CE-31
In September 2001, Consumers entered into a cash flow hedge to fix the
interest rate on $100 million of debt to be issued. In September 2001, the swap
terminated and resulted in a $2 million loss that has been recorded in other
comprehensive income and will be amortized to interest expense over the life of
the debt using the effective interest method.
Consumers also uses interest-rate swaps to hedge the risk associated with
the fair value of its debt. These interest rate swaps are designated as fair
value hedges. As such, Consumers will record any change in the fair value of
these contracts and the fair value of the debt directly in earnings. These
hedges are considered to be fully effective, and as such changes in the fair
value of the swaps offset changes in the fair value of the debt. These swaps
hedge the fair value on $400 million of fixed rate debt, and expire in May 2003
and December 2006. As of September 30, 2001, these interest rate swaps had a
fair value of $1 million. Subsequently in November 2001, these swaps were
terminated and resulted in a $4 million gain that will be deferred and recorded
as part of the debt. It is anticipated that this gain will be recognized over
the remaining life of the debt.
During the third quarter 2001, Consumers entered into fair value hedges to
hedge the risk associated with the fair value of $250 million of debt. These
swaps terminated in the third quarter 2001, and resulted in a $4 million gain
that has been deferred and recorded as part of the debt. It is anticipated that
this gain will be recognized over the remaining life of the debt.
4: LEASES
In April 2001, Consumers Campus Holdings, entered into a lease agreement
for the construction of an office building to be used as the main headquarters
for Consumers in Jackson, Michigan. Consumers' current headquarters building
leases expire in June 2003. The lessor has committed to fund up to $70 million
for construction of the building. Consumers is acting as the construction agent
of the lessor for this project. The agreement is a seven-year lease term with
payments commencing upon completion of construction, which is projected for
March of 2003. Consumers Campus Holdings has the right to acquire the property
at any time during the life of the agreement. At the end of the lease term,
Consumers Campus Holdings has the option to renew the lease, purchase the
property, or return the property and assist the lessor in the sale of the
building. The return option obligates Consumers Campus Holdings to pay the
lessor an amount equal to the outstanding debt associated with the building.
This lease is classified as an operating lease. Estimated minimum lease
commitments, assuming an investment of $70 million, based on LIBOR at inception
of the lease, under this non-cancelable operating lease would be approximately
$5 million each year from 2003 through 2007 and a total of $52 million for the
remainder of the lease. Actual lease payments will depend upon final total
construction costs and LIBOR rates.
CE-32
Report of Independent Public Accountants
To Consumers Energy Company:
We have reviewed the accompanying consolidated balance sheets of CONSUMERS
ENERGY COMPANY (a Michigan corporation and wholly owned subsidiary of CMS Energy
Corporation) and subsidiaries as of September 30, 2001 and 2000, and the related
consolidated statements of income and common stockholder's equity for the
three-month and nine-month periods then ended and related consolidated
statements of cash flows for the nine-month periods then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Consumers
Energy Company and subsidiaries as of December 31, 2000, and, in our report
dated February 2, 2001, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 2000, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Arthur Andersen LLP
Detroit, Michigan,
October 31, 2001.
CE-33
PANHANDLE EASTERN PIPE LINE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
Panhandle is primarily engaged in the interstate transportation and storage
of natural gas. Panhandle also owns a LNG regasification plant and related
facilities. The rates and conditions for service of interstate natural gas
transmission, storage and LNG operations of Panhandle are subject to the rules
and regulations of the FERC.
The MD&A of this Form 10-Q should be read along with the MD&A and other
parts of Panhandle's 2000 Form 10-K. This MD&A also refers to, and in some
sections specifically incorporates by reference, Panhandle's Condensed Notes to
Consolidated Financial Statements and should be read in conjunction with such
Statements and Notes. This report and other written and oral statements made by
Panhandle from time to time contain forward-looking statements, as defined by
the Private Securities Litigation Reform Act of 1995. The words "anticipates,"
"believes," "estimates," "expects," "intends," and "plans" and variations of
such words and similar expressions, are intended to identify forward-looking
statements that involve risk and uncertainty. These forward-looking
statements are subject to various factors, which could cause Panhandle's actual
results to differ materially from those anticipated in such statements.
Panhandle has no obligation to update or revise forward-looking statements
regardless of whether new information, future events or any other factor affects
the information contained in such statements. Panhandle does, however discuss
certain risk factors, uncertainties and assumptions in this MD&A and
particularly in the section entitled "CMS Energy, Consumers, and Panhandle
Forward-Looking Statements Cautionary Factors" in CMS Energy's 2000 Form 10-K,
Item 1 and periodically in various public filings it makes with the SEC.
Panhandle designed this discussion of potential risks and uncertainties which is
by no means comprehensive, to highlight important factors that may impact
Panhandle's outlook. This report also describes material contingencies in the
Condensed Notes to Consolidated Financial Statements and the readers are
encouraged to read such Notes.
The following information is provided to facilitate increased understanding
of the consolidated financial statements and accompanying Notes of Panhandle and
should be read in conjunction with these financial statements. Because all of
the outstanding common stock of Panhandle Eastern Pipe Line is owned by a
wholly-owned subsidiary of CMS Energy, the following discussion uses the reduced
disclosure format permitted by Form 10-Q for issuers that are wholly-owned
subsidiaries of reporting companies.
RESULTS OF OPERATIONS
NET INCOME:
September 30
-------------------
2001 2000 Change
---- ----------- ------
In Millions
Three Months Ended $ 8 $14 $(6)
Nine Months Ended $56 $55 $ 1
For the three months ended September 30, 2001, net income was $8 million,
down $6 million from the same period in 2000. Total natural gas transportation
volumes delivered for the three months ended September 30, 2001 decreased
4 percent from 2000 primarily due to decreased transportation volumes for
Panhandle Eastern Pipe Line. For the nine months ended September 30, 2001, net
income was $56 million, up $1 million from the same period in 2000. Total
natural gas transportation volumes delivered
PE-1
for the nine months ended September 30, 2001 increased 1 percent from 2000
primarily due to increased supply area transportation volumes for Trunkline and
the addition of Sea Robin in March 2000 (see Note 1, Corporate Structure),
partially offset by decreased transportation volumes for Panhandle Eastern Pipe
Line.
Revenues for the three month and nine month periods ended September 30,
2001 increased $6 million and $35 million, respectively, from the corresponding
periods in 2000 due primarily to increased LNG terminalling revenues resulting
from increased LNG demand due to extremely high gas prices in early 2001.
Operating expenses for the three months ended September 30, 2001 increased
$18 million from the corresponding period in 2000 due primarily to a $7 million
lower of cost or market adjustment to Panhandle's current supply of system gas
and higher corporate charges. Operating expenses for the nine months ended
September 30, 2001 increased $33 million from the corresponding period in 2000
due primarily to $10 million of lower of cost or market adjustments to
Panhandle's current supply of system gas, higher corporate charges and increased
expenses for nine months in 2001 for Sea Robin versus seven months in 2000. For
further information about the Sea Robin acquisition, see Note 1, Corporate
Structure.
PRETAX OPERATING INCOME:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
CHANGE COMPARED TO PRIOR YEAR 2001 VS 2000 2001 VS 2000
- ----------------------------- ------------------ ------------------
IN MILLIONS
Reservation revenue $ -- ($13)
LNG terminalling revenue 5 41
Commodity revenue 2 10
Other revenue (1) (3)
Operation and maintenance (14) (26)
Depreciation and amortization (2) (3)
General taxes (2) (4)
---- -----
Total Change $(12) $ 2
==== =====
OUTLOOK
CMS Energy seeks to build on Panhandle's position as a leading United
States interstate natural gas pipeline system and the nation's largest operating
LNG receiving terminal through expansion and better utilization of its existing
facilities and construction of new facilities. In October 2001 CMS Trunkline LNG
Company announced the expansion of its Lake Charles, Louisiana facility to
approximately 1.2 bcf per day of send out capacity, up from its current send out
capacity of 630 million cubic feet per day. The terminal's storage capacity will
also be expanded to 9 bcf from its current storage capacity of 6.3 billion cubic
feet. With FERC approval, the expanded facility is planned to be in operation in
early 2005. In addition, CMS Energy is pursuing financings and monetization of
several of its assets, including the value created by contracts for capacity at
its Lake Charles, Louisiana, LNG receiving facility. For further information,
see Note 7, Trunkline LNG Monetization. By providing additional transportation,
storage and other asset-based, value-added services to customers such as new
gas-fueled
PE-2
power plants, local distribution companies, industrial and end-users, marketers
and others, CMS Energy expects to expand its natural gas pipeline business. CMS
Energy is in the process of converting certain Panhandle pipeline facilities
through a joint venture to permit the throughput of liquid products, such as
gasoline and is participating in a 150-mile natural gas pipeline venture from
Illinois to Wisconsin to meet the needs of those significantly growing markets.
Panhandle continues to attempt to maximize revenues from existing assets and to
advance acquisition opportunities and development projects that provide expanded
services to meet the specific needs of customers. In May 2001, Trunkline LNG
signed an agreement with BG LNG Services that provides for a 22-year contract,
beginning January 2002, for all the uncommitted capacity at Trunkline LNG's
facility. Pursuant to a Trunkline LNG rate settlement approved by FERC in
October 2001 (See Note 2, Regulatory Matters), most of Trunkline LNG's revenues
received beginning January 2002 will be coming from reservation (capacity)
charges and not subject to the volatility of the spot LNG market. This will
result in Trunkline LNG's revenues in 2002 being more certain during a time
period when competition from other terminals is increasing, but at a level
approximately 30% below the revenues expected in 2001. In addition, the LNG
monetization currently being pursued by CMS Energy will result in a reduced
share of Trunkline LNG's income being received by Panhandle, partially offset by
lower interest expense from debt retired with the proceeds from the transaction.
UNCERTAINTIES: Panhandle's results of operations and financial position may
be affected by a number of trends or uncertainties that have, or Panhandle
reasonably expects could have, a material impact on income from continuing
operations and cashflows. Such trends and uncertainties include: 1) the
increased competition in the market for transmission of natural gas to the
Midwest causing pressure on prices charged by Panhandle; 2) the current market
conditions causing more contracts to be shorter duration, which may increase
revenue volatility; 3) the impact of potential future rate cases, for any of
Panhandle's regulated operations; 4) current initiatives for additional federal
rules and legislation regarding pipeline safety; 5) capital spending
requirements for safety, environmental or regulatory requirements that could
result in depreciation expense increases not covered by additional revenues; and
6) construction and market risks associated with Panhandle's investment in the
liquids pipeline business through the Centennial Pipeline venture.
OTHER MATTERS
ENVIRONMENTAL MATTERS
PCB (POLYCHLORINATED BIPHENYL) ASSESSMENT AND CLEAN-UP PROGRAMS: Panhandle
previously identified environmental contamination at certain sites on its
systems and undertook clean-up programs at these sites. For further information,
see Note 4, Commitments and Contingencies - Environmental Matters, incorporated
by reference herein.
AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. For further information, see Note 4, Commitments and
Contingencies - Environmental Matters, incorporated by reference herein.
In 1997, the Illinois Environmental Protection Agency initiated an
enforcement proceeding relating to alleged air quality permit violations at
Panhandle's Glenarm Compressor Station. Panhandle expects a resolution of this
penalty proceeding during the fourth quarter of 2001. For further information,
see Note 4, Commitments and Contingencies - Air Quality Control, incorporated by
reference herein.
PE-3
NEW ACCOUNTING RULES
In July 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that all business combinations initiated after June
30, 2001, be accounted for under the purchase method; use of
pooling-of-interests method is no longer permitted. The adoption of SFAS No. 141
effective July 1, 2001 will result in Panhandle accounting for any future
business combinations under the purchase method of accounting, but will not
change the method of accounting used in previous business combinations.
SFAS No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment on an annual basis. The amortization of
goodwill ceases upon adoption of the standard. The provisions of SFAS No. 142
require adoption as of January 1, 2002 for calendar year entities. Panhandle is
currently studying the effects of the new standard but cannot predict at this
time if any amounts will be recognized as impairments of goodwill or other
intangible assets upon adoption. At September 30, 2001 goodwill was
approximately $718 million and goodwill amortization was approximately $5
million and $15 million for the three months and nine months ended September 30,
2001, respectively.
In August 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. The provisions of SFAS No. 143 require adoption as of January 1,
2003. The standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. Panhandle is currently studying the new
standard but has yet to quantify the effects of the new standard.
In October 2001 FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, that supersedes SFAS NO. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The
accounting model for long-lived assets to be disposed of by sale applies to all
long-lived assets, including discontinued operations, and replaces the
provisions of APB Opinion No. 30, Reporting Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, for the disposal of segments
of a business. SFAS No. 144 requires that those long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured at net realizable value or include amounts
for operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The adoption of SFAS No. 144, effective January 1, 2002, will
result in Panhandle accounting for any future impairments or disposals of
long-lived assets under the provisions of SFAS No. 144, but will not change the
accounting principles used in previous asset impairments or disposals.
PE-4
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2001 2000 2001 2000
----- ---- ---- ----
OPERATING REVENUE
Transportation and storage of natural gas $ 96 $ 94 $308 $311
LNG terminalling revenue 20 15 69 28
Other 4 5 13 16
---- ---- ---- ----
Total operating revenue 120 114 390 355
---- ---- ---- ----
OPERATING EXPENSES
Operation and maintenance 63 49 168 142
Depreciation and amortization 19 17 52 49
General taxes 8 6 22 18
---- ---- ---- ----
Total operating expenses 90 72 242 209
---- ---- ---- ----
PRETAX OPERATING INCOME 30 42 148 146
OTHER INCOME, NET 4 2 8 5
INTEREST CHARGES
Interest on long-term debt 20 21 63 62
Other interest - - (1) -
---- ---- ---- ----
Total interest charges 20 21 62 62
NET INCOME BEFORE INCOME TAXES 14 23 94 89
INCOME TAXES 6 9 38 34
---- ---- ---- ----
CONSOLIDATED NET INCOME $ 8 $ 14 $ 56 $ 55
==== ==== ==== ====
The accompanying condensed notes are an integral part of these statements.
PE-5
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2001 2000
----- -----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 56 $ 55
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 52 49
Deferred income taxes 52 47
Changes in current assets and liabilities (70) (48)
Other, net (5) (10)
----- -----
Net cash provided by operating activities 85 93
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (50) (110)
Other, net (22) -
----- -----
Net cash used in investing activities (72) (110)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from parent 150 -
Proceeds from senior notes - 99
Net increase in note receivable - CMS Capital (111) (28)
Dividends paid (50) (54)
----- -----
Net cash provided by/(used by) financing activities (11) 17
----- -----
Net Increase in Cash and Temporary Cash Investments 2 -
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING OF PERIOD - -
----- -----
CASH AND TEMPORARY CASH INVESTMENTS, END OF PERIOD $ 2 $ -
===== =====
OTHER CASH FLOW ACTIVITIES WERE:
Interest paid (net of amounts capitalized) $ 80 $ 75
Income taxes paid (net of refunds) 8 6
The accompanying condensed notes are an integral part of these statements.
PE-6
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Cost $1,666 $1,679
Less accumulated depreciation and amortization 134 99
------ ------
Sub-total 1,532 1,580
Construction work-in-progress 35 20
------ ------
Net property, plant and equipment 1,567 1,600
------ ------
INVESTMENTS 65 7
------ ------
CURRENT ASSETS
Cash and temporary cash investments at cost, which approximates market 2 --
Accounts receivable, less allowances of $2 as of September 30, 2001 176 140
and $1 as of Dec. 31, 2000
Gas imbalances - receivable 65 71
System gas and operating supplies 24 21
Deferred income taxes 8 12
Note receivable - CMS Capital 273 162
Other 19 21
------ ------
Total current assets 567 427
------ ------
NON-CURRENT ASSETS
Goodwill, net 718 753
Debt issuance cost 10 11
Other 90 8
------ ------
Total non-current assets 818 772
------ ------
TOTAL ASSETS $3,017 $2,806
====== ======
The accompanying condensed notes are an integral part of these statements.
PE-7
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
COMMON STOCKHOLDER'S EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholder's equity
Common stock, no par, 1,000 shares authorized, issued and outstanding $ 1 $ 1
Paid-in capital 1,277 1,127
Retained earnings - (6)
------ ------
Total common stockholder's equity 1,278 1,122
Long-term debt 1,192 1,193
------ ------
Total capitalization 2,470 2,315
------ ------
CURRENT LIABILITIES
Accounts payable 19 32
Gas imbalances - payable 123 56
Accrued taxes 10 3
Accrued interest 15 31
Accrued liabilities 25 45
Other 93 104
------ ------
Total current liabilities 285 271
------ ------
NON-CURRENT LIABILITIES
Deferred income taxes 181 134
Other 81 86
------ ------
Total non-current liabilities 262 220
------ ------
TOTAL COMMON STOCKHOLDER'S EQUITY AND LIABILITIES $3,017 $2,806
====== ======
The accompanying condensed notes are an integral part of these statements.
PE-8
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(UNAUDITED)
(IN MILLIONS)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
----------------- -----------------
COMMON STOCK
At beginning and end of period $ 1 $ 1
------ ------
ADDITIONAL PAID-IN CAPITAL
At beginning of period 1,127 1,127
Contribution from parent 150 -
------ ------
At end of period 1,277 1,127
------ ------
RETAINED EARNINGS
At beginning of period (6) -
Net income 56 55
Common stock dividends (50) (54)
------ ------
At end of period - 1
------ ------
TOTAL COMMON STOCKHOLDER'S EQUITY $1,278 $1,129
====== ======
The accompanying condensed notes are an integral part of these statements.
PE-9
PANHANDLE EASTERN PIPE LINE COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These interim Consolidated Financial Statements have been prepared by
Panhandle and reviewed by the independent public accountants in accordance with
SEC rules and regulations. As such, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles 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 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 contained within should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements contained in Panhandle's Form 10-K for the year ended
December 31, 2000, which includes the Report of Independent Public Accountants.
Due to the seasonal nature of Panhandle'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
Panhandle Eastern Pipe Line is a wholly owned subsidiary of CMS Gas
Transmission. Panhandle Eastern Pipe Line Company was incorporated in Delaware
in 1929. Panhandle is engaged primarily in interstate transportation and storage
of natural gas, including LNG terminalling, and is subject to the rules and
regulations of the FERC.
In March 2000, Trunkline, a subsidiary of Panhandle Eastern Pipe Line,
acquired the Sea Robin pipeline from El Paso Energy Corporation for cash of
approximately $74 million and certain other consideration. Sea Robin is a 1 bcf
per day capacity pipeline system located in the Gulf of Mexico. Year to date
results for 2001 include nine months of Sea Robin activity whereas results for
2000 only include seven months.
2. REGULATORY MATTERS
In conjunction with a FERC order issued in September 1997, FERC required
certain natural gas producers to refund previously collected Kansas ad-valorem
taxes to interstate natural gas pipelines, including Panhandle. FERC ordered
these pipelines to refund these amounts to their customers. The pipelines must
make all payments in compliance with prescribed FERC requirements. In June 2001,
Panhandle filed a proposed settlement with the FERC which is supported by most
of the customers and affected producers. That settlement was approved by the
Commission in October 2001. At September 30, 2001 and December 31, 2000,
Panhandle's Accounts Receivable included $63 million and $59 million,
respectively, due from natural gas producers, and Other Current Liabilities
included $63 million and $59 million, respectively, for related obligations. The
settlement provides for a reduction in these balances resulting in an amount due
from natural gas producers of $33 million and an amount due to jurisdictional
customers of $29 million. These adjustments will be recorded in the fourth
quarter.
In March 2001, Trunkline received FERC approval to abandon 720 miles of its
26-inch diameter pipeline that extends from Longville, Louisiana to Bourbon,
Illinois. This filing is in conjunction with a plan for Centennial Pipeline to
convert the line from natural gas transmission service to a refined products
pipeline by January 2002. Panhandle owns a one-third interest in the venture
along with TEPPCO Partners L.P. and Marathon Ashland Petroleum L.L.C. Effective
April 2001, the 26-inch pipeline was conveyed to Centennial and the book value
of the asset, including related goodwill, is now reflected in Investments on the
Consolidated Balance Sheet.
PE-10
In July 2001, Panhandle filed a settlement with customers on Order 637
matters to resolve matters including capacity release and imbalance penalties,
among others. On October 12, 2001 FERC issued an order approving the settlement,
with modifications. This order is pending potential requests for rehearing.
Management believes that this matter will not have a material adverse effect on
consolidated results of operations or financial position.
In August 2001, an offer of settlement of Trunkline LNG rates sponsored
jointly by Trunkline LNG, BG LNG Services and Duke LNG Sales was filed with the
FERC and was approved on October 11, 2001. The settlement will take effect in
January 2002. This will result in reduced revenues from 2001 levels but
less volatility due to the 22-year contract with BG LNG Services.
3. RELATED PARTY TRANSACTIONS
Other income includes $7 million for the nine months ended September 30,
2001 for interest on Note Receivable from CMS Capital. In June 2001, Panhandle
Eastern Pipe Line received a $150 million capital contribution from CMS Gas
Transmission. Panhandle also loaned CMS Capital $150 million in June 2001.
A summary of certain balances due to or due from related parties included
in the Consolidated Balance Sheets is as follows:
September 30, December 31,
2001 2000
------------- ------------
In Millions
Notes receivable $273 $162
Accounts receivable 73 48
Accounts payable 8 27
4. COMMITMENTS AND CONTINGENCIES
CAPITAL EXPENDITURES: Panhandle currently estimates capital expenditures
and investments, including interest costs capitalized, to be $83 million in
2001, $98 million in 2002 and $70 million in 2003. The amounts for 2002 and 2003
exclude expenditures associated with a potential LNG terminal expansion which is
planned to be filed with FERC in November 2001. The expansion expenditures,
estimated at $25 million in 2002 and $90 million in 2003, are currently expected
to be funded through a joint venture (See Note 7, Trunkline LNG Monetization)
via loans or equity contributions from Panhandle or equity investors or by third
party financings acceptable to the lenders of the joint venture. Panhandle
prepared these estimates for planning purposes and they are therefore subject to
revision. Panhandle satisfies capital expenditures using cash from operations
and contributions from the parent.
LITIGATION: Panhandle is involved in legal, tax and regulatory proceedings
before various courts, regulatory commissions and governmental agencies
regarding matters arising in the ordinary course of business, some of which
involve substantial amounts. Where appropriate, Panhandle has made accruals in
accordance with SFAS 5, Accounting for Contingencies, in order to provide for
such matters. Management believes the final disposition of these proceedings
will not have a material adverse effect on consolidated results of operations,
liquidity, or financial position.
PE-11
ENVIRONMENTAL MATTERS: Panhandle is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters. Panhandle has identified environmental
contamination at certain sites on its systems and has undertaken clean-up
programs at these sites. The contamination resulted from the past use of
lubricants in compressed air systems containing PCBs and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle
communicated with the EPA and appropriate state regulatory agencies on these
matters. Under the terms of the sale of Panhandle to CMS Energy, a subsidiary of
Duke Energy is obligated to complete the Panhandle clean-up programs at certain
agreed-upon sites and to indemnify against certain future environmental
litigation and claims. Panhandle expects these clean-up programs to continue
through 2001. The Illinois EPA included Panhandle Eastern Pipe Line and
Trunkline, together with other non-affiliated parties, in a cleanup of former
waste oil disposal sites in Illinois. Prior to a partial cleanup by the EPA, a
preliminary study estimated the cleanup costs at one of the sites to be between
$5 million and $15 million. The State of Illinois contends that Panhandle
Eastern Pipe Line's and Trunkline's share for the costs of assessment and
remediation of the sites, based on the volume of waste sent to the facilities,
is 17.32 percent. Management believes that the costs of cleanup, if any, will
not have a material adverse impact on Panhandle's financial position, liquidity,
or results of operations.
AIR QUALITY CONTROL: In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPS for 22 states, including five states in which
Panhandle operates. This EPA ruling was challenged in court by various states,
industry and other interests, including the INGAA, an industry group to which
Panhandle belongs. In March 2000, the court upheld most aspects of the EPA's
rule, but agreed with INGAA's position and remanded to the EPA the sections of
the rule that affected Panhandle. Based on the court's decision, most of the
states subject to the rule submitted their SIP revisions in October 2000.
However, the EPA must revise the section of the rule that affected Panhandle's
facilities. Panhandle expects the EPA to make this section of the rule effective
in 2001 and expects the future costs to range from $13 million to $29 million
for capital improvements to comply.
In 1997, the Illinois Environmental Protection Agency initiated an
enforcement proceeding relating to alleged air quality permit violations at
Panhandle's Glenarm Compressor Station. Panhandle expects a resolution of this
penalty proceeding during the fourth quarter of 2001. The resolution could
result in a penalty of $100,000 or potentially a significantly greater amount
and, upon the approval of a pending permit application, will require the
installation of certain capital improvements at the Glenarm facility at a cost
of approximately $3 million. It is expected the capital outlay will occur in
2003 or 2004. Under the terms of the Stock Purchase Agreement between CMS Energy
and an affiliate of Duke Energy, penalties relating to this facility remain the
obligation of a Duke Energy affiliate. Management believes that the resolution
of this matter will not have a material adverse effect on consolidated results
of operations, liquidity, or financial position.
OTHER COMMITMENTS AND CONTINGENCIES: In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. Panhandle's pipelines, with respect to certain producer
contract settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. The potential
liability of the producers to the government and of the pipelines to the
producers involves complex issues of law and fact that are likely to take
substantial time to resolve. If required to reimburse or indemnify the
producers, Panhandle's pipelines will file with FERC to recover a portion of
these costs from pipeline customers. Management believes these commitments and
contingencies will not have a material adverse effect on consolidated results of
operations, liquidity, or financial position.
PE-12
Under the terms of a settlement related to a transportation agreement
between Panhandle and Northern Border Pipeline Company, Panhandle guarantees
payment to Northern Border Pipeline Company under a transportation agreement
held by a third party. The transportation agreement requires estimated total
payments of $5 million through October 2001. The Panhandle guarantee expires on
October 31, 2001.
In conjunction with the Centennial Pipeline project, Panhandle has provided
a guaranty related to project financing for a maximum of $50 million during the
construction and initial operating period of the project. The guaranty will be
released when Centennial reaches certain operational and financial targets. For
further information about the Centennial Pipeline project, see Note 2,
Regulatory Matters.
In March 1999, CMS Gas Transmission, Panhandle's parent company, became a
partner with a one-third interest in Guardian Pipeline L.L.C. along with Viking
Gas Transmission and WICOR. Guardian is currently constructing a 150-mile, 36
inch pipeline from Illinois to Wisconsin for the transportation of natural gas.
In November 2001, in conjunction with the Guardian Pipeline project, Panhandle
provided a guaranty related to project financing for a maximum of $60 million
during the construction and initial operating period of the project, which is
expected to be completed in November 2002. The guaranty will be released when
Guardian reaches certain operational and financial targets. In November 2001,
CMS Gas Transmission will convey its investment in Guardian to Panhandle, and
upon completion of the project, Trunkline will operate and maintain the
pipeline.
5. IMPLEMENTATION OF SFAS NO. 133
Panhandle adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities as amended, effective January 1, 2001. SFAS No. 133 requires
companies to recognize all derivative instruments as assets or liabilities on
the Balance Sheet and to measure those instruments at fair value. As of
September 30, 2001, Panhandle believes its contracts qualify for the normal
purchase and sales exception of SFAS No. 133, and therefore no impact has been
reflected in the financial statements.
6. SYSTEM GAS
Panhandle recorded a lower of cost or market adjustment of approximately $7
million in the third quarter of 2001, reducing its current system gas to market
value. Panhandle classifies its non-current system gas in Other Non-Current
Assets and it is recorded at a cost of $74 million and $1 million at September
30, 2001 and December 31, 2000, respectively.
7. TRUNKLINE LNG MONETIZATION
Panhandle is pursuing a monetization of the value created by contracts for
capacity at the Trunkline LNG terminal. The monetization transaction is planned
to involve an equity investor who will have a 50% voting interest and share
control in Trunkline LNG. The new joint venture (JV) will be deconsolidated from
Panhandle to reflect its loss of majority control of the new entity. The
transaction is expected to result in a book gain, if it is closed by year end,
due to proceeds received by Panhandle from financings of the JV in excess of
Panhandle's current book basis in Trunkline LNG. The transaction is expected to
close in December 2001, and proceeds from the transaction are to be utilized for
Panhandle debt retirement and dividends to CMS Energy for additional debt
retirement at that level.
PE-13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Panhandle Eastern Pipe Line Company:
We have reviewed the accompanying consolidated balance sheet of Panhandle
Eastern Pipe Line Company (a Delaware corporation) and subsidiaries as of
September 30, 2001, and the related consolidated statements of income, common
stockholder's equity and cash flows for the three-month and nine-month periods
then ended. These financial statements are the responsibility of the company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Panhandle
Eastern Pipe Line Company and subsidiaries as of December 31, 2000, and, in our
report dated March 6, 2001, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2000, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Houston, Texas
October 25, 2001
PE-14
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.
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, Consumers' and Panhandle's Form 10-K for
the year ended December 31, 2000 and Forms 10-Q for the quarters ended March 31,
2001 and June 30, 2001. Reference is also made to the CONDENSED NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS, in particular Note 4 - Uncertainties for CMS
Energy and Consumers, and Note 4 - Commitments and Contingencies for Panhandle,
included herein for additional information regarding various pending
administrative and judicial proceedings involving rate, operating, regulatory
and environmental matters.
CONSUMERS
CMS ENERGY, CONSUMERS AND PANHANDLE
ENVIRONMENTAL MATTERS: CMS Energy, Consumers, Panhandle 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, Consumers and Panhandle 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, Consumers' and Panhandle's MANAGEMENT'S
DISCUSSION AND ANALYSIS; and CMS Energy's, Consumers' and Panhandle's CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CO-1
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
CMS ENERGY CORPORATION
During the 3rd Quarter 2001, CMS Energy did not submit any matters to a
vote of security holders.
ITEM 5. OTHER INFORMATION
In order for a shareholder to submit a proposal for a vote at the CMS
Energy 2002 Annual Meeting, the shareholder must assure that CMS Energy receives
the proposal on or before March 10, 2002. CMS Energy will not include
shareholder's proposals in the CMS Energy's proxy statement. The shareholder
must address the proposal to: Mr. Thomas A. McNish, Corporate Secretary,
Fairlane Plaza South, Suite 1100, 330 Town Center Drive, Dearborn, Michigan
48126. If the shareholder fails to submit the proposal on or before March 10,
2002, then management may use its discretionary voting authority to decide if it
will submit the proposal to vote when the shareholder raises the proposal at the
CMS Energy 2002 Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) LIST OF EXHIBITS
(4)(a) Fourth Supplemental Indenture dated as of May 31, 2001 between Consumers
Energy Company and The Bank of New York, as Trustee.
(4)(b) Seventy-Ninth Supplemental Indenture dated as of September 26, 2001 between
Consumers Energy Company and The Chase Manhattan Bank, as Trustee.
(4)(c) Amendment No. 1 to Credit Agreement dated June 18, 2001 among CMS
Energy, the Banks, the Administrative Agent and Collateral Agent,
the Co-Syndication Agents, the Documentation Agents and the Advisor,
Arranger and Book Manager, all as defined thereto.
(4)(d) Amendment No. 1 to Credit Agreement dated June 18, 2001 among CMS
Energy, the Banks, the Administrative Agent and Collateral Agent,
the Co-Syndication Agents, the Documentation Agents and the Advisor,
Arranger and Book Manager, all as defined thereto.
(10)(a) Purchase and Sale Agreement by and between CMS Gas
Transmission Company and Marathon Oil Company dated October 31,
2001.
Share Purchase Agreement by and among CMS Methanol Company, CMS
Enterprises Company, Marathon E.G. Methanol Limited, and Marathon
Oil Company dated October 31, 2001.
Stock Purchase Agreement by and among CMS Oil and Gas Company,
CMS Enterprises Company, Marathon E.G. Holding Limited and
Marathon Oil Company dated October 31, 2001.
(12) - CMS Energy: Statements regarding computation of Ratio of Earnings to Fixed
Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(15)(b) - Consumers: Letter of Independent Public Accountant
CO-2
(b) REPORTS ON FORM 8-K
CMS ENERGY
During 3rd Quarter 2001, CMS Energy filed reports of Form 8-K on, July 12,
2001, August 1, 2001, August 31, 2001, October 26, 2001 and November 2, 2001.
The reports covered matters pursuant to ITEM 5. OTHER EVENTS.
CONSUMERS
During 3rd Quarter 2001, Consumers filed reports of Form 8-K on July 12,
2001, August 1, 2001, August 31, 2001 and October 26, 2001. The reports covered
matters pursuant to ITEM 5. OTHER EVENTS.
PANHANDLE
During 3rd Quarter 2001, Panhandle filed reports of Form 8-K filed August
1, 2001 and October 26, 2001. The reports covered matters pursuant to ITEM 5.
OTHER EVENTS.
CO-3
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: November 14, 2001 By: /s/ A.M. Wright
--------------------------------------
Alan M. Wright
Executive Vice President
Chief Financial Officer and
Chief Administrative Officer
CONSUMERS ENERGY COMPANY
------------------------------------------
(Registrant)
Dated: November 14, 2001 By: /s/ A.M. Wright
--------------------------------------
Alan M. Wright
Executive Vice President
Chief Financial Officer and
Chief Administrative Officer
PANHANDLE EASTERN PIPE LINE COMPANY
------------------------------------------
(Registrant)
Dated: November 14, 2001 By: /s/ A.M. Wright
---------------------------------------
Alan M. Wright
Senior Vice President,
Chief Financial Officer and Treasurer
CO-4
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CMS ENERGY CORPORATION,
CONSUMERS ENERGY COMPANY
AND
PANHANDLE EASTERN PIPE LINE COMPANY
FORM 10-Q
EXHIBITS
FOR QUARTER ENDED SEPTEMBER 30, 2001
================================================================================
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
(4)(a) - Consumers: Fourth Supplemental Indenture dated as of May 31, 2001
between Consumers Energy Company and The Bank of New
York, as Trustee.
(4)(b) - Consumers: Seventy-Ninth Supplemental Indenture dated as of
September 26, 2001 between Consumers Energy Company and The
Chase Manhattan Bank, as Trustee.
(4)(c) - CMS Energy: Amendment No. 1 to Credit Agreement dated June 18,
2001 among CMS Energy, the Banks, the Administrative
Agent and Collateral Agent, the Co-Syndication Agents,
the Documentation Agents and the Advisor, Arranger and
Book Manager, all as defined thereto.
(4)(d) - CMS Energy: Amendment No. 1 to Credit Agreement dated June 18,
2001 among CMS Energy, the Banks, the Administrative
Agent and Collateral Agent, the Co-Syndication Agents,
the Documentation Agents and the Advisor, Arranger and
Book Manager, all as defined thereto.
(10)(a) - CMS Energy: Purchase and Sale Agreement by and between CMS Gas
Transmission Company and Marathon Oil Company dated October 31,
2001.
CMS Energy: Share Purchase Agreement by and among CMS Methanol
Company, CMS Enterprises Company, Marathon E.G. Methanol
Limited, and Methanol Oil Company dated October 31, 2001.
CMS Energy: Stock Purchase Agreement by and among CMS
Oil and Gas Company, CMS Enterprises Company,
Marathon E.G. Holding Limited and Marathon Oil
Company dated October 31, 2001.
(12) - CMS Energy: Statements regarding computation of Ratio of Earnings to
Fixed Charges
(15)(a) - CMS Energy: Letter of Independent Public Accountant
(15)(b) - Consumers: Letter of Independent Public Accountant
EXHIBIT (4)(a)
EXHIBIT (4)(a)
====================================
FOURTH SUPPLEMENTAL INDENTURE
between
CONSUMERS ENERGY COMPANY
and
THE BANK OF NEW YORK
Dated as of May 31st, 2001
====================================
TABLE OF CONTENTS
PAGE
----
ARTICLE I. DEFINITIONS
SECTION 1.1. Definition of Terms 2
ARTICLE II. GENERAL TERMS AND CONDITIONS OF THE NOTES
SECTION 2.1. Designation and Principal Amount 3
SECTION 2.2. Maturity 3
SECTION 2.3. Form and Payment 3
SECTION 2.4. Global Note 4
SECTION 2.5. Interest 5
ARTICLE III. REDEMPTION OF THE NOTES
SECTION 3.1. Special Event Redemption 6
SECTION 3.2. Optional Redemption by Issuer 6
SECTION 3.3. No Sinking Fund 7
ARTICLE IV. EXTENSION OF INTEREST PAYMENT PERIOD
SECTION 4.1. Extension of Interest Payment Period 7
SECTION 4.2. Notice of Extension 8
ARTICLE V. EXPENSES
SECTION 5.1. Payment of Expenses 8
SECTION 5.2. Payment Upon Resignation or Removal 9
ARTICLE VI. SUBORDINATION
SECTION 6.1. Agreement to Subordinate 9
ARTICLE VII. COVENANT TO LIST ON EXCHANGE
SECTION 7.1. Listing on an Exchange 10
ARTICLE VIII. FORM OF NOTES
SECTION 8.1. Form of Note 10
ARTICLE IX. ORIGINAL ISSUE OF NOTES
SECTION 9.1. Original Issue of Notes 16
i
ARTICLE X. MISCELLANEOUS
SECTION 10.1 Provisions of Indenture for the Sole Benefit of Parties and Holders of Trust Securities 16
SECTION 10.2 Ratification of Indenture 16
SECTION 10.3. Trustee Not Responsible for Recitals 16
SECTION 10.4. Governing Law 16
SECTION 10.5. Separability 17
SECTION 10.6. Counterparts 17
ii
FOURTH SUPPLEMENTAL INDENTURE, dated as of May 31, 2001, (the
"Fourth Supplemental Indenture"), between Consumers Energy Company, a Michigan
Corporation (the "Issuer"), and The Bank of New York, as trustee (the "Trustee")
under the Indenture dated as of January 1, 1996 between the Issuer and the
Trustee (the "Indenture").
WHEREAS, the Issuer executed and delivered the Indenture to the
Trustee to provide for the future issuance of the Issuer's Securities to be
issued from time to time in one or more series as might be determined by the
Issuer under the Indenture, in an unlimited aggregate principal amount which may
be authenticated and delivered as provided in the Indenture; and
WHEREAS, Section 2.3 of the Indenture permits the terms of any
series of Securities to be established in an indenture supplemental to the
Indenture; and
WHEREAS, Section 8.1(d) of the Indenture provided that a
supplemental indenture may be entered into without the consent of any Holders of
Securities to supplement certain provisions of the Indenture; and
WHEREAS, Section 8.1(e) of the Indenture provides that a
supplemental indenture may be entered into by the Issuer and the Trustee without
the consent of any Holders of the Securities to establish the form and terms of
the Securities of any series; and
WHEREAS, pursuant to the terms of the Indenture, the Issuer desires
to provide for the establishment of a new series of its Securities to be known
as its 9% subordinated Debentures due June 30, 2030 (the "Notes"), the form and
substance of such Notes and the terms, provisions and conditions thereof to be
set forth as provided in the Indenture and this Fourth Supplemental Indenture;
and
WHEREAS, Consumers Energy Company Financing IV, a Delaware statutory
business trust (the "Trust"), has offered to the public $125 million aggregate
liquidation amount of its 9% Trust Originated Preferred Securities (the
"Preferred Securities"), representing undivided beneficial interests in the
assets of the Trust and proposes to invest the proceeds from such offering,
together with the proceeds of the issuance and sale by the Trust to the Issuer
of $3,866,000 aggregate liquidation amount of its 9% Trust Originated Common
Securities (together the "Trust Securities"), in $128,866,000 aggregate
principal amount of the Notes; and
WHEREAS, the Issuer wishes to supplement Section 13.2 of the
Indenture with respect to the Notes and the Preferred Securities; and
WHEREAS, the Issuer has requested that the Trustee execute and
deliver this Fourth Supplemental Indenture and all requirements necessary to
make this Fourth Supplemental Indenture a valid instrument in accordance with
its terms, and to make the Notes, when executed by the Issuer and authenticated
and delivered by the Trustee, the valid obligations of the Issuer, have been
1
performed, and the execution and delivery of this Fourth Supplemental Indenture
has been duly authorized in all respects.
NOW THEREFORE, in consideration of the purchase and acceptance of
the Notes by the Holders thereof, and for the purpose of setting forth, as
provided in the Indenture, the form and substance of the Notes and the terms,
provisions and conditions thereof, the Issuer covenants and agrees with the
Trustee as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.1. Definition of Terms.
Unless the context otherwise requires:
(a) a term defined in the Indenture has the same meaning when used
in this Fourth Supplemental Indenture;
(b) a term defined anywhere in this Fourth Supplemental Indenture
has the same meaning throughout;
(c) the singular includes the plural and vice versa;
(d) a reference to a Section or Article is to a Section or Article
of this Fourth Supplemental Indenture;
(e) headings are for convenience of reference only and do not affect
interpretation;
(f) the following terms have the meanings given to them in the
Declaration: (i) Clearing Agency; (ii) Delaware Trustee; (iii) Redemption Tax
Opinion; (iv) No Recognition Opinion; (v) Preferred Security Certificate; (vi)
Property Trustee; (vii) Regular Trustees; (viii) Special Event; (ix) Tax Event;
(x) Underwriting Agreement; (xi) Investment Company Event; and (xii)
Distribution;
(g) the following terms have the meanings given to them in this
Section 1.1(g):
"Additional Interest" shall have the meaning set forth in Section
2.5.
"Compounded Interest" shall have the meaning set forth in Section
4.1.
"Coupon Rate" shall have the meaning set forth in Section 2.5.
"Declaration" means the Amended and Restated Declaration of Trust of
Consumers Energy Company Financing IV, a Delaware statutory business trust,
dated as of , .
2
"Deferred Interest" shall have the meaning set forth in Section 4.1.
"Dissolution Event" means that, as a result of the occurrence and
continuation of a Special Event, the Trust is to be dissolved in accordance with
the Declaration, and the Notes held by the Property Trustee are to be
distributed to the holders of the Trust Securities issued by the Trust pro rata
in accordance with the Declaration.
"Extended Interest Payment Period" shall have the meaning set forth
in Section 4.1.
"Global Note" shall have the meaning set forth in Section 2.4.
"Non Book-Entry Preferred Securities" shall have the meaning set
forth in Section 2.4.
"Optional Redemption Price" shall have the meaning set forth in
Section 3.2.
ARTICLE II.
GENERAL TERMS AND CONDITIONS OF THE NOTES
SECTION 2.1. Designation and Principal Amount.
There is hereby authorized and established a series of unsecured
Securities designated the "9% subordinated Debentures due June 30, 2030,
limited in aggregate principal amount to $125,000,000 (except as contemplated in
Section 2(f)(2) of the Indenture).
SECTION 2.2. Maturity.
The Maturity Date of the Notes is June 30, 2031.
SECTION 2.3. Form and Payment.
The Notes shall be issued in fully registered form without interest
coupons. Principal and interest on the Notes issued in certificated form will be
payable, the transfer of such Notes will be registrable and such Notes will be
exchangeable for Notes bearing identical terms and provisions, at the office or
agency of the Trustee in the Borough of Manhattan, the City of New York;
provided, however, that payment of interest may be made at the option of the
Issuer by check mailed to the Holder at such address as shall appear in the
Security Register or by wire transfer to an account maintained by the Holder.
Notwithstanding the foregoing, so long as the Holder of any Notes is the
Property Trustee, the payment of the principal of and interest (including
Compounded Interest and Additional Interest, if any) on such Notes held by the
Property Trustee will be made at such place and to such account as may be
designated by the Property Trustee.
3
SECTION 2.4. Global Note.
(a) In connection with a Dissolution Event,
(i) the Notes may be presented to the Trustee by the Property
Trustee in exchange for a global Note in an aggregate principal amount
equal to the aggregate principal amount of all outstanding Notes (a
"Global Note"), to be registered in the name of the Clearing Agency, or
its nominee, and delivered by the Trustee to the Clearing Agency for
crediting to the accounts of its participants pursuant to the instructions
of the Regular Trustees and the Clearing Agency will act as Depository for
the Notes. The Issuer upon any such presentation, shall execute a Global
Note in such aggregate principal amount and deliver the same to the
Trustee for authentication and delivery in accordance with the Indenture
and this Fourth Supplemental Indenture. Payments on the Notes issued as a
Global Note will be made to the Depositary; and
(ii) if any Preferred Securities are held in non book-entry
certificated form, the Notes may be presented to the Trustee by the
Property Trustee and any Preferred Security Certificate which represents
Preferred Securities other than Preferred Securities held by the Clearing
Agency or its nominee ("Non Book-Entry Preferred Securities") will be
deemed to represent beneficial interests in Notes presented to the Trustee
by the Property Trustee having an aggregate principal amount equal to the
aggregate liquidation amount of the Non Book-Entry Preferred Securities
until such Preferred Security Certificates are presented to the Security
Registrar for transfer or reissuance at which time such Preferred Security
Certificates will be canceled and a Note, registered in the name of the
holder of the Preferred Security Certificate or the transferee of the
holder of such Preferred Security Certificate, as the case may be, with an
aggregate principal amount equal to the aggregate liquidation amount of
the Preferred Security Certificate canceled, will be executed by the
Issuer and delivered to the Trustee for authentication and delivery in
accordance with the Indenture and this Fourth Supplemental Indenture.
(b) Except as provided in (c) below, a Global Note may be
transferred, in whole but not in part, only to another nominee of the
Depositary, or to a successor Depositary selected or approved by the Issuer or
to a nominee of such successor Depositary.
(c) If at any time the Depositary notifies the Issuer that it is
unwilling or unable to continue as Depositary or if at any time the Depositary
for such series shall no longer be registered or in good standing under the
Securities Exchange Act of 1934, as amended, or other applicable statute or
regulation, and a successor Depositary for such series is not appointed by the
Issuer within 90 days after the Issuer receives such notice or becomes aware of
such condition, as the case may be, the Issuer will execute, and, subject to
Section 2.8 of the Indenture, the Trustee, upon written notice from the Issuer,
will authenticate and deliver the Notes in definitive registered form, in
authorized denominations, and in an aggregate principal amount equal to the
principal amount of the Global Note in exchange for such Global Note. In
addition, the Issuer may at any time determine that the Notes shall no longer be
represented by a Global Note. In such event the Issuer will execute, and
4
subject to Section 2.8 of the Indenture, the Trustee, upon receipt of an
Officers' Certificate evidencing such determination by the Issuer, will
authenticate and deliver the Notes in definitive registered form, in authorized
denominations, and in an aggregate principal amount equal to the principal
amount of the Global Note in exchange for such Global Note. Upon the exchange of
the Global Note for such Notes in definitive registered form, in authorized
denominations, the Global Note shall be canceled by the Trustee. Such Notes in
definitive registered form issued in exchange for the Global Note shall be
registered in such names and in such authorized denominations as the Depositary,
pursuant to instructions from its direct or indirect participants or otherwise,
shall instruct the Trustee. The Trustee shall deliver such Notes to the
Depositary for delivery to the Persons in whose names such Notes are so
registered.
SECTION 2.5. Interest.
(a) Each Note will bear interest at the rate of 9% per annum (the
"Coupon Rate") from the original date of issuance until the principal thereof
becomes due and payable, and on any overdue principal and (to the extent that
payment of such interest is enforceable under applicable law) on any overdue
installment of interest, at the Coupon Rate, compounded quarterly, payable
(subject to the provisions of Article IV) quarterly in arrears on March 31, June
30, September 30, and December 31 of each year (each, an "Interest Payment
Date," commencing on June 30, 2001), to the Person in whose name such Note or
any predecessor Note is registered, at the close of business on the regular
record date for such interest installment, which, in respect of any Notes of
which the Property Trustee is the Holder or a Global Note, shall be the close of
business on the Business Day next preceding that Interest Payment Date.
Notwithstanding the foregoing sentence, if the Preferred Securities are no
longer in book-entry only form or, except if the Notes are held by the Property
Trustee, the Notes are not represented by a Global Note, the regular record date
for such interest installment shall be the fifteenth day of the month in which
the applicable Interest Payment Date occurs.
(b) The amount of interest payable for any period will be computed
on the basis of a 360-day year of twelve 30-day months. Except as provided in
the following sentence, the amount of interest payable for any period shorter
than a full quarterly period for which interest is computed, will be computed on
the basis of the actual number of days elapsed in such a 90-day period. In the
event that any date on which interest is payable on the Notes is not a Business
Day, then payment of interest payable on such date will be made on the next
succeeding day which is a Business Day (and without any interest or other
payment in respect of any such delay), except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date.
(c) If, at any time while the Property Trustee is the Holder of any
Notes, the Trust or the Property Trustee is required to pay any taxes, duties,
assessments or governmental charges of whatever nature (other than withholding
taxes) imposed by the United States, or any other taxing authority, then, in any
case, the Issuer will pay as additional interest ("Additional Interest") on the
Notes held by the Property Trustee, such additional amounts as shall be required
so that the net
5
amounts received and retained by the Trust and the Property Trustee after paying
such taxes, duties, assessments or other governmental charges will be equal to
the amounts the Trust and the Property Trustee would have received had no such
taxes, duties, assessments or other governmental charges been imposed.
ARTICLE III.
REDEMPTION OF THE NOTES
SECTION 3.1. Special Event Redemption.
If (a) a Tax Event has occurred and is continuing and (i) the Issuer
has received a Redemption Tax Opinion, or (ii) The Regular Trustees shall have
been informed by tax counsel that a No Recognition Opinion cannot be delivered
to the Trust, or (b) an Investment Company Event has occurred and is continuing,
then, notwithstanding Section 3.2(a) but subject to Section 3.2(b) and Article
Eleven of the Indenture, the Issuer shall have the right upon not less than 30
days' nor more than 60 days' notice to the Holders of the Notes to redeem the
Notes, in whole or in part, for cash within 90 days' following the occurrence of
such Special Event (the "90 Day Period") at a redemption price equal to 100% of
the principal amount to be redeemed plus any accrued and unpaid interest thereon
to the date of such redemption (the "Redemption Price"), provided that, if at
the time there is available to the Issuer or the Trust the opportunity to
eliminate, within the 90 Day Period, the Special Event by taking some
ministerial action ("Ministerial Action"), such as filing a form or making an
election, or pursuing some other similar reasonable measure which has no adverse
effect on the Issuer, the Trust or the Holders of the Trust Securities issued by
the Trust, the Issuer shall pursue such Ministerial Action in lieu of
redemption, and, provided, further, that the Issuer shall have no right to
redeem the Notes while the Trust is pursuing any Ministerial Action pursuant to
its obligations under the Declaration. The Redemption Price shall be paid prior
to 12:00 noon, New York time, on the date of such redemption or such earlier
time as the Issuer determines, and the Issuer shall deposit with the Trustee an
amount sufficient to pay the Redemption Price by 10:00 a.m., New York time, on
the date such Redemption Price is to be paid.
6
SECTION 3.2. Optional Redemption by Issuer.
(a) Subject to the provisions of Section 3.2(b) and to the
provisions of Article Eleven of the Indenture, the Issuer shall have the right
to redeem the Notes, in whole or in part, from time to time, on or after [May
__, ], at a redemption price equal to 100% of the principal amount to be
redeemed plus any accrued and unpaid interest thereon to the date of such
redemption (the "Optional Redemption Price"). Any redemption pursuant to this
paragraph will be made upon not less than 30 days' nor more than 60 days' notice
to the Holder of the Notes, at the Optional Redemption Price. If the Notes are
only partially redeemed pursuant to this Section 3.2, the Notes will be redeemed
on a pro rata basis; provided that, if at the time of redemption the Notes are
registered as a Global Note, the Depository shall determine, in accordance with
its procedures, the principal amount of such Notes held by each Holder of Notes
to be redeemed. The Optional Redemption Price shall be paid prior to 12:00 noon,
New York time, on the date of such redemption or at such earlier time as the
Issuer determines and the Issuer shall deposit with the Trustee an amount
sufficient to pay the Optional Redemption Price by 10:00 a.m., New York time, on
the date such Optional Redemption Price is to be paid.
(b) If a partial redemption of the Notes would result in the
delisting of the Preferred Securities from any national securities exchange or
other organization on which the Preferred Securities are then listed, the Issuer
shall not be permitted to effect such partial redemption and may only redeem the
Notes in whole.
SECTION 3.3. No Sinking Fund.
The Notes are not entitled to the benefit of any sinking fund.
7
ARTICLE IV.
EXTENSION OF INTEREST PAYMENT PERIOD
SECTION 4.1. Extension of Interest Payment Period.
The Issuer shall have the right, at any time and from time to time
during the term of the Notes, to defer payments of interest by extending the
interest payment period of such Notes for a period not exceeding 20 consecutive
quarters (the "Extended Interest Payment Period"), during which Extended
Interest Payment Period no interest shall be due and payable; provided that, no
Extended Interest Payment Period may extend beyond the Maturity Date. To the
extent permitted by applicable law, interest, the payment of which has been
deferred because of the extension of the interest payment period pursuant to
this Section 4.1, will bear interest thereon at the Coupon Rate compounded
quarterly for each quarter of the Extended Interest Payment Period ("Compounded
Interest"). At the end of the Extended Interest Payment Period, the Issuer shall
pay all interest accrued and unpaid on the Notes, including any Additional
Interest and Compounded Interest (together, "Deferred Interest") that shall be
payable to the Holders of the Notes in whose names the Notes are registered in
the Security Register on the First record date after the end of the Extended
Interest Payment Period. Prior to the termination of any Extended Interest
Payment Period, the Issuer may further extend such period, provided that such
period together with all such further extensions thereof shall not exceed 20
consecutive quarters. Upon the termination of any Extended Interest Payment
Period and upon the payment of all Deferred Interest then due, the Issuer may
commence a new Extended Interest Payment Period, subject to the foregoing
requirements. No interest shall be due and payable during an Extended Interest
Payment Period, except at the end thereof, but the Issuer may prepay at any time
all or any portion of the interest accrued during an Extended Interest Payment
Period.
The limitations set forth in Section 3.5 of the Indenture shall
apply during any Extended Interest Payment Period.
SECTION 4.2. Notice of Extension.
(a) If the Property Trustee is the only registered Holder of the
Notes at the time the Issuer elects an Extended Interest Payment Period, the
Issuer shall give written notice to the Regular Trustees, the Property Trustee
and the Trustee of its election of such Extended Interest Payment Period one
Business Day before the earlier of (i) the next succeeding date on which
Distributions on the Trust Securities issued by the Trust are payable, or (ii)
the date the Trust is required to give notice of the record date, or the date
such Distributions are payable, to the New York Stock Exchange or other
applicable self-regulatory organization or to holders of the Preferred
Securities, but in any event at least one Business Day before such record date.
(b) If the Property Trustee is not the only Holder of the Notes at
the time the Issuer elects an Extended Interest Payment Period, the Issuer shall
give the Holders of the Notes and the Trustee written notice of its election of
such Extended Interest Payment Period one Business Days before the
8
earlier of (i) the next succeeding Interest Payment Date, or (ii) the date the
Issuer is required to give notice of the record or payment date of such interest
payment to the New York Stock Exchange or other applicable self-regulatory
organization or to Holders of the Notes.
(c) The quarter in which any notice is given pursuant to paragraphs
(a) or (b) of this Section 4.2 shall be counted as one of the 20 quarters
permitted in the maximum Extended Interest Payment Period permitted under
Section 4.1.
ARTICLE V.
EXPENSES
SECTION 5.1. Payment of Expenses.
In connection with the offering, sale and issuance of the Notes to
the Property Trustee and in connection with the sale of the Trust Securities by
the Trust, the Issuer, in its capacity as borrower with respect to the Notes,
shall:
(a) pay all costs and expenses relating to the offering, sale and
issuance of the Notes, including commissions to the underwriters payable
pursuant to the Underwriting Agreement and the Pricing Agreements, and
compensation of the Trustee under the Indenture in accordance with the
provisions of Section 6.6 of the Indenture;
(b) pay all costs and expenses of the Trust (including, but not
limited to, costs and expenses relating to the organization of the Trust, the
offering, sale and issuance of the Trust Securities (including commissions to
the underwriters in connection therewith), the fees and expenses of the Property
Trustee and the Delaware Trustee, the costs and expenses relating to the
operation of the Trust, including without limitation, costs and expenses of
accountants, attorneys, statistical or bookkeeping services, expenses for
printing and engraving and computing or accounting equipment, paying agent(s),
registrar(s), transfer agent(s), duplicating, travel and telephone and other
telecommunications expenses and costs and expenses incurred in connection with
the acquisition, financing, and disposition of Trust assets);
(c) be primarily liable for any indemnification obligations arising
with respect to the Declaration; and
(d) pay any and all taxes (other than United States withholding
taxes attributable to the Trust or its assets) and all liabilities, costs and
expenses with respect to such taxes of the Trust.
9
SECTION 5.2. Payment Upon Resignation or Removal.
Upon termination of this Fourth Supplemental Indenture or the
Indenture or the removal or resignation of the Trustee pursuant to Section 6.10
of the Indenture, the Issuer shall pay to the Trustee all amounts accrued to the
date of such termination, removal or resignation. Upon termination of the
Declaration or the removal or resignation of the Delaware Trustee or the
Property Trustee, as the case may be, pursuant to Section 5.6 of the
Declaration, the Issuer shall pay to the Delaware Trustee or the Property
Trustee, as the case may be, all amounts accrued to the date of such
termination, removal or resignation.
ARTICLE VI.
SUBORDINATION
SECTION 6.1. Agreement to Subordinate.
The Issuer covenants and agrees, and each Holder of Notes issued
hereunder, by such Holder's acceptance thereof likewise covenants and agrees,
that pursuant to Section 2.3(f)(9) of the Indenture all Notes shall be issued as
Subordinated Securities subject to the provisions of Article Twelve of the
Indenture and this Article VI; and each Holder of a Note by its acceptance
thereof accepts and agrees to be bound by such provisions.
ARTICLE VII.
COVENANT TO LIST ON EXCHANGE
SECTION 7.1. Listing on an Exchange.
In connection with the distribution of the Notes to the holders of
the Preferred Securities upon a Dissolution Event, the Issuer will use its best
efforts to list such Notes on the New York Stock Exchange or on such other
exchange as the Preferred Securities are then listed.
ARTICLE VIII.
FORM OF NOTES
SECTION 8.1. Form of Note.
The Notes and the Trustee's Certificate of Authentication to be
endorsed thereon are to be substantially in the following forms and the Notes
shall have such additional terms as may be set forth in such form:
(FORM OF FACE OF NOTE)
10
[IF THE NOTE IS TO BE A GLOBAL NOTES, INSERT - This Note is a Global
Note within the meaning of the Indenture hereinafter referred to, and is
registered in the name of, a Depositary or a nominee of a Depositary. This Note
is exchangeable for Notes registered in the name of a person other than the
Depositary or its nominee only in the limited circumstances described in the
Indenture, and no transfer of this Note (other than a transfer of this Note as a
whole by the Depositary to a nominee of the Depositary or by a nominee of the
Depositary to the Depositary or another nominee of the Depositary) may be
registered except in limited circumstances.
Unless this Note is presented by an authorized representative of The
Depository Trust Company (55 Water Street, New York, New York) to the issuer or
its agent for registration of transfer, exchange or payment, and any Note issued
is registered in the name of Cede & Co. or such other name as requested by an
authorized representative of The Depository Trust Company and any payment hereon
is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY A PERSON IS WRONGFUL since the registered owner hereof, Cede & Co.,
has an interest herein.]
No.
$
CUSIP NO. 20151E202
CONSUMERS ENERGY COMPANY
9% SUBORDINATED DEBENTURES
DUE JUNE 30, 2031
Consumers Energy Company, a Michigan corporation (the "Issuer",
which term includes any successor corporation under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
_____________, or registered assigns, the principal sum of ($128,866,000) on
June 30, 2001, and to pay interest on said principal sum from May 31, 2001, or
from the most recent interest payment date (each such date, an "Interest Payment
Date") to which interest has been paid or duly provided for, quarterly (subject
to deferral as set forth herein) in arrears on March 31, June 30, September 30
and December 31 of each year commencing June 30, 2001 at the rate of 9% per
annum until the principal hereof shall have become due and payable, and on any
overdue principal and premium, if any, and (without duplication and to the
extent that payment of such interest is enforceable under applicable law) on any
overdue installment of interest at the same rate per annum compounded quarterly.
The amount of interest payable on any Interest Payment Date shall be computed on
the basis of a 360-day year of twelve 30-day months. In the event that any date
on which interest is payable on this Note is not a Business Day, then payment of
interest payable on such date will be made on the next succeeding day that is a
Business Day (and without any interest or
11
other payment in respect of any such delay), except that, if such Business Day
is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date. The interest installment so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as provided in the
Indenture, be paid to the person in whose name this Note (or one or more
Predecessor Securities, as defined in said Indenture) is registered at the close
of business on the regular record date for such interest installment, which
shall be the close of business on the Business Day next preceding such Interest
Payment Date. [IF PURSUANT TO THE PROVISIONS OF THE INDENTURE THE DEBENTURES ARE
NO LONGER REPRESENTED BY A GLOBAL NOTE -- which shall be the close of business
on the 15th day of the month in which such Interest Payment Date occurs.] If and
to the extent the Issuer shall default in the payment of the interest due on
such Interest Payment Date, interest shall be paid to the person in whose name
this Note is registered at the close of business on a subsequent record date
(which shall not be less than five Business Days prior to the date of payment of
such defaulted interest) established by notice given by mail by or on behalf of
the Issuer to the Holder of this Note not less than 15 days preceding such
subsequent Record Date. The principal of (and premium, if any) and the interest
on this Note shall be payable at the office or agency of the Trustee in the
Borough of Manhattan, the City of New York maintained for that purpose in any
coin or currency of the United States of America that at the time is legal
tender for payment of public and private debts; provided, however, that payment
of interest may be made at the option of the Issuer by check mailed to the
registered Holder at such address as shall appear in the Security Register or by
wire transfer to an account maintained by the Holder. Notwithstanding the
foregoing, so long as the Holder of this Note is the Property Trustee, the
payment of the principal of (and premium, if any) and interest on this Note will
be made at such place and to such account as may be designated by the Property
Trustee.
The indebtedness evidenced by this Note is, to the extent provided
in the Indenture, subordinate and junior in right of payment to the prior
payment in full of all Senior Indebtedness, and this Note is issued subject to
the provisions of the Indenture with respect thereto. Each Holder of this Note,
by accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his or her behalf to take such action as
may be necessary or appropriate to acknowledge or effectuate the subordination
so provided and (c) appoints the Trustee his or her attorney-in-fact for any and
all such purposes. Each Holder hereof, by his or her acceptance hereof, hereby
waives all notice of the acceptance of the subordination provisions contained
herein and in the Indenture by each holder of Senior Indebtedness, whether now
outstanding or hereafter incurred, and waives reliance by each such holder upon
said provisions.
This Note shall not be entitled to any benefit under the Indenture
hereinafter referred to, be valid or become obligatory for any purpose until the
Certificate of Authentication hereon shall have been signed by or on behalf of
the Trustee.
The provisions of this Note are continued on the reverse side hereof
and such continued provisions shall for all purposes have the same effect as
though fully set forth at this place.
12
IN WITNESS WHEREOF, the Issuer has caused this instrument to be
executed.
Dated
Consumers Energy Company
[Seal] By:
Name:
Title
Attest:
By:
Name:
Title:
(FORM OF CERTIFICATE OF AUTHENTICATION)
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series of Securities described
in the within-mentioned Indenture.
[ ]
--------------------------------
as Trustee
By
Authorized Signatory
(FORM OF REVERSE OF NOTE)
This Note is one of a duly authorized series of Securities of the
Issuer (herein sometimes referred to as the "Notes"), specified in the
Indenture, all issued or to be issued in one or more series under and pursuant
to an Indenture dated as of January 1, 1996, duly executed and delivered between
the Issuer and The Bank of New York, a New York banking corporation, as Trustee
(the "Trustee"), as supplemented by certain supplemental indentures, including
the Fourth Supplemental Indenture
13
dated as of May __, 2001, between the Issuer and the Trustee (the Indenture as
so supplemented, the "Indenture"), to which Indenture and all indentures
supplemental thereto reference is hereby made for a description of the rights,
limitations of rights, obligations, duties and immunities thereunder of the
Trustee, the Issuer and the Holders of the Notes. By the terms of the Indenture,
the Notes are issuable in series that may vary as to amount, date of maturity,
rate of interest and in other respects as provided in the Indenture. This series
of Notes is limited in aggregate principal amount as specified in said Third
Supplemental Indenture.
The Issuer shall have the right to redeem this Note at the option of
the Issuer, without premium or penalty, in whole or in part at any time on or
after [ ] or at any time in certain circumstances upon the occurrence of a
Special Event, at a redemption price equal to 100% of the principal amount plus
any accrued but unpaid interest, to the date of such redemption. Any redemption
pursuant to this paragraph will be made upon not less than 30 days nor more than
60 days' notice. If the Notes are only partially redeemed by the Issuer pursuant
to an Optional Redemption, the Notes will be redeemed pro rata.
In the event of redemption of this Note in part only, a new Note or
Notes of this series for the unredeemed portion hereof will be issued in the
name of the Holder hereof upon the cancellation hereof.
In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal of all of the Notes may be declared,
and upon such declaration shall become, due and payable, in the manner, with the
effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Issuer and the
Trustee, with the consent of the Holders of not less than a majority in
aggregate principal amount of the Notes and other Indenture securities of each
series affected at the time Outstanding and affected (voting as one class), as
defined in the Indenture, to execute supplemental indentures for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of any supplemental indenture or of modifying in
any manner the rights of the Holders of the Notes; provided, however, that the
Company and the Trustee may not, without the consent of the Holder of each Note
then Outstanding and affected thereby: (a) change the time of payment of the
principal (or any installment) of any Note, or reduce the principal amount
thereof, or reduce the rate or change the time of payment of interest thereon,
or impair the right to institute suit for the enforcement of any payment on any
Note when due or (b) reduce the percentage in principal amount of the Notes, the
consent of whose Holders is required for any such modification or for any waiver
provided for in the Indenture. The Indenture also contains provisions providing
that prior to the acceleration of the maturity of any Note or other securities
outstanding under the Indenture, the Holders of a majority in aggregate
principal amount of Notes of and other Securities Outstanding under the
Indenture with respect to which a default or/an Event of Default shall have
occurred and be continuing (voting as one class) may on behalf of the Holders of
all such affected Securities (including the Notes) waive any past default and
its consequences, except a default or an Event of Default in respect of a
14
covenant or provision of the Indenture or of any Note or other Security which
cannot be modified or amended without the consent of the Holder of each Note or
other Security affected. Any such consent or waiver by the registered Holder of
this Note (unless revoked as provided in the Indenture) shall be conclusive and
binding upon such Holder and upon all future Holders and owners of this Note and
of any Note issued in exchange herefor or in place hereof (whether by
registration of transfer or otherwise), irrespective of whether or not any
notation of such consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note
or of the Indenture shall alter or impair the obligation of the Issuer, which is
absolute and unconditional, to pay the principal of and premium, if any, and
interest on this Note at the time and place and at the rate and in the money
herein prescribed.
The Issuer shall have the right at any time during the term of the
Notes and from time to time to extend the interest payment period of such Notes
for up to 20 consecutive quarters (an "Extended Interest Payment Period"), at
the end of which period the Issuer shall pay all interest then accrued and
unpaid (together with interest thereon at the rate specified for the Notes to
the extent that payment of such interest is enforceable under applicable law).
Before the termination of any such Extended Interest Payment Period, the Issuer
may further extend such Extended Interest Payment Period, provided that such
Extended Interest Payment Period together with all such further extensions
thereof shall not exceed 20 consecutive quarters. At the termination of any such
Extended Interest Payment Period and upon the payment of all accrued and unpaid
interest and any additional amounts then due, the Issuer may commence a new
Extended Interest Payment Period.
As provided in the Indenture and subject to certain limitations
therein set forth, this Note is transferable by the registered Holder hereof on
the Security Register of the Issuer, upon surrender of this Note for
registration of transfer at the office or agency of the Trustee in the City and
State of New York accompanied by a written instrument or instruments of transfer
in form satisfactory to the Issuer or the Trustee duly executed by the
registered Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Notes of authorized denominations and for the same
aggregate principal amount and series will be issued to the designated
transferee or transferees. No service charge will be made for any such transfer,
but the Issuer may require payment of a sum sufficient to cover any tax or other
governmental charge payable in relation thereto.
Prior to due presentment for registration of transfer of this Note,
the Issuer, the Trustee, any paying agent and the Security Registrar may deem
and treat the registered holder hereof as the absolute owner hereof (whether or
not this Note shall be overdue and notwithstanding any notice of ownership or
writing hereon made by anyone other than the Security Registrar) for the purpose
of receiving payment of or on account of the principal hereof and premium, if
any, and interest due hereon and for all other purposes, and neither the Issuer
nor the Trustee nor any paying agent nor any Security Registrar shall be
affected by any notice to the contrary.
15
No recourse shall be had for the payment of the principal of or the
interest on this Note, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of the Indenture, against any incorporator,
stockholder, officer or director, past, present or future, as such, of the
Issuer or of any predecessor or successor corporation, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise, all such liability being, by the acceptance hereof and as
part of the consideration for the issuance hereof, expressly waived and
released.
Notes of this series so issued are issuable only in registered form
without coupons in denominations of $25 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations herein and therein
set forth, Notes of this series so issued are exchangeable for a like aggregate
principal amount of Notes of this series in authorized denominations, as
requested by the Holder surrendering the same.
All terms used in this Note that are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
[END OF FORM OF NOTE]
ARTICLE IX.
ORIGINAL ISSUE OF NOTES
SECTION 9.1. Original Issue of Notes.
Notes in the aggregate principal amount of $128,866,000 may, upon
execution of this Fourth Supplemental Indenture, be executed by the Issuer and
delivered to the Trustee for authentication, and the Trustee shall thereupon
authenticate and deliver said Notes to or upon the written order of the Issuer,
in accordance with Section 2.4 of the Indenture.
16
ARTICLE X.
MISCELLANEOUS
SECTION 10.1 Provisions of Indenture for the Sole Benefit of Parties and Holders
of Trust Securities.
Notwithstanding Section 13.2 of the Indenture, for so long as any
Trust Securities remain outstanding, the Issuer's obligations under the
Indenture and this Fourth Supplemental Indenture will also be for the benefit of
the holders of the Trust Securities, and the Issuer acknowledges and agrees that
such holders will be entitled to enforce certain payment obligations under the
Notes directly against the Issuer to the extent provided in the Declaration.
SECTION 10.2 Ratification of Indenture.
The Indenture, as supplemented by this Fourth Supplemental
Indenture, is in all respects ratified and confirmed, and this Fourth
Supplemental Indenture shall be deemed part of the Indenture in the manner and
to the extent herein and therein provided.
SECTION 10.3. Trustee Not Responsible for Recitals.
The recitals herein contained are made by the Issuer and not by the
Trustee, and the Trustee assumes no responsibility for the correctness thereof.
The Trustee makes no representation as to the validity or sufficiency of this
Fourth Supplemental Indenture.
SECTION 10.4. Governing Law.
This Fourth Supplemental Indenture and each Note shall be deemed to
be a contract made under the internal laws of the State of Michigan, and for all
purposes shall be construed in accordance with the laws of said State; provided,
however, that the rights, duties and obligations of the Trustee are governed and
construed in accordance with the laws of the State of New York.
SECTION 10.5. Separability.
In case any one or more of the provisions contained in this Fourth
Supplemental Indenture or in the Notes shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Fourth
Supplemental Indenture or of the Notes, but this Fourth Supplemental Indenture
and the Notes shall be construed as if such invalid or illegal or unenforceable
provision had never been contained herein or therein.
17
SECTION 10.6. Counterparts.
This Fourth Supplemental Indenture may be executed in any number of
counterparts each of which shall be an original, but such counterparts shall
together constitute but one and the same instrument.
18
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Supplemental Indenture to be duly executed on the date or dates indicated in the
acknowledgments and as of the day and year first above written.
Consumers Energy Company
By: /s/ Alan M. Wright
------------------------------------
Name: Alan M. Wright
Title: Executive Vice President,
Chief Financial Officer and Chief
Administrative Officer
[Seal]
Attest:
By: /s/ Adam Norlander
---------------------------
The Bank of New York, as Trustee
By: /s/ Paul Schmalzel
---------------------------------
Name: Paul Schmalzel
Title: Vice President
19
STATE OF MICHIGAN )
)ss.
COUNTY OF WAYNE )
On the 31st day of May, 2001, before me personally came Alan M. Wright, to
me known, who, being by me duly sworn, did depose and say that he resides at Ann
Arbor, Michigan; that he is Executive Vice President, Chief Financial Officer
and Chief Administrative Officer of Consumers Energy Company, one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate; that it was so affixed by authority of the Board of Directors of
said corporation; and that he signed his name thereto by like authority.
[Notarial Seal]
/s/ Leslie Higdon
- --------------------------------------
Notary Public, Wayne County, Michigan
My Commission Expires: 10/05/04
20
EXHIBIT (4)(b)
EXHIBIT 4(b)
SEVENTY-NINTH SUPPLEMENTAL INDENTURE
Providing among other things for
FIRST MORTGAGE BONDS,
6.25% Senior Notes, due September 15, 2006
--------------
Dated as of September 26, 2001
--------------
CONSUMERS ENERGY COMPANY
TO
THE CHASE MANHATTAN BANK,
TRUSTEE
Counterpart ______ of 80
SEVENTY-NINTH SUPPLEMENTAL INDENTURE, dated as of September
26, 2001 (herein sometimes referred to as "this Supplemental Indenture"), made
and entered into by and between CONSUMERS ENERGY COMPANY, a corporation
organized and existing under the laws of the State of Michigan, with its
principal executive office and place of business at 212 West Michigan Avenue, in
Jackson, Jackson County, Michigan 49201, formerly known as Consumers Power
Company, (hereinafter sometimes referred to as the "Company"), and THE CHASE
MANHATTAN BANK, a corporation organized and existing under the laws of the State
of New York, with its corporate trust offices at 450 W. 33rd Street, in the
Borough of Manhattan, The City of New York, New York 10001 (hereinafter
sometimes referred to as the "Trustee"), as Trustee under the Indenture dated as
of September 1, 1945 between Consumers Power Company, a Maine corporation
(hereinafter sometimes referred to as the "Maine corporation"), and City Bank
Farmers Trust Company (Citibank, N.A., successor, hereinafter sometimes referred
to as the "Predecessor Trustee"), securing bonds issued and to be issued as
provided therein (hereinafter sometimes referred to as the "Indenture"),
WHEREAS at the close of business on January 30, 1959, City
Bank Farmers Trust Company was converted into a national banking association
under the title "First National City Trust Company"; and
WHEREAS at the close of business on January 15, 1963, First
National City Trust Company was merged into First National City Bank; and
WHEREAS at the close of business on October 31, 1968, First
National City Bank was merged into The City Bank of New York, National
Association, the name of which was thereupon changed to First National City
Bank; and
WHEREAS effective March 1, 1976, the name of First National
City Bank was changed to Citibank, N.A.; and
WHEREAS effective July 16, 1984, Manufacturers Hanover Trust
Company succeeded Citibank, N.A. as Trustee under the Indenture; and
WHEREAS effective June 19, 1992, Chemical Bank succeeded by
merger to Manufacturers Hanover Trust Company as Trustee under the Indenture;
and
WHEREAS effective July 15, 1996, The Chase Manhattan Bank
(National Association), merged with and into Chemical Bank which thereafter was
renamed The Chase Manhattan Bank as Trustee under the Indenture; and
WHEREAS the Indenture was executed and delivered for the
purpose of securing such bonds as may from time to time be issued under and in
accordance with the terms of the Indenture, the aggregate principal amount of
bonds to be secured thereby being limited to $5,000,000,000 at any one time
outstanding (except as provided in Section 2.01 of the Indenture), and the
Indenture describes and sets forth the property conveyed thereby and is filed in
the Office of the Secretary of State of the State of Michigan and is of record
in the Office of the Register of Deeds of each county in the State of Michigan
in which this Supplemental Indenture is to be recorded; and
WHEREAS the Indenture has been supplemented and amended by
various indentures supplemental thereto, each of which is filed in the Office of
the Secretary of State of the State of Michigan and is of record in the Office
of the Register of Deeds of each county in the State of Michigan in which this
Supplemental Indenture is to be recorded; and
WHEREAS the Company and the Maine corporation entered into an
Agreement of Merger and Consolidation, dated as of February 14, 1968, which
provided for the Maine corporation to merge into the Company; and
WHEREAS the effective date of such Agreement of Merger and
Consolidation was June 6, 1968, upon which date the Maine corporation was merged
into the Company and the name of the Company was changed from "Consumers Power
Company of Michigan" to "Consumers Power Company"; and
WHEREAS the Company and the Predecessor Trustee entered into a
Sixteenth Supplemental Indenture, dated as of June 4, 1968, which provided,
among other things, for the assumption of the Indenture by the Company; and
WHEREAS said Sixteenth Supplemental Indenture became effective
on the effective date of such Agreement of Merger and Consolidation; and
WHEREAS the Company has succeeded to and has been substituted
for the Maine corporation under the Indenture with the same effect as if it had
been named therein as the mortgagor corporation; and
WHEREAS effective March 11, 1997, the name of Consumers Power
Company was changed to Consumers Energy Company; and
WHEREAS, the Company has entered into an Indenture dated as of
February 1, 1998 ("Senior Note Indenture") with The Chase Manhattan Bank, as
trustee ("Senior Note Trustee") providing for the issuance of notes thereunder,
and pursuant to such Senior Note Indenture the Company has agreed to issue to
the Senior Note Trustee, as security for the notes ("Senior Notes") to be issued
thereunder, a new series of bonds under the Indenture at the time of
authentication of each series of Senior Notes issued under such Senior Note
Indenture; and
WHEREAS, for such purposes the Company desires to issue: a new
series of bonds, to be designated First Mortgage Bonds, 6.25% Senior Notes, due
September 15, 2006, each of which bonds shall also bear the descriptive title
"First Mortgage Bond" (hereinafter provided for and hereinafter sometimes
referred to as the "2006 Note Bonds"), the bonds of which series are to be
issued as registered bonds without coupons and are to bear interest at the rate
per annum specified herein and are to mature September 15, 2006; and
WHEREAS, the 2006 Note Bonds shall be issued to the Senior
Note Trustee in connection with the issuance by the Company of its 6.25% Senior
Notes due September 15, 2006 (the "2006 Notes"); and
WHEREAS, each of the registered bonds without coupons of the
2006 Note Bonds and the Trustee's Authentication Certificate thereon are to be
substantially in the following form, to wit:
2
[FORM OF REGISTERED BOND OF THE 2006 NOTE BONDS]
[FACE]
NOTWITHSTANDING ANY PROVISIONS HEREOF OR IN THE INDENTURE,
THIS BOND IS NOT ASSIGNABLE OR TRANSFERABLE EXCEPT AS PERMITTED OR REQUIRED BY
SECTION 4.04 OF THE INDENTURE, DATED AS OF FEBRUARY 1, 1998 BETWEEN CONSUMERS
ENERGY COMPANY AND THE CHASE MANHATTAN BANK, AS TRUSTEE.
CONSUMERS ENERGY COMPANY
FIRST MORTGAGE BOND
6.25% SENIOR NOTES
DUE SEPTEMBER 15, 2006
No. 1 $350,000,000
CONSUMERS ENERGY COMPANY, a Michigan corporation (hereinafter
called the "Company"), for value received, hereby promises to pay to The Chase
Manhattan Bank, as trustee under the Senior Note Indenture hereinafter referred
to, or registered assigns, the principal sum of Three Hundred Fifty Million
Dollars on September 15, 2006, and to pay to the registered holder hereof
interest on said sum from the latest semi-annual interest payment date to which
interest has been paid on the bonds of this series preceding the date hereof,
unless the date hereof be an interest payment date to which interest is being
paid, in which case from the date hereof, or unless the date hereof is prior to
March 15, 2002, in which case from September 26, 2001, (or if this bond is dated
between the record date for any interest payment date and such interest payment
date, then from such interest payment date, provided, however, that if the
Company shall default in payment of the interest due on such interest payment
date, then from the next preceding semi-annual interest payment date to which
interest has been paid on the bonds of this series, or if such interest payment
date is March 15, 2002, from September 26, 2001), at 6.25% per annum through
September 15, 2006; provided, however, the interest rate is subject to
adjustment as provided in the 2006 Notes, defined below.
Under an Indenture dated as of February 1, 1998 (hereinafter
sometimes referred to as the "Senior Note Indenture"), between Consumers Energy
Company and The Chase Manhattan Bank, as trustee (hereinafter sometimes called
the "Senior Note Trustee"), the Company will issue, concurrently with the
issuance of this bond, an issue of notes under the Senior Note Indenture
entitled 6.25% Senior Notes, due September 15, 2006 (the "2006 Notes"). Pursuant
to Article IV of the Senior Note Indenture, this bond is issued to the Senior
Note Trustee to secure any and all obligations of the Company under the 2006
Notes and any other series of senior notes from time to time outstanding under
the Senior Note Indenture. Payment of principal of, or premium, if any, or
interest on, the 2006 Notes shall constitute payments on this bond as further
provided herein and in the Supplemental Indenture.
The provisions of this bond are continued on the reverse
hereof and such continued provisions shall for all purposes have the same effect
as though fully set forth at this place.
This bond shall not be valid or become obligatory for any
purpose unless and until it shall have been authenticated by the execution by
the Trustee or its successor in trust under the Indenture of the certificate
hereon.
3
IN WITNESS WHEREOF, Consumers Energy Company has caused this
bond to be executed in its name by its Chairman of the Board, its President or
one of its Vice Presidents by his signature or a facsimile thereof, and its
corporate seal or a facsimile thereof to be affixed hereto or imprinted hereon
and attested by its Secretary or one of its Assistant Secretaries by his
signature or a facsimile thereof.
CONSUMERS ENERGY COMPANY,
Dated: By _______________________________
Attest: _________________________
TRUSTEE'S AUTHENTICATION CERTIFICATE
This is one of the bonds, of the series designated therein,
described in the within-mentioned Indenture.
THE CHASE MANHATTAN BANK, Trustee
By ____________________________________
Authorized Officer
4
[REVERSE]
CONSUMERS ENERGY COMPANY
FIRST MORTGAGE BOND
6.25% SENIOR NOTES
DUE SEPTEMBER 15, 2006
The interest payable on any March 15 and September 15 will,
subject to certain exceptions provided in the Indenture hereinafter mentioned,
be paid to the person in whose name this bond is registered at the close of
business on the record date, which shall be March 1 or September 1, as the case
may be, next preceding such interest payment date, or, if such March 1 or
September 1 shall be a legal holiday or a day on which banking institutions in
the City of New York, New York or the City of Detroit, Michigan are authorized
by law to close, the next succeeding day which shall not be a legal holiday or a
day on which such institutions are so authorized to close. The principal of and
the premium, if any, and the interest on this bond shall be payable at the
office or agency of the Company in the City of Jackson, Michigan designated for
that purpose, in any coin or currency of the United States of America which at
the time of payment is legal tender for public and private debts.
The 2006 Notes are subject to redemption described therein. In
the event the redemption is exercised as set forth in the 2006 Notes, interest
on this bond shall cease to accrue on the redemption date in accordance with
2006 Notes. The Senior Note Trustee shall give written notice to the Trustee
that the redemption has been exercised. In the event the 2006 Notes are redeemed
as provided therein, upon redemption thereof, this bond shall be deemed to be
redeemed on the respective dates for, in the principal amounts to be redeemed
of, and for the redemption prices for the 2006 Notes.
Upon payment of the principal of and interest by the Company
on the 2006 Notes, whether at maturity or prior to maturity by redemption or
otherwise or upon provision for the payment thereof having been made in
accordance with Section 5.01(a) of the Senior Note Indenture, the 2006 Note
Bonds in a principal amount equal to the principal amount of such 2006 Notes and
having both a corresponding maturity date and interest rate shall, to the extent
of such payment of principal and interest, be deemed paid and the obligation of
the Company thereunder to make such payment shall be discharged to such extent
and, in the case of the payment of principal (and premium, if any) this bond
shall be surrendered to the Company for cancellation as provided in Section 4.08
of the Senior Note Indenture. The Trustee may at anytime and all times
conclusively assume that the obligation of the Company to make payments with
respect to the principal of and interest on this bond, so far as such payments
at the time have become due, has been fully satisfied and discharged pursuant to
the foregoing sentence unless and until the Trustee shall have received a
written notice from the Senior Note Trustee signed by one of its officers
stating (i) that timely payment of, or premium or interest on, the 2006 Notes
has not been made, (ii) that the Company is in arrears as to the payments
required to be made by it to the Senior Note Trustee pursuant to the Senior Note
Indenture, and (iii) the amount of the arrearage.
For purposes of Section 4.09 of the Senior Note Indenture,
this bond shall be deemed to be the "related series of Senior Note First
Mortgage Bonds" in respect of the 2006 Notes.
This bond is one of the bonds issued and to be issued from
time to time under and in accordance with and all secured by an Indenture dated
as of September 1, 1945, given by the Company (or its predecessor, Consumers
Power Company, a Maine corporation) to City Bank Farmers Trust Company (The
Chase Manhattan Bank, successor) (hereinafter sometimes referred to as the
"Trustee"), and indentures supplemental thereto, heretofore or hereafter
executed, to which indenture and indentures supplemental thereto (hereinafter
referred to collectively as the "Indenture") reference is hereby made for a
description of the property mortgaged and pledged, the nature and extent of the
security and the rights, duties and immunities thereunder of the Trustee and the
rights of the holders of said bonds and of the Trustee and of the Company in
5
respect of such security, and the limitations on such rights. By the terms of
the Indenture, the bonds to be secured thereby are issuable in series which may
vary as to date, amount, date of maturity, rate of interest and in other
respects as provided in the Indenture.
The Indenture contains provisions permitting the Company and
the Trustee, with the consent of the holders of not less than seventy-five per
centum in principal amount of the bonds (exclusive of bonds disqualified by
reason of the Company's interest therein) at the time outstanding, including, if
more than one series of bonds shall be at the time outstanding, not less than
sixty per centum in principal amount of each series affected, to effect, by an
indenture supplemental to the Indenture, modifications or alterations of the
Indenture and of the rights and obligations of the Company and the rights of the
holders of the bonds and coupons; provided, however, that no such modification
or alteration shall be made without the written approval or consent of the
holder hereof which will (a) extend the maturity of this bond or reduce the rate
or extend the time of payment of interest hereon or reduce the amount of the
principal hereof, or (b) permit the creation of any lien, not otherwise
permitted, prior to or on a parity with the lien of the Indenture, or (c) reduce
the percentage of the principal amount of the bonds the holders of which are
required to approve any such supplemental indenture.
The Company reserves the right, without any consent, vote or
other action by holders of bonds of this series or any other series created
after the Sixty-eighth Supplemental Indenture to amend the Indenture to reduce
the percentage of the principal amount of bonds the holders of which are
required to approve any supplemental indenture (other than any supplemental
indenture which is subject to the proviso contained in the immediately preceding
sentence) (a) from not less than seventy-five per centum (including sixty per
centum of each series affected) to not less than a majority in principal amount
of the bonds at the time outstanding or (b) in case fewer than all series are
affected, not less than a majority in principal amount of the bonds of all
affected series, voting together.
This bond is not redeemable except upon written demand of the
Senior Note Trustee following the occurrence of an Event of Default under the
Senior Note Indenture and the acceleration of the senior notes, as provided in
Section 8.01 of the Senior Note Indenture. This bond is not redeemable by the
operation of the improvement fund or the maintenance and replacement provisions
of the Indenture or with the proceeds of released property.
This bond shall not be assignable or transferable except as
permitted or required by Section 4.04 of the Senior Note Indenture. Any such
transfer shall be effected at the Investor Services Department of the Company,
as transfer agent (hereinafter referred to as "corporate trust office"). This
bond shall be exchangeable for other registered bonds of the same series, in the
manner and upon the conditions prescribed in the Indenture, upon the surrender
of such bonds at said corporate trust office of the transfer agent. However,
notwithstanding the provisions of Section 2.05 of the Indenture, no charge shall
be made upon any registration of transfer or exchange of bonds of said series
other than for any tax or taxes or other governmental charge required to be paid
by the Company.
As provided in Section 4.11 of the Senior Note Indenture, from
and after the Release Date (as defined in the Senior Note Indenture), the
obligations of the Company with respect to this bond shall be deemed to be
satisfied and discharged, this bond shall cease to secure in any manner any
senior notes outstanding under the Senior Note Indenture, and, pursuant to
Section 4.08 of the Senior Note Indenture, the Senior Note Trustee shall
forthwith deliver this bond to the Company for cancellation.
In case of certain defaults as specified in the Indenture, the
principal of this bond may be declared or may become due and payable on the
conditions, at the time, in the manner and with the effect provided in the
Indenture.
No recourse shall be had for the payment of the principal of
or premium, if any, or interest on this bond, or for any claim based hereon, or
otherwise in respect hereof or of the Indenture, to or against any
6
incorporator, stockholder, director or officer, past, present or future, as
such, of the Company, or of any predecessor or successor company, either
directly or through the Company, or such predecessor or successor company, or
otherwise, under any constitution or statute or rule of law, or by the
enforcement of any assessment or penalty, or otherwise, all such liability of
incorporators, stockholders, directors and officers, as such, being waived and
released by the holder and owner hereof by the acceptance of this bond and being
likewise waived and released by the terms of the Indenture.
--------------------
AND WHEREAS all acts and things necessary to make the 2006
Note Bonds, when duly executed by the Company and authenticated by the Trustee
or its agent and issued as prescribed in the Indenture, as heretofore
supplemented and amended, and this Supplemental Indenture provided, the valid,
binding and legal obligations of the Company, and to constitute the Indenture,
as supplemented and amended as aforesaid, as well as by this Supplemental
Indenture, a valid, binding and legal instrument for the security thereof, have
been done and performed, and the creation, execution and delivery of this
Supplemental Indenture and the creation, execution and issuance of bonds subject
to the terms hereof and of the Indenture, as so supplemented and amended, have
in all respects been duly authorized;
NOW, THEREFORE, in consideration of the premises, of the
acceptance and purchase by the holders thereof of the bonds issued and to be
issued under the Indenture, as supplemented and amended as above set forth, and
of the sum of One Dollar duly paid by the Trustee to the Company, and of other
good and valuable considerations, the receipt whereof is hereby acknowledged,
and for the purpose of securing the due and punctual payment of the principal of
and premium, if any, and interest on all bonds now outstanding under the
Indenture and the $350,000,000 principal amount of the 2006 Note Bonds proposed
to be issued initially and all other bonds which shall be issued under the
Indenture, as supplemented and amended from time to time, and for the purpose of
securing the faithful performance and observance of all covenants and conditions
therein, and in any indenture supplemental thereto, set forth, the Company has
given, granted, bargained, sold, released, transferred, assigned, hypothecated,
pledged, mortgaged, confirmed, set over, warranted, alienated and conveyed and
by these presents does give, grant, bargain, sell, release, transfer, assign,
hypothecate, pledge, mortgage, confirm, set over, warrant, alien and convey unto
The Chase Manhattan Bank, as Trustee, as provided in the Indenture, and its
successor or successors in the trust thereby and hereby created and to its or
their assigns forever, all the right, title and interest of the Company in and
to all the property, described in Section 13 hereof, together (subject to the
provisions of Article X of the Indenture) with the tolls, rents, revenues,
issues, earnings, income, products and profits thereof, excepting, however, the
property, interests and rights specifically excepted from the lien of the
Indenture as set forth in the Indenture.
TOGETHER WITH all and singular the tenements, hereditaments
and appurtenances belonging or in any wise appertaining to the premises,
property, franchises and rights, or any thereof, referred to in the foregoing
granting clause, with the reversion and reversions, remainder and remainders and
(subject to the provisions of Article X of the Indenture) the tolls, rents,
revenues, issues, earnings, income, products and profits thereof, and all the
estate, right, title and interest and claim whatsoever, at law as well as in
equity, which the Company now has or may hereafter acquire in and to the
aforesaid premises, property, franchises and rights and every part and parcel
thereof.
SUBJECT, HOWEVER, with respect to such premises, property,
franchises and rights, to excepted encumbrances as said term is defined in
Section 1.02 of the Indenture, and subject also to all defects and limitations
of title and to all encumbrances existing at the time of acquisition.
TO HAVE AND TO HOLD all said premises, property, franchises
and rights hereby conveyed, assigned, pledged or mortgaged, or intended so to
be, unto the Trustee, its successor or successors in trust and their assigns
forever;
7
BUT IN TRUST, NEVERTHELESS, with power of sale for the equal
and proportionate benefit and security of the holders of all bonds now or
hereafter authenticated and delivered under and secured by the Indenture and
interest coupons appurtenant thereto, pursuant to the provisions of the
Indenture and of any supplemental indenture, and for the enforcement of the
payment of said bonds and coupons when payable and the performance of and
compliance with the covenants and conditions of the Indenture and of any
supplemental indenture, without any preference, distinction or priority as to
lien or otherwise of any bond or bonds over others by reason of the difference
in time of the actual authentication, delivery, issue, sale or negotiation
thereof or for any other reason whatsoever, except as otherwise expressly
provided in the Indenture; and so that each and every bond now or hereafter
authenticated and delivered thereunder shall have the same lien, and so that the
principal of and premium, if any, and interest on every such bond shall, subject
to the terms thereof, be equally and proportionately secured, as if it had been
made, executed, authenticated, delivered, sold and negotiated simultaneously
with the execution and delivery thereof.
AND IT IS EXPRESSLY DECLARED by the Company that all bonds
authenticated and delivered under and secured by the Indenture, as supplemented
and amended as above set forth, are to be issued, authenticated and delivered,
and all said premises, property, franchises and rights hereby and by the
Indenture and indentures supplemental thereto conveyed, assigned, pledged or
mortgaged, or intended so to be, are to be dealt with and disposed of under,
upon and subject to the terms, conditions, stipulations, covenants, agreements,
trusts, uses and purposes expressed in the Indenture, as supplemented and
amended as above set forth, and the parties hereto mutually agree as follows:
SECTION 1. There is hereby created one series of bonds (the
"2006 Note Bonds") designated as hereinabove provided, which shall also bear the
descriptive title "First Mortgage Bond", and the form thereof shall be
substantially as hereinbefore set forth. The 2006 Note Bonds shall be issued in
the aggregate principal amount of $350,000,000, shall mature on September 15,
2006 and shall be issued only as registered bonds without coupons in
denominations of $1,000 and any multiple thereof. The serial numbers of bonds of
the 2006 Note Bonds shall be such as may be approved by any officer of the
Company, the execution thereof by any such officer either manually or by
facsimile signature to be conclusive evidence of such approval. The 2006 Note
Bonds shall bear interest at a rate of 6.25% per annum until the principal
thereof shall have become due and payable, subject to adjustment in accordance
with the 2006 Notes. The principal of and the premium, if any, and the interest
on said bonds shall be payable in any coin or currency of the United States of
America which at the time of payment is legal tender for public and private
debts, at the office or agency of the Company in the City of Jackson, Michigan
designated for that purpose.
Upon any payment by the Company of the principal of and
interest on, all or any portion of the Notes whether at maturity or prior to
maturity by redemption or otherwise or upon provision for the payment thereof
having been made in accordance with Section 5.01(a) of the Senior Note
Indenture, the 2006 Note Bonds in a principal amount equal to the principal
amount of such 2006 Notes and having both a corresponding maturity date and
interest rate shall, to the extent of such payment of principal and interest, be
deemed paid and the obligation of the Company thereunder to make such payment
shall be discharged to such extent and, in the case of the payment of principal
(and premium, if any) such bonds of said series shall be surrendered to the
Company for cancellation as provided in Section 4.08 of the Senior Note
Indenture. The Trustee may at anytime and all times conclusively assume that the
obligation of the Company to make payments with respect to the principal of and
premium, if any, and interest on the 2006 Note Bonds so far as such payments at
the time have become due, has been fully satisfied and discharged pursuant to
the foregoing sentence unless and until the Trustee shall have received a
written notice from the Senior Note Trustee signed by one of its officers
stating (i) that timely payment of or premium or interest on, the 2006 Notes has
not been so made, (ii) that the Company is in arrears as to the payments
required to be made by it to the Senior Note Trustee pursuant to the Senior Note
Indenture, and (iii) the amount of the arrearage.
The 2006 Note Bonds are to be issued to and registered in the
name of The Chase Manhattan Bank, as trustee, or a successor trustee (said
trustee or any successor trustee being hereinafter referred to as the
8
"Senior Note Trustee") under the Indenture, dated as of February 1, 1998
(hereinafter sometimes referred to as the "Senior Note Indenture") between
Consumers Energy Company and the Senior Note Trustee, to secure any and all
obligations of the Company under the Notes and any other series of senior notes
from time to time outstanding under the Senior Note Indenture.
The 2006 Note Bonds shall not be assignable or transferable
except as permitted or required by Section 4.04 of the Senior Note Indenture.
Any such transfer shall be effected at the Investor Services Department of the
Company, as transfer agent (hereinafter referred to as "corporate trust
office"). The 2006 Note Bonds shall be exchangeable for other registered bonds
of the same series, in the manner and upon the conditions prescribed in the
Indenture, upon the surrender of such bonds at said corporate trust office of
the transfer agent. However, notwithstanding the provisions of Section 2.05 of
the Indenture, no charge shall be made upon any registration of transfer or
exchange of bonds of said series other than for any tax or taxes or other
governmental charge required to be paid by the Company.
SECTION 2. The 2006 Notes are subject to redemption described
therein. In the event the 2006 Notes are redeemed as provided therein, upon
redemption thereof, the 2006 Note Bonds shall be deemed to be redeemed on the
respective dates for, in the principal amounts to be redeemed of, and for the
redemption prices for the 2006 Notes.
The 2006 Note Bonds are also redeemable as set forth in
Section 3 hereof.
The 2006 Note Bonds are not redeemable by the operation of the
maintenance and replacement provisions of this Indenture or with the proceeds of
released property.
SECTION 3. Upon the occurrence of an Event of Default under
the Senior Note Indenture and the acceleration of the 2006 Notes, the 2006 Note
Bonds shall be redeemable in whole upon receipt by the Trustee of a written
demand (hereinafter called a "Redemption Demand") from the Senior Note Trustee
stating that there has occurred under the Senior Note Indenture both an Event of
Default and a declaration of acceleration of payment of principal, accrued
interest and premium, if any, on the 2006 Notes, specifying the last date to
which interest on such notes has been paid (such date being hereinafter referred
to as the "Initial Interest Accrual Date") and demanding redemption of the 2006
Note Bonds. The Company waives any right it may have to prior notice of such
redemption under the Indenture. Upon surrender of the 2006 Note Bonds by the
Senior Note Trustee to the Trustee, the 2006 Note Bonds shall be redeemed at a
redemption price equal to the principal amount thereof plus accrued interest
thereon from the Initial Interest Accrual Date to the date of the Redemption
Demand; provided, however, that in the event of a recision of acceleration of
senior notes pursuant to the last paragraph of Section 8.01(a) of the Senior
Note Indenture, then any Redemption Demand shall thereby be deemed to be
rescinded by the Senior Note Trustee; but no such recision or annulment shall
extend to or affect any subsequent default or impair any right consequent
thereon.
SECTION 4. For purposes of Section 4.09 of the Senior Note
Indenture, the 2006 Note Bonds shall be deemed to be the "related series of
Senior Note First Mortgage Bonds" in respect of the 2006 Notes.
SECTION 5. As provided in Section 4.11 of the Senior Note
Indenture, from and after the Release Date (as defined in the Senior Note
Indenture), the obligations of the Company with respect to the 2006 Note Bonds
shall be deemed to be satisfied and discharged, the 2006 Note Bonds shall cease
to secure in any manner any senior notes outstanding under the Senior Note
Indenture, and, pursuant to Section 4.08 of the Senior Note Indenture, the
Senior Note Trustee shall forthwith deliver the 2006 Note Bonds to the Company
for cancellation.
SECTION 6. The Company reserves the right, without any
consent, vote or other action by the holder of the 2006 Note Bonds or the
holders of any Notes, or of any subsequent series of bonds issued
9
under the Indenture, to make such amendments to the Indenture, as supplemented,
as shall be necessary in order to amend Section 17.02 to read as follows:
SECTION 17.02. With the consent of the holders of not
less than a majority in principal amount of the bonds at the
time outstanding or their attorneys-in-fact duly authorized,
or, if fewer than all series are affected, not less than a
majority in principal amount of the bonds at the time
outstanding of each series the rights of the holders of which
are affected, voting together, the Company, when authorized by
a resolution, and the Trustee may from time to time and at any
time enter into an indenture or indentures supplemental hereto
for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of this Indenture
or of any supplemental indenture or modifying the rights and
obligations of the Company and the rights of the holders of
any of the bonds and coupons; provided, however, that no such
supplemental indenture shall (1) extend the maturity of any of
the bonds or reduce the rate or extend the time of payment of
interest thereon, or reduce the amount of the principal
thereof, or reduce any premium payable on the redemption
thereof, without the consent of the holder of each bond so
affected, or (2) permit the creation of any lien, not
otherwise permitted, prior to or on a parity with the lien of
this Indenture, without the consent of the holders of all the
bonds then outstanding, or (3) reduce the aforesaid percentage
of the principal amount of bonds the holders of which are
required to approve any such supplemental indenture, without
the consent of the holders of all the bonds then outstanding.
For the purposes of this Section, bonds shall be deemed to be
affected by a supplemental indenture if such supplemental
indenture adversely affects or diminishes the rights of
holders thereof against the Company or against its property.
The Trustee may in its discretion determine whether or not, in
accordance with the foregoing, bonds of any particular series
would be affected by any supplemental indenture and any such
determination shall be conclusive upon the holders of bonds of
such series and all other series. Subject to the provisions of
Sections 16.02 and 16.03 hereof, the Trustee shall not be
liable for any determination made in good faith in connection
herewith.
Upon the written request of the Company, accompanied
by a resolution authorizing the execution of any such
supplemental indenture, and upon the filing with the Trustee
of evidence of the consent of bondholders as aforesaid (the
instrument or instruments evidencing such consent to be dated
within one year of such request), the Trustee shall join with
the Company in the execution of such supplemental indenture
unless such supplemental indenture affects the Trustee's own
rights, duties or immunities under this Indenture or
otherwise, in which case the Trustee may in its discretion but
shall not be obligated to enter into such supplemental
indenture.
It shall not be necessary for the consent of the
bondholders under this Section to approve the particular form
of any proposed supplemental indenture, but it shall be
sufficient if such consent shall approve the substance
thereof.
The Company and the Trustee, if they so elect, and
either before or after such consent has been obtained, may
require the holder of any bond consenting to the execution of
any such supplemental indenture to submit his
10
bond to the Trustee or to ask such bank, banker or trust
company as may be designated by the Trustee for the purpose,
for the notation thereon of the fact that the holder of such
bond has consented to the execution of such supplemental
indenture, and in such case such notation, in form
satisfactory to the Trustee, shall be made upon all bonds so
submitted, and such bonds bearing such notation shall
forthwith be returned to the persons entitled thereto.
Prior to the execution by the Company and the Trustee
of any supplemental indenture pursuant to the provisions of
this Section, the Company shall publish a notice, setting
forth in general terms the substance of such supplemental
indenture, at least once in one daily newspaper of general
circulation in each city in which the principal of any of the
bonds shall be payable, or, if all bonds outstanding shall be
registered bonds without coupons or coupon bonds registered as
to principal, such notice shall be sufficiently given if
mailed, first class, postage prepaid, and registered if the
Company so elects, to each registered holder of bonds at the
last address of such holder appearing on the registry books,
such publication or mailing, as the case may be, to be made
not less than thirty days prior to such execution. Any failure
of the Company to give such notice, or any defect therein,
shall not, however, in any way impair or affect the validity
of any such supplemental indenture.
SECTION 7. As supplemented and amended as above set forth, the
Indenture is in all respects ratified and confirmed, and the Indenture and all
indentures supplemental thereto shall be read, taken and construed as one and
the same instrument.
SECTION 8. Nothing contained in this Supplemental Indenture
shall, or shall be construed to, confer upon any person other than a holder of
bonds issued under the Indenture, as supplemented and amended as above set
forth, the Company, the Trustee and the Senior Note Trustee, for the benefit of
the holder or holders of the Notes, any right or interest to avail himself of
any benefit under any provision of the Indenture, as so supplemented and
amended.
SECTION 9. The Trustee assumes no responsibility for or in
respect of the validity or sufficiency of this Supplemental Indenture or of the
Indenture as hereby supplemented or the due execution hereof by the Company or
for or in respect of the recitals and statements contained herein (other than
those contained in the sixth and seventh recitals hereof), all of which recitals
and statements are made solely by the Company.
SECTION 10. This Supplemental Indenture may be simultaneously
executed in several counterparts and all such counterparts executed and
delivered, each as an original, shall constitute but one and the same
instrument.
SECTION 11. In the event the date of any notice required or
permitted hereunder or the date of maturity of interest on or principal of the
2006 Note Bonds or the date fixed for redemption or repayment of the 2006 Note
Bonds shall not be a Business Day, then (notwithstanding any other provision of
the Indenture or of any supplemental indenture thereto) such notice or such
payment of such interest or principal need not be made on such date, but may be
made on the next succeeding Business Day with the same force and effect as if
made on the date fixed for such notice or as if made on the date of maturity or
the date fixed for redemption or repayment, and no interest shall accrue for the
period from and after such date. "Business Day" means, with respect to this
Section 11, a day of the year on which banks are not required or authorized to
close in New York City or Detroit, Michigan.
11
SECTION 12. This Supplemental Indenture and the 2006 Note
Bonds shall be governed by and deemed to be a contract under, and construed in
accordance with, the laws of the State of Michigan, and for all purposes shall
be construed in accordance with the laws of such state, except as may otherwise
be required by mandatory provisions of law.
SECTION 13. Detailed Description of Property Mortgaged:
I.
ELECTRIC GENERATING PLANTS AND DAMS
All the electric generating plants and stations of the
Company, constructed or otherwise acquired by it and not heretofore described in
the Indenture or any supplement thereto and not heretofore released from the
lien of the Indenture, including all powerhouses, buildings, reservoirs, dams,
pipelines, flumes, structures and works and the land on which the same are
situated and all water rights and all other lands and easements, rights of way,
permits, privileges, towers, poles, wires, machinery, equipment, appliances,
appurtenances and supplies and all other property, real or personal, forming a
part of or appertaining to or used, occupied or enjoyed in connection with such
plants and stations or any of them, or adjacent thereto.
II.
ELECTRIC TRANSMISSION LINES
All the electric transmission lines of the Company,
constructed or otherwise acquired by it and not heretofore described in the
Indenture or any supplement thereto and not heretofore released from the lien of
the Indenture, including towers, poles, pole lines, wires, switches, switch
racks, switchboards, insulators and other appliances and equipment, and all
other property, real or personal, forming a part of or appertaining to or used,
occupied or enjoyed in connection with such transmission lines or any of them or
adjacent thereto; together with all real property, rights of way, easements,
permits, privileges, franchises and rights for or relating to the construction,
maintenance or operation thereof, through, over, under or upon any private
property or any public streets or highways, within as well as without the
corporate limits of any municipal corporation. Also all the real property,
rights of way, easements, permits, privileges and rights for or relating to the
construction, maintenance or operation of certain transmission lines, the land
and rights for which are owned by the Company, which are either not built or now
being constructed.
III.
ELECTRIC DISTRIBUTION SYSTEMS
All the electric distribution systems of the Company,
constructed or otherwise acquired by it and not heretofore described in the
Indenture or any supplement thereto and not heretofore released from the lien of
the Indenture, including substations, transformers, switchboards, towers, poles,
wires, insulators, subways, trenches, conduits, manholes, cables, meters and
other appliances and equipment, and all other property, real or personal,
forming a part of or appertaining to or used, occupied or enjoyed in connection
with such distribution systems or any of them or adjacent thereto; together with
all real property, rights of way, easements, permits, privileges, franchises,
grants and rights, for or relating to the construction, maintenance or operation
thereof, through, over, under or upon any private property or any public streets
or highways within as well as without the corporate limits of any municipal
corporation.
12
IV.
ELECTRIC SUBSTATIONS,
SWITCHING STATIONS AND SITES
All the substations, switching stations and sites of the
Company, constructed or otherwise acquired by it and not heretofore described in
the Indenture or any supplement thereto and not heretofore released from the
lien of the Indenture, for transforming, regulating, converting or distributing
or otherwise controlling electric current at any of its plants and elsewhere,
together with all buildings, transformers, wires, insulators and other
appliances and equipment, and all other property, real or personal, forming a
part of or appertaining to or used, occupied or enjoyed in connection with any
of such substations and switching stations, or adjacent thereto, with sites to
be used for such purposes.
V.
GAS COMPRESSOR STATIONS, GAS PROCESSING PLANTS,
DESULPHURIZATION STATIONS, METERING STATIONS,
ODORIZING STATIONS, REGULATORS AND SITES
All the compressor stations, processing plants,
desulphurization stations, metering stations, odorizing stations, regulators and
sites of the Company, constructed or otherwise acquired by it and not heretofore
described in the Indenture or any supplement thereto and not heretofore released
from the lien of the Indenture, for compressing, processing, desulphurizing,
metering, odorizing and regulating manufactured or natural gas at any of its
plants and elsewhere, together with all buildings, meters and other appliances
and equipment, and all other property, real or personal, forming a part of or
appertaining to or used, occupied or enjoyed in connection with any of such
purposes, with sites to be used for such purposes.
VI.
GAS STORAGE FIELDS
The natural gas rights and interests of the Company, including
wells and well lines (but not including natural gas, oil and minerals), the gas
gathering system, the underground gas storage rights, the underground gas
storage wells and injection and withdrawal system used in connection therewith,
constructed or otherwise acquired by it and not heretofore described in the
Indenture or any supplement thereto and not heretofore released from the lien of
the Indenture: In the Overisel Gas Storage Field, located in the Township of
Overisel, Allegan County, and in the Township of Zeeland, Ottawa County,
Michigan; in the Northville Gas Storage Field located in the Township of Salem,
Washtenaw County, Township of Lyon, Oakland County, and the Townships of
Northville and Plymouth and City of Plymouth, Wayne County, Michigan; in the
Salem Gas Storage Field, located in the Township of Salem, Allegan County, and
in the Township of Jamestown, Ottawa County, Michigan; in the Ray Gas Storage
Field, located in the Townships of Ray and Armada, Macomb County, Michigan; in
the Lenox Gas Storage Field, located in the Townships of Lenox and Chesterfield,
Macomb County, Michigan; in the Ira Gas Storage Field, located in the Township
of Ira, St. Clair County, Michigan; in the Puttygut Gas Storage Field, located
in the Township of Casco, St. Clair County, Michigan; in the Four Corners Gas
Storage Field, located in the Townships of Casco, China, Cottrellville and Ira,
St. Clair County, Michigan; in the Swan Creek Gas Storage Field, located in the
Township of Casco and Ira, St. Clair County, Michigan; and in the Hessen Gas
Storage Field, located in the Townships of Casco and Columbus, St. Clair,
Michigan.
13
VII.
GAS TRANSMISSION LINES
All the gas transmission lines of the Company, constructed or
otherwise acquired by it and not heretofore described in the Indenture or any
supplement thereto and not heretofore released from the lien of the Indenture,
including gas mains, pipes, pipelines, gates, valves, meters and other
appliances and equipment, and all other property, real or personal, forming a
part of or appertaining to or used, occupied or enjoyed in connection with such
transmission lines or any of them or adjacent thereto; together with all real
property, right of way, easements, permits, privileges, franchises and rights
for or relating to the construction, maintenance or operation thereof, through,
over, under or upon any private property or any public streets or highways,
within as well as without the corporate limits of any municipal corporation.
VIII.
GAS DISTRIBUTION SYSTEMS
All the gas distribution systems of the Company, constructed
or otherwise acquired by it and not heretofore described in the Indenture or any
supplement thereto and not heretofore released from the lien of the Indenture,
including tunnels, conduits, gas mains and pipes, service pipes, fittings,
gates, valves, connections, meters and other appliances and equipment, and all
other property, real or personal, forming a part of or appertaining to or used,
occupied or enjoyed in connection with such distribution systems or any of them
or adjacent thereto; together with all real property, rights of way, easements,
permits, privileges, franchises, grants and rights, for or relating to the
construction, maintenance or operation thereof, through, over, under or upon any
private property or any public streets or highways within as well as without the
corporate limits of any municipal corporation.
IX.
OFFICE BUILDINGS,
SERVICE BUILDINGS, GARAGES, ETC.
All office, garage, service and other buildings of the
Company, wherever located, in the State of Michigan, constructed or otherwise
acquired by it and not heretofore described in the Indenture or any supplement
thereto and not heretofore released from the lien of the Indenture, together
with the land on which the same are situated and all easements, rights of way
and appurtenances to said lands, together with all furniture and fixtures
located in said buildings.
X.
TELEPHONE PROPERTIES AND
RADIO COMMUNICATION EQUIPMENT
All telephone lines, switchboards, systems and equipment of
the Company, constructed or otherwise acquired by it and not heretofore
described in the Indenture or any supplement thereto and not heretofore released
from the line of the Indenture, used or available for use in the operation of
its properties, and all other property, real or personal, forming a part of or
appertaining to or used, occupied or enjoyed in connection with such telephone
properties or any of them or adjacent thereto; together with all real estate,
rights of way, easements, permits, privileges, franchises, property, devices or
rights related to the dispatch, transmission, reception or reproduction of
messages, communications, intelligence, signals, light, vision or
14
sound by electricity, wire or otherwise, including all telephone equipment
installed in buildings used as general and regional offices, substations and
generating stations and all telephone lines erected on towers and poles; and all
radio communication equipment of the Company, together with all property, real
or personal (except any in the Indenture expressly excepted), fixed stations,
towers, auxiliary radio buildings and equipment, and all appurtenances used in
connection therewith, wherever located, in the State of Michigan.
XI.
OTHER REAL PROPERTY
All other real property of the Company and all interests
therein, of every nature and description (except any in the Indenture expressly
excepted) wherever located, in the State of Michigan, acquired by it and not
heretofore described in the Indenture or any supplement thereto and not
heretofore released from the line of the Indenture. Such real property includes
but is not limited to the following described property, such property is subject
to any interests that were excepted or reserved in the conveyance to the
Company:
ALCONA COUNTY
Certain land in Caledonia Township, Alcona County, Michigan
described as:
The East 330 feet of the South 660 feet of the SW 1/4 of the
SW 1/4 of Section 8, T28N, R8E, except the West 264 feet of
the South 330 feet thereof; said land being more particularly
described as follows: To find the place of beginning of this
description, commence at the Southwest corner of said section,
run thence East along the South line of said section 1243 feet
to the place of beginning of this description, thence
continuing East along said South line of said section 66 feet
to the West 1/8 line of said section, thence N 02 degrees 09'
30" E along the said West 1/8 line of said section 660 feet,
thence West 330 feet, thence S 02 degrees 09' 30" W, 330 feet,
thence East 264 feet, thence S 02 degrees 09' 30" W, 330 feet
to the place of beginning.
ALLEGAN COUNTY
Certain land in Lee Township, Allegan County, Michigan
described as:
The NE 1/4 of the NW 1/4 of Section 16, T1N, R15W.
ALPENA COUNTY
Certain land in Wilson and Green Townships, Alpena County,
Michigan described as:
All that part of the S'ly 1/2 of the former Boyne City-Gaylord
and Alpena Railroad right of way, being the Southerly 50 feet
of a 100 foot strip of land formerly occupied by said
Railroad, running from the East line of Section 31, T31N, R7E,
Southwesterly across said Section 31 and Sections 5 and 6 of
T30N, R7E and Sections 10, 11 and the E 1/2 of Section 9,
except the West 1646 feet thereof, all in T30N, R6E.
15
ANTRIM COUNTY
Certain land in Mancelona Township, Antrim County, Michigan
described as:
The S 1/2 of the NE 1/4 of Section 33, T29N, R6W, excepting
therefrom all mineral, coal, oil and gas and such other rights
as were reserved unto the State of Michigan in that certain
deed running from the State of Michigan to August W. Schack
and Emma H. Schack, his wife, dated April 15, 1946 and
recorded May 20, 1946 in Liber 97 of Deeds on page 682 of
Antrim County Records.
ARENAC COUNTY
Certain land in Standish Township, Arenac County, Michigan
described as:
A parcel of land in the SW 1/4 of the NW 1/4 of Section 12,
T18N, R4E, described as follows: To find the place of
beginning of said parcel of land, commence at the Northwest
corner of Section 12, T18N, R4E; run thence South along the
West line of said section, said West line of said section
being also the center line of East City Limits Road 2642.15
feet to the W 1/4 post of said section and the place of
beginning of said parcel of land; running thence N 88 degrees
26' 00" E along the East and West 1/4 line of said section,
660.0 feet; thence North parallel with the West line of said
section, 310.0 feet; thence S 88 degrees 26' 00" W, 330.0
feet; thence South parallel with the West line of said
section, 260.0 feet; thence S 88 degrees 26' 00" W, 330.0 feet
to the West line of said section and the center line of East
City Limits Road; thence South along the said West line of
said section, 50.0 feet to the place of beginning.
BARRY COUNTY
Certain land in Johnstown Township, Barry County, Michigan
described as:
A strip of land 311 feet in width across the SW 1/4 of the NE
1/4 of Section 31, T1N, R8W, described as follows: To find the
place of beginning of this description, commence at the E 1/4
post of said section; run thence N 00 degrees 55' 00" E along
the East line of said section, 555.84 feet; thence N 59
degrees 36' 20" W, 1375.64 feet; thence N 88 degrees 30' 00"
W, 130 feet to a point on the East 1/8 line of said section
and the place of beginning of this description; thence
continuing N 88 degrees 30' 00" W, 1327.46 feet to the North
and South 1/4 line of said section; thence S 00 degrees 39'
35" W along said North and South 1/4 line of said section,
311.03 feet to a point, which said point is 952.72 feet
distant N'ly from the East and West 1/4 line of said section
as measured along said North and South 1/4 line of said
section; thence S 88 degrees 30' 00" E, 1326.76 feet to the
East 1/8 line of said section; thence N 00 degrees 47' 20" E
along said East 1/8 line of said section, 311.02 feet to the
place of beginning.
16
BAY COUNTY
Certain land in Frankenlust Township, Bay County, Michigan
described as:
The South 250 feet of the N 1/2 of the W 1/2 of the W 1/2 of
the SE 1/4 of Section 9, T13N, R4E.
BENZIE COUNTY
Certain land in Benzonia Township, Benzie County, Michigan
described as:
A parcel of land in the Northeast 1/4 of Section 7, Township
26 North, Range 14 West, described as beginning at a point on
the East line of said Section 7, said point being 320 feet
North measured along the East line of said section from the
East 1/4 post; running thence West 165 feet; thence North
parallel with the East line of said section 165 feet; thence
East 165 feet to the East line of said section; thence South
165 feet to the place of beginning.
BRANCH COUNTY
Certain land in Girard Township, Branch County, Michigan
described as:
A parcel of land in the NE 1/4 of Section 23 T5S, R6W,
described as beginning at a point on the North and South
quarter line of said section at a point 1278.27 feet distant
South of the North quarter post of said section, said distance
being measured along the North and South quarter line of said
section, running thence S89 degrees 21'E 250 feet, thence
North along a line parallel with the said North and South
quarter line of said section 200 feet, thence N89 degrees 21'W
250 feet to the North and South quarter line of said section,
thence South along said North and South quarter line of said
section 200 feet to the place of beginning.
CALHOUN COUNTY
Certain land in Convis Township, Calhoun County, Michigan
described as:
A parcel of land in the SE 1/4 of the SE 1/4 of Section 32,
T1S, R6W, described as follows: To find the place of beginning
of this description, commence at the Southeast corner of said
section; run thence North along the East line of said section
1034.32 feet to the place of beginning of this description;
running thence N 89 degrees 39' 52" W, 333.0 feet; thence
North 290.0 feet to the South 1/8 line of said section; thence
S 89 degrees 39' 52" E along said South 1/8 line of said
section 333.0 feet to the East line of said section; thence
South along said East line of said section 290.0 feet to the
place of beginning. (Bearings are based on the East line of
Section 32, T1S, R6W, from the Southeast corner of said
section to the Northeast corner of said section assumed as
North.)
17
CASS COUNTY
Certain easement rights located across land in Marcellus
Township, Cass County, Michigan described as:
The East 6 rods of the SW 1/4 of the SE 1/4 of Section 4, T5S,
R13W.
CHARLEVOIX COUNTY
Certain land in South Arm Township, Charlevoix County,
Michigan described as:
A parcel of land in the SW 1/4 of Section 29, T32N, R7W,
described as follows: Beginning at the Southwest corner of
said section and running thence North along the West line of
said section 788.25 feet to a point which is 528 feet distant
South of the South 1/8 line of said section as measured along
the said West line of said section; thence N 89 degrees 30'
19" E, parallel with said South 1/8 line of said section 442.1
feet; thence South 788.15 feet to the South line of said
section; thence S 89 degrees 29' 30" W, along said South line
of said section 442.1 feet to the place of beginning.
CHEBOYGAN COUNTY
Certain land in Inverness Township, Cheboygan County, Michigan
described as:
A parcel of land in the SW frl 1/4 of Section 31, T37N, R2W,
described as beginning at the Northwest corner of the SW frl
1/4, running thence East on the East and West quarter line of
said Section, 40 rods, thence South parallel to the West line
of said Section 40 rods, thence West 40 rods to the West line
of said Section, thence North 40 rods to the place of
beginning.
CLARE COUNTY
Certain land in Frost Township, Clare County, Michigan
described as:
The East 150 feet of the North 225 feet of the NW 1/4 of the
NW 1/4 of Section 15, T20N, R4W.
CLINTON COUNTY
Certain land in Watertown Township, Clinton County, Michigan
described as:
The NE 1/4 of the NE 1/4 of the SE 1/4 of Section 22, and the
North 165 feet of the NW 1/4 of the NE 1/4 of the SE 1/4 of
Section 22, T5N, R3W.
CRAWFORD COUNTY
Certain land in Lovells Township, Crawford County, Michigan
described as:
A parcel of land in Section 1, T28N, R1W, described as:
Commencing at NW corner said section; thence South 89 degrees
53'30" East along North section line 105.78 feet to point of
beginning; thence South 89 degrees 53'30" East along North
section line 649.64 feet; thence South 55 degrees 42'30" East
340.24 feet; thence South 55 degrees 44'37" East 5,061.81 feet
to the East section line; thence
18
South 00 degrees 00'08" West along East section line 441.59
feet; thence North 55 degrees 44'37" West 5,310.48 feet;
thence North 55 degrees 42'30" West 877.76 feet to point of
beginning.
EATON COUNTY
Certain land in Eaton Township, Eaton County, Michigan
described as:
A parcel of land in the SW 1/4 of Section 6, T2N, R4W,
described as follows: To find the place of beginning of this
description commence at the Southwest corner of said section;
run thence N 89 degrees 51' 30" E along the South line of said
section 400 feet to the place of beginning of this
description; thence continuing N 89 degrees 51' 30" E, 500
feet; thence N 00 degrees 50' 00" W, 600 feet; thence S 89
degrees 51' 30" W parallel with the South line of said section
500 feet; thence S 00 degrees 50' 00" E, 600 feet to the place
of beginning.
EMMET COUNTY
Certain land in Wawatam Township, Emmet County, Michigan
described as:
The West 1/2 of the Northeast 1/4 of the Northeast 1/4 of
Section 23, T39N, R4W.
GENESEE COUNTY
Certain land in Argentine Township, Genesee County, Michigan
described as:
A parcel of land of part of the SW 1/4 of Section 8, T5N, R5E,
being more particularly described as follows:
Beginning at a point of the West line of Duffield Road, 100
feet wide, (as now established) distant 829.46 feet measured
N01 degrees 42'56"W and 50 feet measured S88 degrees 14'04"W
from the South quarter corner, Section 8, T5N, R5E; thence S88
degrees 14'04"W a distance of 550 feet; thence N01 degrees
42'56"W a distance of 500 feet to a point on the North line of
the South half of the Southwest quarter of said Section 8;
thence N88 degrees 14'04"E along the North line of South half
of the Southwest quarter of said Section 8 a distance 550 feet
to a point on the West line of Duffield Road, 100 feet wide
(as now established); thence S01 degrees 42'56"E along the
West line of said Duffield Road a distance of 500 feet to the
point of beginning.
GLADWIN COUNTY
Certain land in Secord Township, Gladwin County, Michigan
described as:
The East 400 feet of the South 450 feet of Section 2, T19N,
R1E.
19
GRAND TRAVERSE COUNTY
Certain land in Mayfield Township, Grand Traverse County,
Michigan described as:
A parcel of land in the Northwest 1/4 of Section 3, T25N,
R11W, described as follows: Commencing at the Northwest corner
of said section, running thence S 89 degrees 19'15" E along
the North line of said section and the center line of Clouss
Road 225 feet, thence South 400 feet, thence N 89 degrees
19'15" W 225 feet to the West line of said section and the
center line of Hannah Road, thence North along the West line
of said section and the center line of Hannah Road 400 feet to
the place of beginning for this description.
GRATIOT COUNTY
Certain land in Washington Township, Gratiot County, Michigan
described as:
Commencing at the Northeast corner of Section 10, T9N, R2W,
running thence West along the North line of said section a
distance of 194.5 feet, thence S0 degrees 07'10"W 200 feet to
a point, thence East 194.5 feet to the East line of said
Section 10, thence N0 degrees 07'10"E along the East line of
said section a distance of 200 feet to the point of beginning.
HILLSDALE COUNTY
Certain land in Litchfield Village, Hillsdale County, Michigan
described as:
Lots numbered three (3) and four (4) of Block three (3) of
Harvey Smiths Southern Addition to the Village of Litchfield
according to the recorded plat thereof as recorded in Liber AK
of deeds, page 490.
HURON COUNTY
Certain easement rights located across land in Sebewaing
Township, Huron County, Michigan described as:
The North 1/2 of the Northwest 1/4 of Section 15, T15N, R9E.
INGHAM COUNTY
Certain land in Vevay Township, Ingham County, Michigan
described as:
A parcel of land 660 feet wide in the Southwest 1/4 of Section
7 lying South of the centerline of Sitts Road as extended to
the North-South 1/4 line of said Section 7, T2N, R1W, more
particularly described as follows: Commence at the Southwest
corner of said Section 7, thence North along the West line of
said Section 2502.71 feet to the centerline of Sitts Road;
thence South 89 degrees 54'45" East along said centerline
2282.38 feet to the place of beginning of this description;
thence continuing South 89 degrees 54'45" East along said
centerline and said centerline extended 660.00 feet to the
North-South 1/4 line of said section; thence South 00 degrees
07'20" West 1461.71 feet; thence North 89 degrees 34'58" West
660.00 feet; thence North 00 degrees 07'20" East 1457.91 feet
to the centerline of Sitts Road and the place of beginning.
20
IONIA COUNTY
Certain land in Sebewa Township, Ionia County, Michigan
described as:
A strip of land 280 feet wide across that part of the SW 1/4
of the NE 1/4 of Section 15, T5N, R6W, described as follows:
To find the place of beginning of this description commence at
the E 1/4 corner of said section; run thence N 00 degrees 05'
38" W along the East line of said section, 1218.43 feet;
thence S 67 degrees 18' 24" W, 1424.45 feet to the East 1/8
line of said section and the place of beginning of this
description; thence continuing S 67 degrees 18' 24" W, 1426.28
feet to the North and South 1/4 line of said section at a
point which said point is 105.82 feet distant N'ly of the
center of said section as measured along said North and South
1/4 line of said section; thence N 00 degrees 04' 47" E along
said North and South 1/4 line of said section, 303.67 feet;
thence N 67 degrees 18' 24" E, 1425.78 feet to the East 1/8
line of said section; thence S 00 degrees 00' 26" E along said
East 1/8 line of said section, 303.48 feet to the place of
beginning. (Bearings are based on the East line of Section 15,
T5N, R6W, from the E 1/4 corner of said section to the
Northeast corner of said section assumed as N 00 degrees 05'
38" W.)
IOSCO COUNTY
Certain land in Alabaster Township, Iosco County, Michigan
described as:
A parcel of land in the NW 1/4 of Section 34, T21N, R7E,
described as follows: To find the place of beginning of this
description commence at the N 1/4 post of said section; run
thence South along the North and South 1/4 line of said
section, 1354.40 feet to the place of beginning of this
description; thence continuing South along the said North and
South 1/4 line of said section, 165.00 feet to a point on the
said North and South 1/4 line of said section which said point
is 1089.00 feet distant North of the center of said section;
thence West 440.00 feet; thence North 165.00 feet; thence East
440.00 feet to the said North and South 1/4 line of said
section and the place of beginning.
ISABELLA COUNTY
Certain land in Chippewa Township, Isabella County, Michigan
described as:
The North 8 rods of the NE 1/4 of the SE 1/4 of Section 29,
T14N, R3W.
JACKSON COUNTY
Certain land in Waterloo Township, Jackson County, Michigan
described as:
A parcel of land in the North fractional part of the N
fractional 1/2 of Section 2, T1S, R2E, described as follows:
To find the place of beginning of this description commence at
the E 1/4 post of said section; run thence N 01 degrees 03'
40" E along the East line of said section 13335.45 feet to the
North 1/8 line of said section and the place of beginning of
this description; thence N 89 degrees 32' 00" W, 2677.7 feet
to the North and South 1/4 line of said
21
section; thence S 00E 59' 25" W along the North and South 1/4
line of said section 22.38 feet to the North 1/8 line of said
section; thence S 89E 59' 10" W along the North 1/8 line of
said section 2339.4 feet to the center line of State Trunkline
Highway M-52; thence N 53 degrees 46' 00" W along the center
line of said State Trunkline Highway 414.22 feet to the West
line of said section; thence N 00 degrees 55' 10" E along the
West line of said section 74.35 feet; thence S 89 degrees 32'
00" E, 5356.02 feet to the East line of said section; thence S
01 degrees 03' 40" W along the East line of said section 250
feet to the place of beginning.
KALAMAZOO COUNTY
Certain land in Alamo Township, Kalamazoo County, Michigan
described as:
The South 350 feet of the NW 1/4 of the NW 1/4 of Section 16,
T1S, R12W, being more particularly described as follows: To
find the place of beginning of this description, commence at
the Northwest corner of said section; run thence S 00 degrees
36' 55" W along the West line of said section 971.02 feet to
the place of beginning of this description; thence continuing
S 00 degrees 36' 55" W along said West line of said section
350.18 feet to the North 1/8 line of said section; thence S 87
degrees 33' 40" E along the said North 1/8 line of said
section 1325.1 feet to the West 1/8 line of said section;
thence N 00 degrees 38' 25" E along the said West 1/8 line of
said section 350.17 feet; thence N 87 degrees 33' 40" W,
1325.25 feet to the place of beginning.
KALKASKA COUNTY
Certain land in Kalkaska Township, Kalkaska County, Michigan
described as:
The NW 1/4 of the SW 1/4 of Section 4, T27N, R7W, excepting
therefrom all mineral, coal, oil and gas and such other rights
as were reserved unto the State of Michigan in that certain
deed running from the Department of Conservation for the State
of Michigan to George Welker and Mary Welker, his wife, dated
October 9, 1934 and recorded December 28, 1934 in Liber 39 on
page 291 of Kalkaska County Records, and subject to easement
for pipeline purposes as granted to Michigan Consolidated Gas
Company by first party herein on April 4, 1963 and recorded
June 21, 1963 in Liber 91 on page 631 of Kalkaska County
Records.
KENT COUNTY
Certain land in Caledonia Township, Kent County, Michigan
described as:
A parcel of land in the Northwest fractional 1/4 of Section
15, T5N, R10W, described as follows: To find the place of
beginning of this description commence at the North 1/4 corner
of said section, run thence S 0 degrees 59' 26" E along the
North and South 1/4 line of said section 2046.25 feet to the
place of beginning of this description, thence continuing S 0
degrees 59' 26" E along said North and South 1/4 line of said
section 332.88 feet, thence S 88 degrees 58' 30" W 2510.90
feet to a point herein designated "Point A" on the East bank
of the Thornapple River, thence continuing S 88 degrees 53'
30" W to the center thread of the Thornapple River, thence
NW'ly along the center thread of said
22
Thornapple River to a point which said point is S 88 degrees
58' 30" W of a point on the East bank of the Thornapple River
herein designated "Point B", said "Point B" being N 23 degrees
41' 35" W 360.75 feet from said above-described "Point A",
thence N 88 degrees 58' 30" E to said "Point B", thence
continuing N 88 degrees 58' 30" E 2650.13 feet to the place of
beginning. (Bearings are based on the East line of Section 15,
T5N, R10W between the East 1/4 corner of said section and the
Northeast corner of said section assumed as N 0 degrees 59'
55" W.)
LAKE COUNTY
Certain land in Pinora and Cherry Valley Townships, Lake
County, Michigan described as:
A strip of land 50 feet wide East and West along and adjoining
the West line of highway on the East side of the North 1/2 of
Section 13 T18N, R12W. Also a strip of land 100 feet wide East
and West along and adjoining the East line of the highway on
the West side of following described land: The South 1/2 of NW
1/4, and the South 1/2 of the NW 1/4 of the SW 1/4, all in
Section 6, T18N, R11W.
LAPEER COUNTY
Certain land in Hadley Township, Lapeer County, Michigan
described as:
The South 825 feet of the W 1/2 of the SW 1/4 of Section 24,
T6N, R9E, except the West 1064 feet thereof.
LEELANAU COUNTY
Certain land in Cleveland Township, Leelanau County, Michigan
described as:
The North 200 feet of the West 180 feet of the SW 1/4 of the
SE 1/4 of Section 35, T29N, R13W.
LENAWEE COUNTY
Certain land in Madison Township, Lenawee County, Michigan
described as:
A strip of land 165 feet wide off the West side of the
following described premises: The E 1/2 of the SE 1/4 of
Section 12. The E 1/2 of the NE 1/4 and the NE 1/4 of the SE
1/4 of Section 13, being all in T7S, R3E, excepting therefrom
a parcel of land in the E 1/2 of the SE 1/4 of Section 12,
T7S, R3E, beginning at the Northwest corner of said E 1/2 of
the SE 1/4 of Section 12, running thence East 4 rods, thence
South 6 rods, thence West 4 rods, thence North 6 rods to the
place of beginning.
23
LIVINGSTON COUNTY
Certain land in Cohoctah Township, Livingston County, Michigan
described as:
Parcel 1
The East 390 feet of the East 50 rods of the SW 1/4 of Section
30, T4N, R4E.
Parcel 2
A parcel of land in the NW 1/4 of Section 31, T4N, R4E,
described as follows: To find the place of beginning of this
description commence at the N 1/4 post of said section; run
thence N 89 degrees 13' 06" W along the North line of said
section, 330 feet to the place of beginning of this
description; running thence S 00 degrees 52' 49" W, 2167.87
feet; thence N 88 degrees 59' 49" W, 60 feet; thence N 00
degrees 52' 49" E, 2167.66 feet to the North line of said
section; thence S 89 degrees 13' 06" E along said North line
of said section, 60 feet to the place of beginning.
MACKINAC COUNTY
Certain easement rights located across land in Moran Township,
Mackinac County, Michigan described as:
A 20 foot wide strip of land, 10 feet on each side of the
hereinafter described center line, through Lots 16, 17 and 21,
Block 12 of Partition Plat of Private Claim No. 1, Section 23,
Township 40 North, Range 4 West: Said center line being
described as beginning at Edison Sault Electric Company's
existing 35 foot service pole located 200 feet, more or less,
Northerly of the shoreline of the Straits of Mackinac, running
thence Easterly to a point approximately 20 feet Westerly of
the center line of Lakehead Pipeline Company's existing 20
inch pipeline, thence Northerly and Easterly along and
approximately 20 feet Westerly and Northerly of the center
line of said 20 inch existing pipeline to a certain Michigan
Bell Telephone Company's existing pole located Easterly of the
Westerly line of Lot 22, Block 12 of Partition Plat of Private
Claim No. 1 in said Section 23.
MACOMB COUNTY
Certain land in Macomb Township, Macomb County, Michigan
described as:
A parcel of land commencing on the West line of the E 1/2 of
the NW 1/4 of fractional Section 6, 20 chains South of the NW
corner of said E 1/2 of the NW 1/4 of Section 6; thence South
on said West line and the East line of A. Henry Kotner's Hayes
Road Subdivision #15, according to the recorded plat thereof,
as recorded in Liber 24 of Plats, on page 7, 24.36 chains to
the East and West 1/4 line of said Section 6; thence East on
said East and West 1/4 line 8.93 chains; thence North parallel
with the said West line of the E 1/2 of the NW 1/4 of Section
6, 24.36 chains; thence West 8.93 chains to the place of
beginning, all in T3N, R13E.
24
MANISTEE COUNTY
Certain land in Manistee Township, Manistee County, Michigan
described as:
A parcel of land in the SW 1/4 of Section 20, T22N, R16W,
described as follows: To find the place of beginning of this
description, commence at the Southwest corner of said section;
run thence East along the South line of said section 832.2
feet to the place of beginning of this description; thence
continuing East along said South line of said section 132
feet; thence North 198 feet; thence West 132 feet; thence
South 198 feet to the place of beginning, excepting therefrom
the South 2 rods thereof which was conveyed to Manistee
Township for highway purposes by a Quitclaim Deed dated June
13, 1919 and recorded July 11, 1919 in Liber 88 of Deeds on
page 638 of Manistee County Records.
MASON COUNTY
Certain land in Riverton Township, Mason County, Michigan
described as:
Parcel 1
The South 10 acres of the West 20 acres of the S 1/2 of the NE
1/4 of Section 22, T17N, R17W.
Parcel 2
A parcel of land containing 4 acres of the West side of
highway, said parcel of land being described as commencing 16
rods South of the Northwest corner of the NW 1/4 of the SW 1/4
of Section 22, T17N, R17W, running thence South 64 rods,
thence NE'ly and N'ly and NW'ly along the W'ly line of said
highway to the place of beginning, together with any and all
right, title, and interest of Howard C. Wicklund and Katherine
E. Wicklund in and to that portion of the hereinbefore
mentioned highway lying adjacent to the E'ly line of said
above described land.
MECOSTA COUNTY
Certain land in Wheatland Township, Mecosta County, Michigan
described as:
A parcel of land in the SW 1/4 of the SW 1/4 of Section 16,
T14N, R7W, described as beginning at the Southwest corner of
said section; thence East along the South line of Section 133
feet; thence North parallel to the West section line 133 feet;
thence West 133 feet to the West line of said Section; thence
South 133 feet to the place of beginning.
MIDLAND COUNTY
Certain land in Ingersoll Township, Midland County, Michigan
described as:
The West 200 feet of the W 1/2 of the NE 1/4 of Section 4,
T13N, R2E.
25
MISSAUKEE COUNTY
Certain land in Norwich Township, Missaukee County, Michigan
described as:
A parcel of land in the NW 1/4 of the NW 1/4 of Section 16,
T24N, R6W, described as follows: Commencing at the Northwest
corner of said section, running thence N 89 degrees 01' 45" E
along the North line of said section 233.00 feet; thence South
233.00 feet; thence S 89 degrees 01' 45" W, 233.00 feet to the
West line of said section; thence North along said West line
of said section 233.00 feet to the place of beginning.
(Bearings are based on the West line of Section 16, T24N, R6W,
between the Southwest and Northwest corners of said section
assumed as North.)
MONROE COUNTY
Certain land in LaSalle Township, Monroe County, Michigan
described as:
A strip of land 150 feet in width across part of the S 1/2 of
the SE 1/4 of Section 35, T7S, R8E, described as follows: To
find the place of beginning of this description commence at
the S 1/4 post of said section; run thence N 89 degrees 30'
20" E along the South line of said section 2118.39 feet to the
place of beginning of this description; thence continuing N 89
degrees 30' 20" E along said South line of said section 198.56
feet to the NW'ly right-of-way line of Highway I-75, so
called; thence N 40 degrees 26' 30" E along the NW'ly line of
said highway 477.72 feet to the East line of said section;
thence N 00 degrees 25' 15" W along the East line of said
section 229.27 feet; thence S 40 degrees 26' 30" W, 781.21
feet to the place of beginning.
MONTCALM COUNTY
Certain land in Crystal Township, Montcalm County, Michigan
described as:
The N 1/2 of the S 1/2 of the SE 1/4 of Section 35, T10N, R5W.
MONTMORENCY COUNTY
Certain land in the Village of Hillman, Montmorency County,
Michigan described as:
Lot 14 of Hillman Industrial Park, being a subdivision in the
South 1/2 of the Northwest 1/4 of Section 24, T31N, R4E,
according to the plat thereof recorded in Liber 4 of Plats on
Pages 32-34, Montmorency County Records.
MUSKEGON COUNTY
Certain land in Casnovia Township, Muskegon County, Michigan
described as:
The West 433 feet of the North 180 feet of the South 425 feet
of the SW 1/4 of Section 3, T10N, R13W.
26
NEWAYGO COUNTY
Certain land in Ashland Township, Newaygo County, Michigan
described as:
The West 250 feet of the NE 1/4 of Section 23, T11N, R13W.
OAKLAND COUNTY
Certain land in Wixcom City, Oakland County, Michigan
described as:
The E 75 feet of the N 160 feet of the N 330 feet of the W
526.84 feet of the NW 1/4 of the NW 1/4 of Section 8, T1N,
R8E, more particularly described as follows: Commence at the
NW corner of said Section 8, thence N 87 degrees 14' 29" E
along the North line of said Section 8 a distance of 451.84
feet to the place of beginning for this description; thence
continuing N 87 degrees 14' 29" E along said North section
line a distance of 75.0 feet to the East line of the West
526.84 feet of the NW 1/4 of the NW 1/4 of said Section 8;
thence S 02 degrees 37' 09" E along said East line a distance
of 160.0 feet; thence S 87 degrees 14' 29" W a distance of
75.0 feet; thence N 02 degrees 37' 09" W a distance of 160.0
feet to the place of beginning.
OCEANA COUNTY
Certain land in Crystal Township, Oceana County, Michigan
described as:
The East 290 feet of the SE 1/4 of the NW 1/4 and the East 290
feet of the NE 1/4 of the SW 1/4, all in Section 20, T16N,
R16W.
OGEMAW COUNTY
Certain land in West Branch Township, Ogemaw County, Michigan
described as:
The South 660 feet of the East 660 feet of the NE 1/4 of the
NE 1/4 of Section 33, T22N, R2E.
OSCEOLA COUNTY
Certain land in Hersey Township, Osceola County, Michigan
described as:
A parcel of land in the North 1/2 of the Northeast 1/4 of
Section 13, T17N, R9W, described as commencing at the
Northeast corner of said Section; thence West along the North
Section line 999 feet to the point of beginning of this
description; thence S 01 degrees 54' 20" degrees 1327.12 feet
to the North 1/8 line; thence S 89 degrees 17' 05" W along the
North 1/8 line 330.89 feet; thence N 01 degrees 54' 20" W
1331.26 feet to the North Section line; thence East along the
North Section line 331 feet to the point of beginning.
OSCODA COUNTY
Certain land in Comins Township, Oscoda County, Michigan
described as:
The East 400 feet of the South 580 feet of the W 1/2 of the SW
1/4 of Section 15, T27N, R3E.
27
OTSEGO COUNTY
Certain land in Corwith Township, Otsego County, Michigan
described as:
Part of the NW 1/4 of the NE 1/4 of Section 28, T32N, R3W,
described as: Beginning at the N 1/4 corner of said section;
running thence S 89 degrees 04' 06" E along the North line of
said section, 330.00 feet; thence S 00 degrees 28' 43" E,
400.00 feet; thence N 89 degrees 04' 06" W, 330.00 feet to the
North and South 1/4 line of said section; thence N 00 degrees
28' 43" W along the said North and South 1/4 line of said
section, 400.00 feet to the point of beginning; subject to the
use of the N'ly 33.00 feet thereof for highway purposes.
OTTAWA COUNTY
Certain land in Robinson Township, Ottawa County, Michigan
described as:
The North 660 feet of the West 660 feet of the NE 1/4 of the
NW 1/4 of Section 26, T7N, R15W.
PRESQUE ISLE COUNTY
Certain land in Belknap and Pulawski Townships, Presque Isle
County, Michigan described as:
Part of the South half of the Northeast quarter, Section 24,
T34N, R5E, and part of the Northwest quarter, Section 19,
T34N, R6E, more fully described as: Commencing at the East 1/4
corner of said Section 24; thence N 00 degrees 15'47" E,
507.42 feet, along the East line of said Section 24 to the
point of beginning; thence S 88 degrees 15'36" W, 400.00 feet,
parallel with the North 1/8 line of said Section 24; thence N
00 degrees 15'47" E, 800.00 feet, parallel with said East line
of Section 24; thence N 88 degrees 15'36"E, 800.00 feet, along
said North 1/8 line of Section 24 and said line extended;
thence S 00 degrees 15'47" W, 800.00 feet, parallel with said
East line of Section 24; thence S 88 degrees 15'36" W, 400.00
feet, parallel with said North 1/8 line of Section 24 to the
point of beginning.
Together with a 33 foot easement along the West 33 feet of the
Northwest quarter lying North of the North 1/8 line of Section
24, Belknap Township, extended, in Section 19, T34N, R6E.
ROSCOMMON COUNTY
Certain land in Backus Township, Roscommon County, Michigan
described as:
A parcel of land the NW 1/4 of the NE 1/4 of the NE 1/4 of
Section 18, T22N, R2W described as commencing at the North
quarter corner thereof; thence North 89 degrees 00'56" East
along the North Section line 208 feet to the point of
beginning; thence continue East along the North line of said
Section 245 feet; thence South 00 degrees 59'03" East 233
feet; thence South 89 degrees 00'57" West 245 feet; thence
North 00 degrees 59'03" West 233 feet to the point of
beginning.
28
SAGINAW COUNTY
Certain land in Chapin Township, Saginaw County, Michigan
described as:
A parcel of land in the SW 1/4 of Section 13, T9N, R1E,
described as follows: To find the place of beginning of this
description commence at the Southwest corner of said section;
run thence North along the West line of said section 1581.4
feet to the place of beginning of this description; thence
continuing North along said West line of said section 230 feet
to the center line of a creek; thence S 70 degrees 07' 00" E
along said center line of said creek 196.78 feet; thence South
163.13 feet; thence West 185 feet to the West line of said
section and the place of beginning.
SANILAC COUNTY
Certain easement rights located across land in Minden
Township, Sanilac County, Michigan described as:
The Southeast 1/4 of the Southeast 1/4 of Section 1, T14N,
R14E, excepting therefrom the South 83 feet of the East 83
feet thereof.
SHIAWASSEE COUNTY
Certain land in Burns Township, Shiawassee County, Michigan
described as:
The South 330 feet of the E 1/2 of the NE 1/4 of Section 36,
T5N, R4E.
ST. CLAIR COUNTY
Certain land in Ira Township, St. Clair County, Michigan
described as:
The N 1/2 of the NW 1/4 of the NE 1/4 of Section 6, T3N, R15E.
ST. JOSEPH COUNTY
Certain land in Mendon Township, St. Joseph County, Michigan
described as:
The North 660 feet of the West 660 feet of the NW 1/4 of SW
1/4, Section 35, T5S, R10W.
TUSCOLA COUNTY
Certain land in Millington Township, Tuscola County, Michigan
described as:
A strip of land 280 feet wide across the East 96 rods of the
South 20 rods of the N 1/2 of the SE 1/4 of Section 34, T10N,
R8E, more particularly described as commencing at the
Northeast corner of Section 3, T9N, R8E, thence S 89 degrees
55' 35" W along the South line of said Section 34 a distance
of 329.65 feet, thence N 18 degrees 11' 50" W a distance of
1398.67 feet to the South 1/8 line of said Section 34 and the
place of beginning for this description; thence continuing N
18 degrees 11' 50" W a distance of 349.91 feet; thence N 89
degrees 57' 01" W a distance of 294.80 feet; thence S 18
degrees 11' 50" E a
29
distance of 350.04 feet to the South 1/8 line of said Section
34; thence S 89 degrees 58' 29" E along the South 1/8 line of
said section a distance of 294.76 feet to the place of
beginning.
VAN BUREN COUNTY
Certain land in Covert Township, Van Buren County, Michigan
described as:
All that part of the West 20 acres of the N 1/2 of the NE
fractional 1/4 of Section 1, T2S, R17W, except the West 17
rods of the North 80 rods, being more particularly described
as follows: To find the place of beginning of this description
commence at the N 1/4 post of said section; run thence N 89
degrees 29' 20" E along the North line of said section 280.5
feet to the place of beginning of this description; thence
continuing N 89 degrees 29' 20" E along said North line of
said section 288.29 feet; thence S 00 degrees 44' 00" E,
1531.92 feet; thence S 89 degrees 33' 30" W, 568.79 feet to
the North and South 1/4 line of said section; thence N 00
degrees 44' 00" W along said North and South 1/4 line of said
section 211.4 feet; thence N 89 degrees 29' 20" E, 280.5 feet;
thence N 00 degrees 44' 00" W, 1320 feet to the North line of
said section and the place of beginning.
WASHTENAW COUNTY
Certain land in Manchester Township, Washtenaw County,
Michigan described as:
A parcel of land in the NE 1/4 of the NW 1/4 of Section 1,
T4S, R3E, described as follows: To find the place of beginning
of this description commence at the Northwest corner of said
section; run thence East along the North line of said section
1355.07 feet to the West 1/8 line of said section; thence S 00
degrees 22' 20" E along said West 1/8 line of said section
927.66 feet to the place of beginning of this description;
thence continuing S 00 degrees 22' 20" E along said West 1/8
line of said section 660 feet to the North 1/8 line of said
section; thence N 86 degrees 36' 57" E along said North 1/8
line of said section 660.91 feet; thence N 00 degrees 22' 20"
W, 660 feet; thence S 86 degrees 36' 57" W, 660.91 feet to the
place of beginning.
WAYNE COUNTY
Certain land in Livonia City, Wayne County, Michigan described
as:
Commencing at the Southeast corner of Section 6, T1S, R9E;
thence North along the East line of Section 6 a distance of
253 feet to the point of beginning; thence continuing North
along the East line of Section 6 a distance of 50 feet; thence
Westerly parallel to the South line of Section 6, a distance
of 215 feet; thence Southerly parallel to the East line of
Section 6 a distance of 50 feet; thence easterly parallel with
the South line of Section 6 a distance of 215 feet to the
point of beginning.
30
WEXFORD COUNTY
Certain land in Selma Township, Wexford County, Michigan
described as:
A parcel of land in the NW 1/4 of Section 7, T22N, R10W,
described as beginning on the North line of said section at a
point 200 feet East of the West line of said section, running
thence East along said North section line 450 feet, thence
South parallel with said West section line 350 feet, thence
West parallel with said North section line 450 feet, thence
North parallel with said West section line 350 feet to the
place of beginning.
SECTION 14. The Company is a transmitting utility under
Section 9401(5) of the Michigan Uniform Commercial Code (M.C.L. 440.9401(5)) as
defined in M.C.L. 440.9105(n).
IN WITNESS WHEREOF, said Consumers Energy Company has caused
this Supplemental Indenture to be executed in its corporate name by its Chairman
of the Board, President, a Vice President or its Treasurer and its corporate
seal to be hereunto affixed and to be attested by its Secretary or an Assistant
Secretary, and said The Chase Manhattan Bank, as Trustee as aforesaid, to
evidence its acceptance hereof, has caused this Supplemental Indenture to be
executed in its corporate name by a Vice President and its corporate seal to be
hereunto affixed and to be attested by a Trust Officer, in several counterparts,
all as of the day and year first above written.
31
CONSUMERS ENERGY COMPANY
(SEAL) By /s/ Laura L. Mountcastle
-----------------------------------
Laura L. Mountcastle
Attest: Vice President and Treasurer
/s/ Joyce H. Norkey
- ----------------------------
Joyce H. Norkey
Assistant Secretary
Signed, sealed and delivered
by CONSUMERS ENERGY COMPANY
in the presence of
/s/ Kimberly C. Wilson
- ----------------------------
Kimberly C. Wilson
/s/ Sammie B. Dalton
- ----------------------------
Sammie B. Dalton
STATE OF MICHIGAN )
ss.
COUNTY OF JACKSON )
The foregoing instrument was acknowledged before me this _____
day of September, 2001, by Laura L. Mountcastle, Vice President and Treasurer of
CONSUMERS ENERGY COMPANY, a Michigan corporation, on behalf of the corporation.
/s/ Margaret Hillman
----------------------------------------
Margaret Hillman, Notary Public
[Seal] Jackson County, Michigan
My Commission Expires: June 14, 2004
S-1
THE CHASE MANHATTAN BANK, AS TRUSTEE
(SEAL) By /s/ L. O'Brien
-------------------------------
Attest: L. O'Brien
Vice President
/s/ Natalie B. Pesce
- ----------------------------
Natalie B. Pesce
Trust Officer
Signed, sealed and delivered
by THE CHASE MANHATTAN BANK
in the presence of
/s/ Natalia Rodriguez
- ----------------------------
Natalia Rodriguez
Assistant Vice President
/s/ William S. Keenan
- ----------------------------
William S. Keenan
Assistant Vice President
STATE OF NEW YORK )
ss.
COUNTY OF NEW YORK )
The foregoing instrument was acknowledged before me this 26th
day of September, 2001, by L. O'Brien, a Vice President of THE CHASE MANHATTAN
BANK, a New York corporation, on behalf of the corporation.
/s/ Emily Fayan
----------------------------------------
Notary Public
[Seal] New York County, New York
My Commission Expires:
Prepared by: When recorded, return to:
Kimberly C. Wilson Consumers Energy Company
212 West Michigan Avenue General Services Real Estate Department
Jackson, MI 49201 Attn: Nancy P. Fisher, P-21-410B
1945 W. Parnall Road
Jackson, MI 49201
S-2
EXHIBIT (4)(c)
EXHIBIT 4(c)
AMENDMENT NO. 1 FOR $450,000,000 CREDIT AGREEMENT
This AMENDMENT NO. 1, dated as of November 13, 2001, among CMS Energy
Corporation (the "BORROWER"), the lenders parties thereto as "lenders" (the
"LENDERS"), Barclays Bank PLC, as administrative agent (the "ADMINISTRATIVE
AGENT"), collateral agent (the "COLLATERAL AGENT") and issuing bank (the
"ISSUING BANK"), Bank of America, N.A., and The Chase Manhattan Bank, as
co-syndication agents (the "CO-SYNDICATION AGENTS"), and Citibank, N.A., and
Union Bank of California, as documentation agents (the "DOCUMENTATION AGENTS").
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders, the Administrative Agent, the Collateral
Agent, the Co-Syndication Agents and the Documentation Agents have entered into
a Credit Agreement, dated as of June 18, 2001 (the "CREDIT AGREEMENT"; the terms
defined therein being used herein as therein defined unless otherwise defined
herein).
(2) The parties to the Credit Agreement have agreed to amend the Credit
Agreement as hereinafter set forth.
1. AMENDMENT. Subject to the conditions set forth in paragraph 2
hereof, the Credit Agreement is, effective as of September 30, 2001, hereby
amended by deleting the reference in Section 8.01(i) of the Credit Agreement to
"Closing Date through June 17, 2002" and the corresponding ratio of "4.9 to 1"
and substituting therefor the following: "Closing Date through June 30, 2001"
with a corresponding ratio of "4.9 to 1"; "July 1, 2001 through December 31,
2001", with a corresponding ratio of "5.25 to 1"; and "January 1, 2002 through
June 17, 2002", with a corresponding ratio of "4.9 to 1".
2. CONDITIONS TO EFFECTIVENESS. The amendments contemplated by this
Agreement shall become effective upon the execution and delivery of counterparts
hereof by the Required Lenders, the Administrative Agent, the Collateral Agent,
the Issuing Bank and the Borrower and the fulfillment of the following
conditions:
(a) All representations and warranties contained in this
Agreement and in the Credit Agreement and the other Loan Documents, in
each case as amended hereby, shall be true and correct in all material
respects.
(b) After giving effect to the amendments in this Agreement,
no event shall have occurred and be continuing which constitutes a
Default or an Event of Default.
3. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and after the
effective date of this Agreement, each reference in the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to the
Credit Agreement shall mean and be a reference to the Credit Agreement, as
amended by this Agreement, and each reference in the other Loan Documents to
"the Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to the Credit
Agreement, as amended by this Agreement. Except as specifically amended above,
the Credit Agreement and all other Loan Documents are and shall continue to be
in full force and effect and are hereby in all respects ratified and confirmed.
Without limiting the generality of the foregoing, the Cash Collateral Agreement
and all of the Collateral described therein do and shall continue to secure the
payment of all obligations of Borrower described therein after giving effect to
this Agreement.
4. FEE. The Borrower hereby agrees to pay to the Agent for the account
of each Lender that shall have executed and delivered to the Agent a counterpart
of this agreement no later than 5:00 p.m. (New York time) on November 13, 2001,
a fee in the amount of ten basis points multiplied by such Lender's Commitment
as of such date.
5. MISCELLANEOUS.
(a) The Borrower reaffirms and restates the representations
and warranties set forth in the Credit Agreement and the other Loan
Documents, and all such representations and warranties shall be true
and correct on the date hereof with the same force and effect as if
made on such date. The Borrower represents and warrants (which
representations and warranties shall survive the execution and delivery
hereof) that:
(i) It is a duly organized, validly existing
corporation in good standing under the laws of its
organization and has the corporate power and authority to
execute, deliver and carry out the terms and provisions of
this Agreement and has taken or caused to be taken all
necessary corporate action to authorize the execution,
delivery and performance of this Agreement;
(ii) No consent of any other person, including,
without limitation, shareholders or creditors of the Borrower,
and no action of, or filing with any governmental or public
body or authority, is required to authorize, or is otherwise
required in connection with the execution, delivery and
performance of this Agreement;
(iii) This Agreement has been duly executed and
delivered by a duly authorized officer on behalf of the
Borrower, and constitutes its legal, valid and binding
obligations, enforceable in accordance with its terms, except
as enforcement thereof may be subject to the effect of any
applicable (i) bankruptcy, insolvency, reorganization,
moratorium or similar law affecting creditors' rights
generally and (ii) general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at
law); and
(iv) The execution, delivery and performance of this
Agreement will not violate any law, statue or regulation
applicable to the Borrower or any order or decree of any court
or governmental instrumentality applicable to it, or conflict
with, or result in the breach of, or constitute a default
under, any of its contractual obligations.
(b) Nothing herein contained shall constitute a waiver or be
deemed to be a waiver, of any existing Defaults or Events of Default,
and the Lenders and the Agent reserve all rights and remedies granted
to them by the Credit Agreement, the other Loan Documents, by law and
otherwise.
(c) This Agreement may be executed in any number of separate
counterparts, each of which shall collectively and separately
constitute one agreement.
(d) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
2
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
CMS ENERGY CORPORATION
By /s/ Alan M. Wright
------------------------------------------------------------
Name: Alan M. Wright
Title: Executive Vice President, Chief Financial Officer
and Chief Administrative Officer
BARCLAYS BANK PLC, individually as
a Lender and as Administrative Agent, Collateral Agent
and Issuing Bank
By: /s/ Sydney Dennis
-----------------------------------------------------------
Name: Sydney Dennis
Title: Director
[Additional bank counterpart signature
pages intentionally omitted.]
3
EXHIBIT (4)(d)
EXHIBIT 4(d)
AMENDMENT NO. 1 FOR $300,000,000 CREDIT AGREEMENT
This AMENDMENT NO. 1, dated as of November 13, 2001, among CMS Energy
Corporation (the "BORROWER"), the lenders parties thereto as "lenders" (the
"LENDERS"), Barclays Bank PLC, as administrative agent (the "ADMINISTRATIVE
AGENT"), collateral agent (the "COLLATERAL AGENT") and issuing bank (the
"ISSUING BANK"), Bank of America, N.A., and The Chase Manhattan Bank, as
co-syndication agents (the "CO-SYNDICATION AGENTS"), and Citibank, N.A., and
Union Bank of California, as documentation agents (the "DOCUMENTATION AGENTS").
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders, the Administrative Agent, the Collateral
Agent, the Co-Syndication Agents and the Documentation Agents have entered into
a Credit Agreement, dated as of June 18, 2001 (the "CREDIT AGREEMENT"; the terms
defined therein being used herein as therein defined unless otherwise defined
herein).
(2) The parties to the Credit Agreement have agreed to amend the Credit
Agreement as hereinafter set forth.
1. AMENDMENT. Subject to the conditions set forth in paragraph 2
hereof, the Credit Agreement is, effective as of September 30, 2001, hereby
amended by deleting the reference in Section 8.01(i) of the Credit Agreement to
"Closing Date through June 17, 2002" and the corresponding ratio of "4.9 to 1"
and substituting therefor the following: "Closing Date through June 30, 2001"
with a corresponding ratio of "4.9 to 1"; "July 1, 2001 through December 31,
2001", with a corresponding ratio of "5.25 to 1"; and "January 1, 2002 through
June 17, 2002", with a corresponding ratio of "4.9 to 1".
2. CONDITIONS TO EFFECTIVENESS. The amendments contemplated by this
Agreement shall become effective upon the execution and delivery of counterparts
hereof by the Required Lenders, the Administrative Agent, the Collateral Agent,
the Issuing Bank and the Borrower and the fulfillment of the following
conditions:
(a) All representations and warranties contained in this
Agreement and in the Credit Agreement and the other Loan Documents, in
each case as amended hereby, shall be true and correct in all material
respects.
(b) After giving effect to the amendments in this Agreement,
no event shall have occurred and be continuing which constitutes a
Default or an Event of Default.
3. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. On and after the
effective date of this Agreement, each reference in the Credit Agreement to
"this Agreement", "hereunder", "hereof" or words of like import referring to the
Credit Agreement shall mean and be a reference to the Credit Agreement, as
amended by this Agreement, and each reference in the other Loan Documents to
"the Credit Agreement", "thereunder", "thereof" or words of like import
referring to the Credit Agreement shall mean and be a reference to the Credit
Agreement, as amended by this Agreement. Except as specifically amended above,
the Credit Agreement and all other Loan Documents are and shall continue to be
in full force and effect and are hereby in all respects ratified and confirmed.
Without limiting the generality of the foregoing, the Cash Collateral Agreement
and all of the Collateral described therein do and shall continue to secure the
payment of all obligations of Borrower described therein after giving effect to
this Agreement.
4. FEE. The Borrower hereby agrees to pay to the Agent for the account
of each Lender that shall have executed and delivered to the Agent a counterpart
of this agreement no later than 5:00 p.m. (New York time) on November 13, 2001,
a fee in the amount of ten basis points multiplied by such Lender's Commitment
as of such date.
5. MISCELLANEOUS.
(a) The Borrower reaffirms and restates the representations
and warranties set forth in the Credit Agreement and the other Loan
Documents, and all such representations and warranties shall be true
and correct on the date hereof with the same force and effect as if
made on such date. The Borrower represents and warrants (which
representations and warranties shall survive the execution and delivery
hereof) that:
(i) It is a duly organized, validly existing
corporation in good standing under the laws of its
organization and has the corporate power and authority to
execute, deliver and carry out the terms and provisions of
this Agreement and has taken or caused to be taken all
necessary corporate action to authorize the execution,
delivery and performance of this Agreement;
(ii) No consent of any other person, including,
without limitation, shareholders or creditors of the Borrower,
and no action of, or filing with any governmental or public
body or authority, is required to authorize, or is otherwise
required in connection with the execution, delivery and
performance of this Agreement;
(iii) This Agreement has been duly executed and
delivered by a duly authorized officer on behalf of the
Borrower, and constitutes its legal, valid and binding
obligations, enforceable in accordance with its terms, except
as enforcement thereof may be subject to the effect of any
applicable (i) bankruptcy, insolvency, reorganization,
moratorium or similar law affecting creditors' rights
generally and (ii) general principles of equity (regardless of
whether enforcement is sought in a proceeding in equity or at
law); and
(iv) The execution, delivery and performance of this
Agreement will not violate any law, statue or regulation
applicable to the Borrower or any order or decree of any court
or governmental instrumentality applicable to it, or conflict
with, or result in the breach of, or constitute a default
under, any of its contractual obligations.
(b) Nothing herein contained shall constitute a waiver or be
deemed to be a waiver, of any existing Defaults or Events of Default,
and the Lenders and the Agent reserve all rights and remedies granted
to them by the Credit Agreement, the other Loan Documents, by law and
otherwise.
(c) This Agreement may be executed in any number of separate
counterparts, each of which shall collectively and separately
constitute one agreement.
(d) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.
2
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
CMS ENERGY CORPORATION
By /s/ Alan M. Wright
------------------
Name: Alan M. Wright
Title: Executive Vice President, Chief Financial Officer
and Chief Administrative Officer
BARCLAYS BANK PLC, individually as
a Lender and as Administrative Agent, Collateral Agent
and Issuing Bank
By: /s/ Sydney Dennis
-----------------
Name: Sydney Dennis
Title: Director
[Additional bank counterpart signature pages intentionally omitted.]
3
EXHIBIT (10)(a)
EXECUTION VERSION
Exhibit 10(a)
STOCK PURCHASE AGREEMENT
BY AND AMONG
CMS OIL AND GAS COMPANY,
CMS ENTERPRISES COMPANY,
MARATHON E.G. HOLDING LIMITED
AND
MARATHON OIL COMPANY
OCTOBER 31, 2001
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
1.01 DEFINITIONS..............................................................1
1.02 CONSTRUCTION.............................................................8
ARTICLE II
PURCHASE AND SALE
2.01 TRANSFER OF SHARES.......................................................8
2.02 PURCHASE PRICE...........................................................8
2.03 ESTIMATE OF WORKING CAPITAL..............................................9
2.04 WORKING CAPITAL AND INVENTORY ADJUSTMENTS................................9
2.05 SETTLEMENT STATEMENT.....................................................9
2.06 ADDITIONAL PURCHASE PRICE ADJUSTMENTS...................................11
ARTICLE III
CLOSING
3.01 TIME AND PLACE OF CLOSING...............................................11
3.02 DELIVERIES BY SELLER....................................................12
3.03 DELIVERIES BY BUYER.....................................................12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
4.01 EXISTENCE AND QUALIFICATION.............................................13
4.02 AUTHORITY, APPROVAL AND ENFORCEABILITY..................................13
4.03 CAPITALIZATION OF THE COMPANIES.........................................13
4.04 NO CONFLICTS............................................................14
4.05 FINANCIAL INFORMATION...................................................15
4.06 MATERIAL CONTRACTS......................................................15
4.07 ABSENCE OF CERTAIN CHANGES..............................................18
4.08 EMPLOYEES...............................................................18
4.09 INSURANCE...............................................................18
4.10 LITIGATION..............................................................19
4.11 LIABILITY FOR BROKERS' FEES.............................................19
4.12 COMPLIANCE WITH LAWS....................................................19
4.13 CONSENTS AND PREFERENTIAL PURCHASE RIGHTS...............................19
4.14 TAXES...................................................................19
4.15 BANK ACCOUNTS...........................................................20
4.16 INTELLECTUAL PROPERTY...................................................21
4.17 DATA ROOM AND INFORMATION...............................................21
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER AND MARATHON
5.01 EXISTENCE AND QUALIFICATION.............................................21
5.02 AUTHORITY, APPROVAL AND ENFORCEABILITY..................................21
5.03 NO CONFLICTS............................................................22
5.04 INVESTMENT..............................................................22
5.05 FINANCIAL CAPACITY......................................................22
5.06 LIABILITY FOR BROKERS' FEES.............................................22
5.07 NO KNOWLEDGE OF SELLER'S BREACH.........................................22
ARTICLE VI
COVENANTS OF SELLER AND BUYER
6.01 ACCESS..................................................................23
6.02 OPERATION OF BUSINESS...................................................23
6.03 REASONABLE EFFORTS......................................................25
6.04 PRESS RELEASES..........................................................25
6.05 INSURANCE...............................................................26
6.06 SATISFACTION OF SELLER'S CONDITIONS.....................................26
6.07 BREACH NOTICE...........................................................26
6.08 BALANCE SHEET ADJUSTMENTS AND OTHER PRE-CLOSING TRANSFERS...............26
6.09 CONSENTS AND PREFERENTIAL RIGHTS........................................26
6.10 PRESERVATION OF BOOKS AND RECORDS; ACCESS...............................26
6.11 FURTHER ASSURANCES......................................................27
6.12 CASUALTY LOSS...........................................................27
6.13 CHANGE OF NAME..........................................................27
6.14 NO SOLICITATION OF EMPLOYEES............................................27
6.15 ASSIGNMENT OF CONTRACTS.................................................27
6.16 BANK ACCOUNTS...........................................................27
6.17 TREATMENT OF CERTAIN CLAIMS.............................................27
6.18 NOTICES.................................................................28
6.19 HSR FILING..............................................................28
6.20 JOA ELECTION............................................................28
ARTICLE VII
TAX MATTERS
7.01 PREPARATION AND FILING OF TAX RETURNS...................................29
7.02 ACCESS TO INFORMATION...................................................30
7.03 INDEMNIFICATION BY SELLER...............................................31
7.04 BUYER TAX INDEMNIFICATION...............................................31
7.05 TAX INDEMNIFICATION PROCEDURES..........................................31
7.06 CONFLICT................................................................32
7.07 MUTUAL COOPERATION......................................................32
7.08 SURVIVAL................................................................33
7.09 WITHHOLDING.............................................................33
ARTICLE VIII
CLOSING CONDITIONS
8.01 CONDITIONS TO OBLIGATIONS OF SELLER.....................................33
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8.02 CONDITIONS TO OBLIGATIONS OF BUYER......................................34
ARTICLE IX
TERMINATION
9.01 TERMINATION.............................................................36
9.02 EFFECT OF TERMINATION...................................................36
ARTICLE X
INDEMNIFICATION; SCOPE OF REPRESENTATIONS; LIMITATIONS
10.01 INDEMNIFICATION.........................................................37
10.02 INDEMNIFICATION PROCEDURES..............................................39
10.03 ARBITRATION.............................................................40
10.04 EXCLUSIVE REMEDY........................................................40
10.05 INDEPENDENT INVESTIGATION...............................................40
10.06 SCOPE OF REPRESENTATIONS................................................41
ARTICLE XI
MISCELLANEOUS
11.01 CONFIDENTIALITY.........................................................41
11.02 BROKERS.................................................................41
11.03 EXPENSES................................................................42
11.04 NOTICES.................................................................42
11.05 GOVERNING LAW...........................................................43
11.06 WAIVER OF JURY TRIAL....................................................43
11.07 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS................................43
11.08 BINDING EFFECT AND ASSIGNMENT...........................................44
11.09 SEVERABILITY............................................................44
11.10 HEADINGS AND SCHEDULES..................................................44
11.11 SURVIVAL OF REPRESENTATIONS.............................................44
11.12 TIME OF THE ESSENCE.....................................................44
11.13 COUNTERPARTS; FACSIMILE.................................................44
11.14 NO THIRD PARTY BENEFICIARIES............................................44
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SCHEDULES
1.01(a) - Knowledge Persons of Buyer
1.01(b) - Knowledge Persons of Seller
2.02 - Designated Account
2.03(a) - Form of Estimate of Working Capital and M&S Book Value as of
December 31, 2001
2.03(b) - Estimate of the Adjusted Purchase Price as of December 31,
2001
2.03(c) - Estimate of Working Capital as of September 30, 2001
2.05 - Settlement Statement
3.02 - Summary of Indicative Terms and Conditions of the Transition
Services Agreement
4.03 - Capitalization
4.05 - Financial Statements
4.06(a)(i) - Material Contracts
4.06(a)(ii) - Pending Material Contracts
4.06(b) - Directors, Officers and Powers of Attorney
4.06(d) - Matters Relating to Material Contracts
4.06(e) - Matters Relating to Alba PSC and Block D PSC
4.06(f) - Matters Relating to Alba Plant
4.08 - Employees
4.09 - Policies of Insurance
4.10 - Claims and Litigation
4.12 - Compliance with Laws
4.13 - Consents and Preferential Purchase Rights
4.14 - Tax Matters
4.14(j) - IRS Form 8832 Filings for Companies and Alba Companies
4.15 - Bank Accounts
6.01 - Other Contracts
6.02 - Operation of Business
6.15(a) - Form of Assignment and Assumption Agreement
6.15(b) - Agreements to be Assigned
8.01(e)(i) - Legal Opinion of Buyer's Counsel
8.01(e)(ii) - Legal Opinion of Marathon's Counsel
8.01(g) - Certain Approvals (Seller's Closing Conditions)
8.02(c) - Form of Resignation
8.02(f)(i) - Legal Opinion of Seller's Cayman Islands' Counsel
8.02(f)(ii) - Legal Opinion of Seller's Counsel
8.02(f)(iii) - Legal Opinion of Enterprises' Counsel
8.02(g) - Certain Approvals (Buyer's Closing Conditions)
-iv-
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "AGREEMENT"), executed as of
October 31, 2001 (the "EXECUTION DATE"), is by and among CMS Oil and Gas
Company, a Michigan corporation ("SELLER"), CMS Enterprises Company, a Michigan
corporation ("ENTERPRISES"), Marathon E.G. Holding Limited, a company formed
under the laws of the Cayman Islands ("BUYER") and Marathon Oil Company, an Ohio
corporation ("MARATHON"). Seller and Buyer shall be referred to herein each as a
"PARTY" and collectively as the "PARTIES."
RECITALS
A. Seller is the owner of all of the issued and outstanding share
capital of CMS Oil and Gas (International) Ltd., a company formed under the laws
of the Cayman Islands ("CMS INTERNATIONAL"). CMS International is the owner of
all of the issued and outstanding share capital of CMS Oil and Gas (Alba) LDC,
an exempted limited duration company limited by shares formed under the laws of
the Cayman Islands ("CMS ALBA"), CMS Oil and Gas (E.G.) LDC, an exempted limited
duration company limited by shares formed under the laws of the Cayman Islands
("CMS EG LDC") and CMS Oil and Gas (E.G.) LTD, an exempted company limited by
shares formed under the laws of the Cayman Islands ("CMS EG LTD.", together with
CMS Alba and CMS EG LDC, the "COMPANIES").
B. Buyer desires to purchase, and Seller desires to sell to Buyer, or
cause the sale by CMS International to Buyer of, all of the outstanding share
capital of the Companies, upon the terms and subject to the conditions contained
herein.
NOW, THEREFORE, in consideration of the premises, agreements and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller and Buyer
agree, upon the terms and subject to the conditions contained herein, as
follows:
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
1.01 Definitions. Capitalized terms used herein shall have the meaning
ascribed to them in this Article I unless such terms are defined elsewhere in
this Agreement.
"ACTUAL CLOSING INVENTORY VALUE" shall have the meaning ascribed to
such term in Section 2.05(c).
"ACTUAL WORKING CAPITAL AMOUNT" shall have the meaning ascribed to such
term in Section 2.05(g).
"ADJUSTED PURCHASE PRICE" shall have the meaning ascribed to such term
in Section 2.02.
"AFFILIATE" shall mean, with respect to any Person, any other Person
controlling, controlled by or under common control with such Person. The term
"control" as used in the preceding sentence means, with respect to a
corporation, the right to exercise, directly or indirectly, 50% or more of the
voting rights attributable to the shares of the controlled corporation, or with
respect to any Person
other than a corporation, the possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of such Person.
The Companies and the Alba Companies shall not be considered Affiliates of Buyer
(or any of its Affiliates) or Seller (or any of its Affiliates), and neither
Buyer (nor its Affiliates) nor Seller (nor its Affiliates) shall be considered
Affiliates of any of the Companies or the Alba Companies.
"AGREEMENT" shall have the meaning ascribed to such term in the
preamble.
"ALBA ASSOCIATES" shall mean Alba Associates LLC, an exempted company
formed with limited liability under the laws of the Cayman Islands.
"ALBA ASSOCIATES LLC AGREEMENT" shall mean that certain Alba Associates
Members Agreement dated January 22, 1996, by and among Alba Associates, CMS
NOMECO Alba LDC, an exempted limited duration company limited by shares
organized under the laws of the Cayman Islands, CMS NOMECO E.G. LDC, an exempted
limited duration company limited by shares organized under the laws of the
Cayman Islands, Moe Oil & Gas Ltd., a corporation organized under the laws of
the Cayman Islands, Globex Offshore Ltd., a corporation organized under the laws
of the Cayman Islands, Samedan LPG, a corporation organized under the laws of
the Cayman Islands and HG Exploration Cayman L.L.C., an exempted limited
liability company limited by shares organized under the laws of the Cayman
Islands.
"ALBA COMPANIES" shall mean Alba Associates and Alba Plant LLC.
"ALBA JOA" shall mean the Operating Agreement made and entered into as
of May 27, 1992 by and between Walter International Equatorial Guinea, Inc., a
Texas corporation; Walter Oil & Gas Corporation, a Texas corporation; General
Atlantic Equatorial Guinea Ltd., a Bermuda corporation; Globex International, a
Wyoming company; Moe Oil & Gas Ltd., a Cayman Islands corporation; Nomeco
Equatorial Guinea Oil & Gas Co., a Michigan company; and Samedan of North
Africa, Inc., a Delaware corporation, as amended.
"ALBA PLANT" shall have the meaning ascribed to such term in Section
4.06(f).
"ALBA PLANT LLC" shall mean Alba Plant LLC, an exempted company formed
with limited liability under the laws of the Cayman Islands.
"ALBA PLANT LLC AGREEMENT" shall mean that certain Alba Plant Members
Agreement dated January 22, 1996, by and among Alba Associates, Guinea
Equatorial Oil & Gas Marketing Ltd., a corporation organized under the laws of
the Republic of Equatorial Guinea, and Alba Plant LLC.
"ALBA PSC" shall mean the Production Sharing Contract (Alba), effective
May 2, 1990, by and between The Ministry of Mines and Hydrocarbons of the
Republic of Equatorial Guinea and Walter International Equatorial Guinea, Inc.,
a Texas corporation, as amended.
"APPROVAL" shall mean an authorization, consent, approval or waiver of,
clearance by, required notice to or registration or filing with, a Governmental
Authority or Person and the expiration or termination of all prescribed waiting
or review periods with respect to any of the foregoing.
-2-
"BASE PURCHASE PRICE" shall have the meaning ascribed to such term in
Section 2.02.
"BLOCK D JOA" shall mean the Joint Operating Agreement (Block D) dated
January 1, 1996 by and between UMC Equatorial Guinea Corporation, a Delaware
corporation, and Yukong Limited, a company incorporated under the laws of the
Republic of Korea, as amended.
"BLOCK D PSC" shall mean the Production Sharing Contract for Block D
dated effective April 17, 1995 by and between the Republic of Equatorial Guinea
and UMC Equatorial Guinea Corporation, a Delaware corporation, as amended.
"BLOCK D RIGHTS OF FIRST REFUSAL" shall have the meaning ascribed to
such term in Section 2.06(a).
"BREACH NOTICE" shall have the meaning ascribed to such term in Section
6.07.
"BUSINESS" shall mean the business and operations of the Companies and
the Alba Companies.
"BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a
United States federal or Texas state banking holiday.
"BUYER" shall have the meaning ascribed to such term in the preamble.
"BUYER INDEMNIFIED PARTIES" shall mean Buyer, its Affiliates and their
respective directors, officers, employees, agents and representatives.
"CLAIM NOTICE" shall have the meaning ascribed to such term in Section
10.01(b)(ii).
"CLOSING" shall have the meaning ascribed to such term in Section 3.01.
"CLOSING DATE" shall have the meaning ascribed to such term in Section
3.01.
"CMS ALBA" shall have the meaning ascribed to such term in Recital A.
"CMS ALBA ASSOCIATES SHARES" shall have the meaning ascribed to such
term in Section 4.03(b).
"CMS ALBA PLANT SHARES" shall have the meaning ascribed to such term in
Section 4.03(c).
"CMS EG LDC" shall have the meaning ascribed to such term in Recital A.
"CMS EG LTD." shall have the meaning ascribed to such term in Recital
A.
"CMS INTERNATIONAL" shall have the meaning ascribed to such term in the
Recital A.
"CODE" shall mean the Internal Revenue Code of 1986, and the applicable
Treasury Regulations thereunder.
"COMPANIES" shall have the meaning ascribed to such term in Recital A.
-3-
"CONFIDENTIALITY AGREEMENT" shall have the meaning ascribed to such
term in Section 11.01.
"CREDITORS' RIGHTS" shall have the meaning ascribed to such term in
Section 4.02.
"DATA ROOM" shall mean the data rooms located at the offices of Randall
& Dewey, Inc. and Seller in Houston, Texas, prepared by Seller to assist Persons
interested in acquiring the Companies with an evaluation of the Companies.
"DEDUCTIBLE" shall have the meaning ascribed to such term in Section
10.01(b)(iv).
"DESIGNATED ACCOUNT" shall have the meaning ascribed to such term in
Section 2.02.
"DOLLARS," "US$" or "$" shall mean the lawful currency of the United
States of America.
"DUE DILIGENCE PERIOD" shall have the meaning ascribed to such term in
Section 6.01.
"ENTERPRISES" shall have the meaning ascribed to such term in the
preamble.
"ENVIRONMENTAL LAW" shall mean any Law issued, promulgated or entered
into by any Governmental Authority of the Republic of Equatorial Guinea relating
to the environment or preservation or reclamation of natural resources.
"ESTIMATED CLOSING INVENTORY VALUE" shall have the meaning ascribed to
such term in Section 2.04(b).
"EXECUTION DATE" shall have the meaning ascribed to such term in the
preamble.
"FINANCIAL STATEMENTS" shall have the meaning ascribed to such term in
Section 4.05.
"GAAP" shall mean generally accepted accounting principles in effect in
the United States of America.
"GOVERNMENTAL AUTHORITY" means any government, governmental agency,
authority, entity or instrumentality or any court thereof.
"HOUSING PROJECT" shall mean a project for the design, fabrication,
construction and installation of 50 homes and one recreational facility,
including related utilities and infrastructure, on a site of approximately 40
acres located in the city of Malabo on Bioko Island in the Republic of
Equatorial Guinea.
"HSR ACT" shall mean the U.S. Hart-Scott-Rodino Antitrust Improvements
Act of 1976.
"INDEMNIFIED LOSSES" shall mean any and all Losses reduced by the
amount of any Tax benefit actually realized and by the amount of any insurance
proceeds actually recovered from any Person that is not an Affiliate of any
Person entitled to indemnification hereunder, but only to the extent that the
Person entitled to indemnification did not negligently or intentionally take
actions that materially exacerbated such Losses; provided that Indemnified
Losses shall not include any
-4-
Losses attributable to matters for which an adjustment to the Base Purchase
Price has been made pursuant to Section 2.04 or 2.05.
"INDEMNIFIED PARTY" shall have the meaning ascribed to such term in
Section 10.02.
"INDEMNIFYING PARTY" shall have the meaning ascribed to such term in
Section 10.02.
"INTELLECTUAL PROPERTY" shall mean all trademarks, service marks, trade
names, patents, trade secrets and copyrights, used by any of the Companies or
the Alba Companies that, in each case, is material to the Business.
"INTERCOMPANY AGREEMENTS" shall have the meaning ascribed to such term
in Section 4.06(a)(x).
"KNOWLEDGE" shall mean the actual knowledge of the persons listed in
Schedule 1.01(a), in the case of Buyer, and those listed on Schedule 1.01(b), in
the case of Seller; provided, however, that such persons shall be assumed to
have actual knowledge of items if there is persuasive evidence that such persons
must have had knowledge by virtue of their respective roles and functions.
"LAW" shall mean any constitution, statute, code, regulation, rule,
injunction, judgment, order, decree, ruling (including any agreement with a
Governmental Authority having the force of law), charge or other restriction of
any applicable Governmental Authority.
"LPG" shall mean liquefied petroleum gas.
"LOSSES" shall mean all losses, costs, and expenses, including
attorneys' fees and expenses; provided, however, for the avoidance of doubt,
that any Losses suffered (a) by Alba Associates shall only constitute Losses of
the Companies to the extent of the Companies' percentage ownership of the
outstanding equity of Alba Associates or (b) by Alba Plant LLC shall only
constitute Losses of the Companies to the extent of the Companies' percentage
ownership of the outstanding equity of Alba Associates multiplied by Alba
Associates' percentage ownership of the outstanding equity of Alba Plant LLC.
"M&S BOOK VALUE" shall have the meaning ascribed to such term in
Section 2.03.
"M&S FAIR MARKET VALUE" shall have the meaning ascribed to such term in
Section 2.05(b)).
"MARATHON" shall have the meaning ascribed to such term in the
preamble.
"MATERIAL ADVERSE EFFECT" shall mean an adverse effect on the business,
financial condition or assets of the Companies that results in Losses to Buyer
or the Companies of $2,000,000 or more, excluding any adverse effect to the
extent the same is reflected in the Settlement Statement and excluding matters
(such as, without limitation, decreases in the prices received by the Companies
for natural gas, natural gas liquids, crude oil, condensate or other natural
resources produced) that are general, regional, industry-wide or economy-wide
developments and excluding political events and conditions; provided, however,
for the avoidance of doubt, that the Companies shall only be deemed to suffer
Losses as a result of adverse effects on (a) Alba Associates to the extent of
the Companies' percentage ownership of the outstanding equity of Alba Associates
or (b) Alba Plant LLC to the
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extent of the Companies' percentage ownership of the outstanding equity of Alba
Associates multiplied by Alba Associates' percentage ownership of the
outstanding equity of Alba Plant LLC.
"MATERIAL CONTRACTS" shall have the meaning ascribed to such term in
Section 4.06(a).
"MEASUREMENT DATE" shall have the meaning ascribed to such term in
Section 2.03.
"NOTICE" shall have the meaning ascribed to such term in Section 11.04.
"NOTICE PERIOD" shall have the meaning ascribed to such term in Section
10.02.
"OTHER CONTRACTS" shall have the meaning ascribed to such term in
Section 6.01(d).
"PARTY" or "PARTIES" shall have the meaning ascribed to such term in
the preamble.
"PENDING MATERIAL CONTRACTS" shall have the meaning ascribed to such
term in Section 4.06(a).
"PERMITTED ENCUMBRANCES" shall mean (i) the terms and conditions of the
Material Contracts, the Pending Material Contracts and the Other Contracts, (ii)
matters disclosed in any Schedule to this Agreement, (iii) sales contracts
terminable without penalty upon no more than 30 days' notice to the purchaser of
production; (iv) materialman's, mechanic's, repairman's, employee's,
contractor's, operator's, tax, and other similar liens or charges arising in the
ordinary course of business for obligations that are not yet due; (v) easements,
rights-of-way, servitudes, permits, surface leases and other rights of third
parties in respect of surface operations, to the extent the same do not have a
Material Adverse Effect on any of the Alba PSC, the Block D PSC, the Housing
Project or the Alba Plant; (vi) rights reserved to or vested in a Governmental
Authority having jurisdiction to control or regulate the Alba PSC, the Block D
PSC, the Housing Project or the Alba Plant in any manner whatsoever, and all
Laws of such Governmental Authorities; and (vii) any other matters that do not
materially interfere with the ownership, operation, value or use of the Alba
PSC, the Block D PSC, the Housing Project or the Alba Plant and that would not
be considered material when applying general standards in the international oil
and gas industry.
"PERSON" shall mean an individual, partnership, corporation,
joint-venture, trust, estate, unincorporated organization or association or
other legal entity.
"PRELIMINARY WORKING CAPITAL AMOUNT" shall have the meaning ascribed to
such term in Section 2.03.
"REASONABLE EFFORTS" shall mean the taking by a Party of such action as
would be in accordance with reasonable commercial practices as applied to the
particular matter in question; provided, however, that such action shall not
include the incurrence of unreasonable expense.
"RECORDS" shall mean and include all originals and copies (except where
the context indicates that only originals or copies are being referred to) of
minute books, tax records, agreements, documents, computer files and tapes,
maps, books, records, accounts and files of the Companies relating to the
Companies and the Business.
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"SCHEDULE" shall mean any schedule attached to and made a part of this
Agreement.
"SECOND REQUEST" shall have the meaning ascribed to such term in
Section 6.19.
"SELLER" shall have the meaning ascribed to such term in the preamble.
"SELLER INDEMNIFIED PARTIES" shall mean Seller, its Affiliates and
their respective directors, officers, employees, agents and representatives.
"SETTLEMENT STATEMENT" shall have the meaning ascribed to such term in
Section 2.05(c).
"SHARES" shall have the meaning ascribed to such term in Section
4.03(a).
"TAX" or "TAXES" shall mean any federal, state, local or foreign
income, gross receipts, license, payroll, employment, excise, severance,
premium, windfall profits, environmental, customs duties, capital stock, capital
gain, petroleum profits, value added, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, minimum, alternative or add-on
minimum, estimated or other tax of any kind whatsoever, including any interest,
penalty or addition thereto, whether disputed or not.
"TAX CLAIM" shall mean any Losses arising out of a breach of the
representations and warranties in Section 4.14 or any of the provisions of
Article VII.
"TAX INDEMNIFIED PARTY" shall have the meaning ascribed to such term in
Section 7.05.
"TAX INDEMNIFYING PARTY" shall have the meaning ascribed to such term
in Section 7.05.
"TAX ITEMS" shall have the meaning ascribed to such term in Section
4.14(a).
"TAX RETURN" shall have the meaning ascribed to such term in Section
4.14.
"TAX SETTLEMENT AGREEMENT" shall have the meaning ascribed to such term
in Section 8.01(f).
THIRD PARTY CLAIM" shall mean any claim, action or proceeding made or
brought by any Person who or that is not a Party or an Affiliate of the Party
seeking indemnification.
"TRANSFER TAXES" shall mean all transfer, sales, use, stamp,
registration or other similar Taxes or fees resulting from the transactions
contemplated by this Agreement.
"TRANSITION SERVICES AGREEMENT" shall have the meaning ascribed to such
term in Section 3.02.
"UNCOLLECTED ACCOUNTS RECEIVABLE" shall have the meaning ascribed to
such term in Section 2.05(d).
"WORKING CAPITAL" shall mean the combined total current assets of the
Companies, excluding (a) condensate and LPG inventory and (b) materials and
supplies inventory, less combined total
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current liabilities as defined by GAAP; provided, however, that prepaid Taxes of
the Companies shall not be included as an asset or a liability in Working
Capital.
1.02 Construction.
(a) All article, section, subsection, schedule and exhibit
references used in this Agreement are to articles, sections,
subsections, schedules and exhibits to this Agreement unless otherwise
specified.
(b) The schedules and exhibits attached to this Agreement
constitute a part of this Agreement and are incorporated herein for all
purposes.
(c) Unless the context of this Agreement clearly requires
otherwise (i) the singular shall include the plural and the plural
shall include the singular wherever and as often as may be appropriate,
(ii) the words "includes" or "including" shall mean "including without
limitation," (iii) the words "hereof," "hereby," "herein," "hereunder"
and similar terms in this Agreement shall refer to this Agreement as a
whole and not any particular section or article in which such words
appear and (iv) any reference to a statute, regulation or law shall
include any amendment thereof or any successor thereto and any rules
and regulations promulgated thereunder.
(d) Currency amounts referenced herein, unless otherwise
specified, are in United States Dollars.
(e) Whenever this Agreement refers to a number of days, such
number shall refer to calendar days unless Business Days are specified.
(f) All accounting terms used herein and not expressly defined
herein shall have the meanings given to them under GAAP. References to
GAAP herein shall refer to such principles in effect in the United
States of America as of the date of the statement to which such phrase
refers.
ARTICLE II
PURCHASE AND SALE
2.01 Transfer of Shares. Upon the terms and subject to the conditions
of this Agreement, at the Closing, Buyer agrees to purchase the Shares and to
deliver payment for such Shares as provided in Section 2.02, and Seller agrees
to sell, assign and deliver, or cause CMS International to sell, assign and
deliver, the Shares to Buyer, subject to the receipt of payment for such Shares
as provided in Section 2.02.
2.02 Purchase Price. The consideration to be paid by Buyer to Seller
at Closing for the Shares shall be seven hundred twenty-one million, seven
hundred fifty thousand dollars (US$721,750,000) (the "BASE PURCHASE PRICE"), as
adjusted by the Preliminary Working Capital Amount and the Estimated Closing
Inventory Value according to Section 2.04, the adjustments described in Section
2.06 (the Base Purchase Price, as adjusted, shall be referred to herein as the
"ADJUSTED PURCHASE PRICE") and, if Closing occurs after January 3, 2002,
interest on the Adjusted
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Purchase Price, from and including January 3, 2002 up to but excluding the
Closing Date, calculated at a per annum interest rate of 5%. The Adjusted
Purchase Price (plus interest due thereon, if any) shall be paid by Buyer at
Closing by wire transfer of immediately available funds to the account specified
on Schedule 2.02 (the "DESIGNATED ACCOUNT").
2.03 Estimate of Working Capital. Seller shall deliver to Buyer (a) no
later than five Business Days prior to the Closing Date a statement setting
forth Seller's reasonable estimate of the Working Capital as of 7:01 a.m.
Equatorial Guinea time on January 1, 2002 (the "MEASUREMENT DATE") in the format
set forth in Schedule 2.03(a) (the "PRELIMINARY WORKING CAPITAL AMOUNT") and (b)
one day prior to the Closing Date a statement setting forth Seller's reasonable
estimate, in the format set forth in Schedule 2.03(b), of the Adjusted Purchase
Price (plus interest due thereon, if any). Also attached as Schedule 2.03(c),
for illustrative purposes only, is a completed statement setting forth Working
Capital as of September 30, 2001. The statements delivered pursuant to the first
sentence of this Section 2.03 shall be accompanied by worksheets setting forth
in reasonable detail Seller's calculations used to estimate the Preliminary
Working Capital Amount and shall also state and show the calculation in
reasonable detail of the Estimated Closing Inventory Value (including the book
value of all materials and supplies of the Companies and the Alba Companies as
of the Measurement Date (the "M&S BOOK VALUE")). Seller shall provide Buyer with
reasonable access to the data used to prepare the Preliminary Working Capital
Amount and the worksheet.
2.04 Working Capital and Inventory Adjustments.
(a) If the Preliminary Working Capital Amount is positive, Buyer
shall pay Seller, at the Closing, in addition to the Base Purchase
Price, an amount equal to such Preliminary Working Capital Amount. If
the Preliminary Working Capital Amount is negative, the Base Purchase
Price payment by Buyer to Seller pursuant to Section 2.02 shall be
reduced by the amount of such Preliminary Working Capital Amount.
(b) In addition to the adjustments to the Base Purchase Price set
forth elsewhere herein, the Base Purchase Price shall be increased by
an amount equal to the sum (the "ESTIMATED CLOSING INVENTORY VALUE") of
(i) the amounts of condensate and LPG in inventory (adjusted to account
for the Companies' direct or indirect ownership of such inventory) on
the Measurement Date, as determined pursuant to Section 2.05(a),
multiplied by the lifting price per barrel of condensate and LPG, as
applicable, paid for the last such liftings of condensate and LPG,
respectively, prior to the Measurement Date and (ii) 80% of the M&S
Book Value.
2.05 Settlement Statement.
(a) At 7:01 a.m. Equatorial Guinea time on January 1, 2002,
Seller shall measure the amounts of condensate and LPG in inventory
(adjusted to account for the Companies' direct or indirect ownership of
such inventory) in accordance with prudent practices used in the
international oil and gas industry, and Buyer shall be entitled to have
a representative present at such measurement.
(b) As soon as reasonably practicable, but in any event within 60
days after the Closing Date, Buyer and Seller shall jointly perform an
audit of the materials and supplies
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existing as of the Measurement Date of the Companies and the Alba
Companies in accordance with prudent industry practices. The results of
such audit shall be adjusted for any purchases, sales, uses, transfers
or losses of materials and supplies since the Measurement Date, and the
fair market value of such materials and supplies, as so adjusted (the
"M&S FAIR MARKET VALUE"), shall be calculated based on (i) the
condition of such materials and supplies and (ii) the purchase prices
for such types of materials and supplies at the locations purchased as
of the Measurement Date plus freight, customs charges, applicable taxes
and inspection fees as would be applicable in order to deliver such
materials and supplies to the Republic of Equatorial Guinea as of the
Measurement Date.
(c) Within 120 days following the Closing Date, Seller and Buyer
shall jointly prepare a statement (the "SETTLEMENT STATEMENT") in the
format set forth in Schedule 2.05, which shall provide (i) the Base
Purchase Price, (ii) actual Working Capital as of the Measurement Date
based on actual revenues earned and obligations incurred up to and
including the Measurement Date, subject to the adjustments in Section
2.05(d), (iii) the sum (the "ACTUAL CLOSING INVENTORY VALUE") of (x)
the amounts of condensate and LPG in inventory (adjusted to account for
the Companies' direct or indirect ownership of such inventory) as
calculated pursuant to Section 2.05(a) multiplied by the lifting price
per barrel of condensate and LPG, as applicable, paid for the first
such liftings of condensate and LPG, respectively, after the
Measurement Date, plus (y) the M&S Fair Market Value, (iv) the
Uncollected Accounts Receivable, (v) any additional adjustments
pursuant to Section 2.06 and (vi) interest due on the Adjusted Purchase
Price due pursuant to Section 2.02, if any.
(d) Except for accounts or notes receivable created as a result
of advances to APEGESA On-Offshore Services or nationals of the
Republic of Equatorial Guinea providing services, directly or
indirectly, to the Companies, any accounts or notes receivable as of
the Measurement Date that have not been collected as of the date of the
Settlement Statement (the "UNCOLLECTED ACCOUNTS RECEIVABLE") shall be
deemed to have zero value and will not be included in the Settlement
Statement; provided, however, that, in such event, Buyer shall (i)
assign, or shall cause the Companies to assign, to Seller or Seller's
designee, all rights and remedies available to Buyer or the Companies
with respect to the Uncollected Accounts Receivable in a form
reasonably acceptable to Seller, (ii) cooperate, and shall cause the
Companies to cooperate, in all reasonable collection efforts by Seller
or Seller's designee with respect to the Uncollected Accounts
Receivable and (iii) promptly transmit, or cause the Companies to
promptly transmit, to Seller any proceeds Buyer or the Companies
receive with respect to the Uncollected Accounts Receivable.
(e) If Buyer and Seller shall be unable to agree on the
Settlement Statement within 120 days after the Closing Date, the public
accounting firm of Ernst & Young, or such other nationally recognized
public accounting firm as is mutually acceptable to Buyer and Seller,
shall be engaged to make its determination of any amounts in dispute
(and only such amounts). Each Party shall bear and pay one-half of the
fees and other costs charged by such accounting firm.
(f) If any accounting firm is engaged as provided in Section
2.05(e), Seller and Buyer agree to provide such accounting firm with a
detailed statement itemizing any amounts in dispute and all books,
Records and other information relevant to the
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determination of the amounts in dispute. Each Party shall also be
permitted to provide expert testimony to such accounting firm
supporting such Party's positions, and such accounting firm shall take
such testimony into consideration. Such accounting firm shall be
instructed to use a materiality standard as such firm may determine to
be reasonable under the circumstances, in light of the cost to be
incurred and the amounts at issue. Such accounting firm shall be
instructed to make such calculations as soon as practicable. The final
determination of any of the aforesaid disputed items pursuant to this
Section 2.05(f) shall be binding on the Parties.
(g) If the sum of the actual Working Capital as of the
Measurement Date, as agreed by the Parties or determined by the
aforementioned accounting firm (the "ACTUAL WORKING CAPITAL AMOUNT"),
and the Actual Closing Inventory Value (as agreed by the Parties or
determined by the aforementioned accounting firm) differs from the sum
of the Preliminary Working Capital Amount and the Estimated Closing
Inventory Value, then Buyer shall pay Seller, or Seller shall pay
Buyer, as the case may be, by wire transfer in immediately available
funds, within five Business Days after final determination of the
Actual Working Capital Amount and the Actual Closing Inventory Value,
the sum of (i) such an amount as necessary to cause the net result of
such payment (not including interest due under Section 2.05(g)(ii)),
the Preliminary Working Capital Amount (whether positive or negative)
and the Estimated Closing Inventory Value to equal the sum of the
Actual Working Capital Amount and the Actual Closing Inventory Value
and interest on such amount at a rate of 8% per annum, compounded
monthly, from the Measurement Date to the date of payment.
2.06 Additional Purchase Price Adjustments.
(a) If the rights of first refusal described in item 1 of
Schedule 4.13 (the "BLOCK D RIGHTS OF FIRST REFUSAL") are exercised,
then the total amount otherwise payable by Buyer under Section 2.02
shall be reduced by the amount of $10 million.
(b) The total amount otherwise payable by Buyer under Section
2.02 shall be increased by the amount of any contributions by Seller or
Seller's Affiliates to the capital of the Companies on or after the
Measurement Date through the Closing Date.
ARTICLE III
CLOSING
3.01 Time and Place of Closing. Subject to fulfillment or waiver of
the conditions precedent specified in Sections 8.01 and 8.02, the consummation
of the transactions contemplated by this Agreement (the "CLOSING") shall take
place at the offices of Vinson & Elkins L.L.P., 1001 Fannin, Houston, Texas
commencing at 8:00 a.m. local time (a) on January 3, 2002 (provided, however,
that such date shall be extended through and including, but no later than, April
2, 2002 (i) if the Parties have complied with their obligations hereunder but
Approval under the HSR Act has not yet been received, until receipt of such
Approval or (ii) for any period of time that Seller is attempting to cure a
breach in accordance with the provisions of Section 6.07 or for any period that
the respective Affiliates of Seller are attempting to cure a breach under the
Share Purchase Agreement by and among CMS Methanol Company, Enterprises,
Marathon E.G. Methanol Limited
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and Marathon dated October 31, 2001 or under the Purchase and Sale Agreement by
and between CMS Gas Transmission Company and Marathon dated October 31, 2001),
or (b) on such other date as Buyer and Seller may mutually agree in writing. The
date upon which the Closing occurs shall be referred to herein as the "CLOSING
DATE."
3.02 Deliveries by Seller.
(a) Delivery of Documents. At the Closing, Seller shall deliver
to Buyer:
(i) With respect to the Shares, stock certificates
representing such Shares, accompanied by (A) copies of duly
executed share transfer forms for each Company, (B) copies of
duly executed resolutions of the Board of Directors of each
Company approving the transfer of the Shares, and (C) copies of
each Company's share register reflecting the transfer of the
Shares to Buyer;
(ii) An executed copy of a transition services agreement
based on the term sheet attached as Schedule 3.02 (the
"TRANSITION SERVICES AGREEMENT"); and
(iii) All other documents, instruments and writings
required to be delivered by Seller at the Closing pursuant to the
terms of this Agreement.
(b) Delivery of Records. On the Closing Date (or as soon
thereafter as practicable in the case of Records other than the minute
books and stock record books), Seller shall deliver or cause to be
delivered to Buyer minute books and stock record books of the Companies
and all Records to the extent same are not already in the possession of
the Companies, subject to the following provisions:
(i) Seller may retain the originals of all Records that
contain information relating to the Companies but principally
relate to Seller or its Affiliates (with Buyer to receive copies
thereof), and Seller may retain copies of all Records that
contain information relating to Seller or its Affiliates but
principally relate to the Companies;
(ii) Seller may retain all Records prepared in connection
with the sale of the Shares or the assets of the Companies or the
Alba Companies, including offers received from prospective
purchasers of the Shares or such assets and any information
relating to such offers, and need not deliver to Buyer or grant
Buyer access to any such Records; and
(iii) Seller may retain (with Buyer to receive copies
thereof) all consolidating and consolidated financial information
and all other accounting Records prepared or used in connection
with (A) the preparation of financial statements of the Companies
and (B) the preparation and filing of any Tax Returns.
3.03 Deliveries by Buyer. At the Closing, Buyer shall deliver to
Seller:
(a) The Adjusted Purchase Price (plus any interest due thereon
under Section 2.02), no later than 1:00 p.m., Houston time, on the
Closing Date, by wire transfer of immediately available funds to the
Designated Account;
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(b) An executed copy of the Transition Services Agreement; and
(c) All other documents, instruments and writings required to be
delivered by Buyer at the Closing pursuant to the terms of this
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as of the date hereof as
follows:
4.01 Existence and Qualification. Each of Seller, Enterprises, CMS
International, the Companies and the Alba Companies is a corporation or company
duly organized and validly existing under the laws of the jurisdiction of its
organization. Each of Seller, Enterprises, CMS International, the Companies and
the Alba Companies is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the lack of such qualification would not have a Material
Adverse Effect. Each of Enterprises, CMS International, the Companies and the
Alba Companies has all requisite power and authority to own, operate and lease
its properties and to carry on the Business as presently conducted by it. Copies
of all of the minute books, including all minutes, consents and other records of
actions taken by the stockholders or shareholders and directors (including any
committee thereof) of the Companies and the Alba Companies, and copies of the
stock or share records of the Companies and the Alba Companies, have been made
available to Buyer for its inspection.
4.02 Authority, Approval and Enforceability. Each of Seller and
Enterprises has all requisite corporate power and authority to execute and
deliver this Agreement and to perform its obligations under this Agreement. The
execution and delivery of this Agreement by each of Seller and Enterprises and
the performance of the transactions contemplated hereby by each of Seller and
Enterprises have been duly and validly approved by the boards of directors of
Seller and Enterprises and by all other corporate action, if any, necessary on
behalf of Seller or Enterprises. As of the Closing Date, the resolutions of the
boards of directors of the Companies approving the transfer of their respective
Shares at the Closing shall have been duly and validly adopted by each such
board of directors. This Agreement has been duly executed and delivered on
behalf of each of Seller and Enterprises and constitutes the legal, valid and
binding obligation of each of Seller and Enterprises, enforceable against each
in accordance with its terms, subject to applicable bankruptcy, insolvency or
other similar laws relating to or affecting the enforcement of creditors' rights
generally and to general principles of equity ("CREDITORS' RIGHTS"). At the
Closing all documents required hereunder to be executed and delivered by Seller
will have been duly authorized, executed and delivered by Seller and will
constitute legal, valid and binding obligations of Seller, enforceable in
accordance with their terms, subject to Creditors' Rights.
4.03 Capitalization of the Companies.
(a) CMS International owns beneficially and of record the shares
of share capital of the Companies set forth in Schedule 4.03 (the
"SHARES"). The Shares represent all of the issued and outstanding share
capital of the Companies. All of the Shares are duly authorized,
validly issued, fully paid and nonassessable. Except as set forth in
Schedule 4.03, (i) the Shares are free and clear of all mortgages,
pledges, security interests, liens or
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encumbrances of any kind and are not subject to any agreements or
understandings among any Persons with respect to the voting or transfer
thereof, and (ii) there are no outstanding subscriptions, options,
convertible securities, warrants, calls or other securities granting
rights to purchase or otherwise acquire any securities of the Companies
or any commitments or agreements of any character obligating Seller or
the Companies to issue or transfer any such securities.
(b) CMS Alba owns beneficially and of record 19.08334% of the
issued and outstanding shares of Alba Associates. CMS EG LDC owns of
record 23.45834% of the issued and outstanding shares of Alba
Associates and beneficial ownership of such shares is owned as provided
in Schedule 4.03. CMS EG LTD owns beneficially and of record 11.45833%
of the issued and outstanding shares of Alba Associates. Except as
otherwise set forth in the Alba Associates LLC Agreement, the shares of
Alba Associates owned by CMS Alba, CMS EG LDC and CMS EG LTD
(collectively, the "CMS ALBA ASSOCIATES SHARES") are duly authorized,
validly issued, fully paid and nonassessable. Except as otherwise
provided in the Alba Associates LLC Agreement or as set forth in
Schedule 4.03, (i) the CMS Alba Associates Shares are free and clear of
all mortgages, pledges, security interests, liens or encumbrances of
any kind and are not subject to any agreements or understandings among
any Persons with respect to the voting or transfer thereof and (ii)
there are no outstanding subscriptions, options, convertible
securities, warrants, calls or other securities granting rights to
purchase or otherwise acquire any of the CMS Alba Associates Shares or
any commitments or agreements of any character obligating Alba
Associates to issue or transfer any such securities.
(c) Alba Associates owns beneficially and of record 80% of the
issued and outstanding shares of Alba Plant LLC (the "CMS ALBA PLANT
SHARES"). Except as otherwise set forth in the Alba Plant LLC
Agreement, the CMS Alba Plant Shares are duly authorized, validly
issued, fully paid and nonassessable. Except as otherwise provided in
the Alba Plant LLC Agreement or as set forth in Schedule 4.03, (i) the
CMS Alba Plant Shares are free and clear of all mortgages, pledges,
security interests, liens or encumbrances of any kind and are not
subject to any agreements or understandings among any Persons with
respect to the voting or transfer thereof and (ii) there are no
outstanding subscriptions, options, convertible securities, warrants,
calls or other securities granting rights to purchase or otherwise
acquire any of the CMS Alba Plant Shares or any commitments or
agreements of any character obligating Alba Plant LLC to issue or
transfer any such securities.
4.04 No Conflicts. Except as provided in Schedule 4.13, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated herein will:
(a) conflict with or result in a breach, default or violation of
the articles of incorporation or other governing documents of Seller,
Enterprises, CMS International, any of the Companies or any of the Alba
Companies;
(b) conflict with or result in a breach, default or violation of,
any material agreement, document, instrument, judgment, decree, order,
governmental permit, certificate or license to which Seller,
Enterprises, CMS International, any of the Companies or any of the Alba
Companies is a party or is subject that would have a Material Adverse
Effect; or
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(c) result in the creation of any lien, charge or other
encumbrance upon any of the properties or assets of any of Enterprises,
CMS International, the Companies or any of the Alba Companies that
would have a Material Adverse Effect.
4.05 Financial Information. Attached as Schedule 4.05 are the
combined, unaudited statements of assets and liabilities of the Companies for
the year ending December 31, 2000 and the nine month period ending September 30,
2001, and the related statements of revenues and direct operating costs and
statements of cash flows relating to revenues and direct operating costs for the
periods then ended (collectively, the "FINANCIAL STATEMENTS"). The Financial
Statements were prepared in accordance with GAAP (except as disclosed in the
notes to the Financial Statements) and fairly present, in all material respects,
the financial condition of the Companies, subject to normal, recurring year end
adjustments and the absence of explanatory footnote disclosures required by
GAAP, and except as set forth on Schedule 4.05.
4.06 Material Contracts.
(a) Except as listed on Schedule 4.06(a)(i) (collectively, the
"MATERIAL CONTRACTS"), none of the Companies or the Alba Companies is a
party to or bound by any lease, agreement or other contract of the type
described below currently in effect (except for those entered into
after the Execution Date and prior to the Closing in accordance with
Section 6.02 and those to be assigned to the Companies or the Alba
Companies prior to Closing in accordance with Section 6.15):
(i) any agreements whereby any of the Companies or the Alba
Companies guarantees any material obligation of Seller, any of
its Affiliates or any other Person;
(ii) any employment agreement between any of the Companies or
the Alba Companies and any expatriates;
(iii) any agreement for capital expenditures or the
acquisition or construction of fixed assets that requires future
payments in excess of US $1,000,000 (or the equivalent in local
currency);
(iv) any collective bargaining agreement with any labor
union;
(v) any agreement granting to any Person a right of first
refusal, option, subscription right or other preferential right
to purchase or acquire any of the Shares;
(vi) agreements, indentures or other instruments relating to
the borrowing, or the guarantee of any borrowing, by any of the
Companies or the Alba Companies;
(vii) any agreement for the purchase or sale of natural gas,
natural gas liquids, crude oil, condensate or associated products
with a term of more than 90 days;
(viii) any agreement for the sale of any asset (other than
sales of natural gas, natural gas liquids, crude oil, condensate
or associated products in the ordinary
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course of business) of any of the Companies or the Alba Companies
for more than US $2,000,000 (or the equivalent in local
currency);
(ix) any agreement that constitutes a lease under which any
of the Companies or the Alba Companies is the lessor or lessee of
real or personal property which lease (A) cannot be terminated
without penalty upon not more than 30 days notice and (B)
involves an annual base rental in excess of US $1,000,000 (or the
equivalent in local currency) or whereby a lease constitutes a
capital lease for Tax or GAAP purposes;
(x) any agreement with Seller or its Affiliates relating to
the provision of goods or services or the payment of funds or the
advancing or borrowing of money (the "INTERCOMPANY AGREEMENTS");
(xi) any agency, consultancy or similar agreement requiring
payment in excess of US $500,000 per annum (or the equivalent in
local currency);
(xii) any agreement concerning a partnership or joint
venture;
(xiii) any commodity futures agreement;
(xiv) any other agreement that (A) involves future payment by
or to any of the Companies or the Alba Companies in excess of US
$1,000,000 (or the equivalent in local currency) and (B) is not
an agreement entered into in the ordinary course of owning,
operating and developing oil and gas properties and marketing
production therefrom;
(xv) any agreement granting or reserving a net profits
interest, overriding royalty interest, production payment, an
incentive compensation plan based on production, or similar
burden on oil and gas production that reduces the proceeds of
production that would otherwise be attributable to the Companies;
(xvi) any agreement pursuant to which the Companies have
acquired or transferred ownership interests in oil and gas
properties (including interests in production sharing contracts),
transferred an interest in the Housing Project, or subjected
interests in oil and gas properties or the Housing Project to any
liens or judgments; or
(xvii) any agreement pursuant to which Alba Plant LLC has
transferred an interest in the Alba Plant or subjected the Alba
Plant to any liens or judgments.
Attached as Schedule 4.06(a)(ii) is a listing of certain
agreements (other than the assignments contemplated by Section 6.15)
that, as of the Execution Date, have not been executed and are under
negotiation (the "PENDING MATERIAL CONTRACTS"). Recent drafts of each
Pending Material Contract have been provided to Buyer, and the draft
date of each such draft so provided is listed on Schedule 4.06(a)(ii).
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(b) Schedule 4.06(b) sets forth the directors, officers and
powers of attorney of or granted by each of the Companies.
(c) True and complete copies of each Material Contract have been
made available to Buyer; provided, however, that many of such documents
are in the Spanish language and Seller makes no representations as to
the accuracy or completeness of any English translations made available
to Buyer.
(d) To the Knowledge of Seller, except as set forth in Schedule
4.06(d), (i) each of the Material Contracts is in full force and
effect, except to the extent that the failure to be in full force and
effect would not have a Material Adverse Effect and (ii) none of the
Companies or the Alba Companies is in default with respect to any
Material Contract other than exceptions to the foregoing that would not
have a Material Adverse Effect.
(e) Except as set forth in Schedule 4.06(e), (i) through the
Execution Date, CMS EG LTD. has (x) been paid all amounts due to CMS EG
LTD. under the Alba PSC and the Block D PSC in accordance with the
percentage interests set forth in and the terms and conditions of the
Alba PSC and the Block D PSC and the other Material Contracts, and (y)
borne expenses in accordance with the percentage interests set forth in
and terms and conditions of the Alba PSC and the Block D PSC and the
other Material Contracts; (ii) to the Knowledge of Seller, except for
matters that have been resolved prior to the Execution Date, the
government of the Republic of Equatorial Guinea, as of the Execution
Date, has not threatened modification or termination of either the Alba
PSC or the Block D PSC, nor has it alleged any breaches of either such
agreement, (iii) CMS EG LTD. has not transferred any interest in either
the Alba PSC or the Block D PSC to any other party or subjected the
Alba PSC or the Block D PSC to any liens or judgments (except for the
Permitted Encumbrances), (iv) no "exclusive operations" or "sole risk
projects" under Article 12 of the Alba JOA or under Article 7 of the
Block D JOA have occurred, (v) except as reflected in the Material
Contacts, CMS EG LTD. is not obligated to pay a share of any costs
arising under either (x) the Alba PSC or the Alba JOA or (y) the Block
D PSC or the Block D JOA, that is disproportionate to its respective
percentage interests under the Alba PSC or Alba JOA or the Block D PSC
or Block D JOA, as applicable, (vi) to the Knowledge of Seller, the
Companies have acquired the rights required pursuant to applicable Law
to construct and operate the Housing Project, (vii) to the Knowledge of
Seller, the Government of the Republic of Equatorial Guinea, as of the
Execution Date, has not threatened termination of any of the rights of
the Companies with respect to the Housing Project and (viii) the
Companies have not transferred any interest in the Housing Project to
any other party or subjected the Housing Project to any liens or
judgments (except Permitted Encumbrances and except for the Pending
Material Contracts listed as item 9 on Schedule 4.06(a)(ii)).
(f) Except as set forth in Schedule 4.06(f), (i) to the Knowledge
of Seller, Alba Plant LLC has acquired the rights required pursuant to
applicable Law to own and operate the Alba Plant in substantially the
same manner in which it has been operated prior to the Execution Date,
(ii) to the Knowledge of Seller, the government of the Republic of
Equatorial Guinea, as of the Execution Date, has not threatened
termination of any of the rights of the Alba Companies with respect to
the LPG plant owned and operated by Alba Plant LLC (the "ALBA PLANT")
and (iii) Alba Plant LLC has not transferred any interest in the
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Alba Plant to any other party or subjected the Alba Plant to any liens
or judgments (except for Permitted Encumbrances).
4.07 Absence of Certain Changes. Since the date of the September 30,
2001 Financial Statements, none of the Companies and the Alba Companies have:
(a) transferred any of its assets, including any right under any
lease or Material Contract or any proprietary right or other intangible
asset, in each case having a value in excess of $1,000,000 except for
fair consideration and in the ordinary course of business;
(b) waived, released, canceled, settled or compromised any debt,
claim or right having a value in excess of $1,000,000 in each case
except in the ordinary course of business;
(c) suffered (i) any damage, destruction or casualty of property
if the anticipated cost to repair such property, after application of
all insurance proceeds with respect thereto, exceeds $5,000,000 in the
aggregate or (ii) any taking by condemnation or eminent domain of any
of its property or assets having a historical cost or fair market value
that exceeds $2,000,000;
(d) conducted any of its affairs in a manner that is outside the
ordinary course of business and inconsistent with its past practices
except (i) for any event described in any of Sections 4.07(a) through
(c) hereof (disregarding the applicable dollar thresholds in any of
such sections), (ii) as otherwise contemplated in this Agreement or
(iii) as results from announcement by Seller of its intention to sell
the Companies;
(e) changed any accounting methods or principles used in
recording transactions on the books of any Company or any of the Alba
Companies or in preparing the financial statements of any Company or
any of the Alba Companies other than as required by GAAP; or
(f) entered into any contract committing itself with respect to
any of the foregoing.
4.08 Employees. Except as set forth on Schedule 4.08, (a) the
Companies and the Alba Companies have no employees, and (b) the Companies and
the Alba Companies do not administer or sponsor any employee pension benefit
plan or employee welfare benefit plan. For the purposes of this Section 4.08, an
employee pension benefit plan includes any plan, fund or program providing
either retirement income to employees, former employees or their beneficiaries
or a deferral of income to employees, former employees or their beneficiaries
beyond termination of employment. Also, for purposes of this Section 4.08, an
employee welfare benefit plan includes any plan, fund or program providing
employees, former employees or their beneficiaries with health, sickness,
accident, disability, death, unemployment or other similar benefits.
4.09 Insurance. Schedule 4.09 contains a list of all material policies
of property damage, liability and other forms of insurance (other than officer's
and director's liability policies) that cover occurrences as of, or claims made
on, the date hereof and maintained by any of the Companies, any
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of the Alba Companies or by Seller or any Affiliate thereof to the extent
applicable to any of the Companies or the Alba Companies.
4.10 Litigation. Except for (a) claims listed in Schedule 4.10, (b)
claims under worker's compensation and similar Laws, (c) routine claims for
employee benefits and (d) claims for money damages alone of less than US$500,000
(or the equivalent in local currency) in respect of any claim, there are no
lawsuits, claims, arbitrative, governmental investigations or other legal
proceedings pending or, to the Knowledge of Seller, threatened against any of
the Companies or any of the Alba Companies or otherwise relating to the conduct
of the Business that would have a Material Adverse Effect.
4.11 Liability for Brokers' Fees. Buyer will not directly or
indirectly incur any liability or expense as a result of any undertakings or
agreements of Seller for brokerage fees, finder's fees, agent's commissions or
other similar forms of compensation in connection with this Agreement or any
agreement or transaction contemplated hereby.
4.12 Compliance with Laws. Except as listed in Schedule 4.12, none of
the Companies or any of the Alba Companies has received any written notice of
any violation of any applicable Law other than such violations as would not have
a Material Adverse Effect. To the Knowledge of Seller, and except as would not
have a Material Adverse Effect, or as set forth in Schedule 4.12, (a) the
Companies and the Alba Companies are in compliance with all applicable Laws and
(b) none of the Companies or any of the Alba Companies has entered into or
agreed to any court decree or order or is subject to any judgment, decree or
order relating to compliance with any applicable Laws.
4.13 Consents and Preferential Purchase Rights. Except as disclosed in
Schedule 4.13, (a) no consents are required to be obtained by Seller or any of
the Companies in connection with the transfer of the Shares to Buyer, and (b)
there are no preferential purchase rights applicable to the transfer of the
Shares to Buyer.
4.14 Taxes. Except as set forth on Schedule 4.14 or as would not have
a Material Adverse Effect:
(a) All returns, reports, and declarations of estimated tax with
respect to any Tax which are required to be filed on or before the
Closing Date by or with respect to the Companies or, to the Knowledge
of Seller, the Alba Companies (the "TAX RETURNS") have been or will be
duly and timely filed, all items of income, gain, loss, deduction,
credit or other items ("TAX ITEMS") required to be included in each
such Tax Return have been so included and all such Tax Items and any
other information provided in each such Tax Return are true, correct,
complete and in accordance with applicable Laws and all such Tax
Returns reflect all liabilities for Taxes for the periods covered by
such Tax Returns, all Taxes shown as due on each such Tax Return have
been or will be timely paid in full, no penalty, interest or other
charge is or will become due with respect to the late filing of any
such Tax Return or late payment of any such Tax or any estimate related
to such Tax, and all Tax withholding and deposit requirements imposed
on or with regard to the Companies and the Alba Companies have been
satisfied in full in all respects.
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(b) There is no investigation or other proceeding pending with
respect to the Companies or the Alba Companies for any Tax in any
jurisdiction where the Companies or the Alba Companies do not file Tax
Returns.
(c) There are no pending audits, assessments or claims for any
Tax deficiency of the Companies or the Alba Companies. There are no
pending claims for refund of any Tax for the Companies or the Alba
Companies.
(d) There are no outstanding agreements, rulings or requests for
rulings applicable to any Tax that are, or if issued would be, binding
upon the Companies or the Alba Companies for any post-Closing period.
(e) The Companies or the Alba Companies do not have in force any
waiver of any statute of limitations in respect of any Tax or any
extension of time with respect to a Tax assessment or deficiency.
(f) There are no liens for any Tax upon any of the assets of the
Companies or the Alba Companies except for liens for Taxes not yet due.
(g) Except as reflected on the Companies' or the Alba Companies'
Tax Returns, there are no elections with respect to any Tax affecting
the Companies or the Alba Companies.
(h) Any Tax required to be withheld by the Companies or the Alba
Companies and paid in connection with amounts paid or owing to any
lender, creditor, employee, contractor, service provider or any other
Person has in fact been withheld and paid in full and all Tax
withholding, reporting and payment obligations have been complied with
in accordance with applicable Law.
(i) Neither the Companies nor the Alba Companies are parties to,
bound by or have any obligation under any Tax sharing agreement, Tax
indemnification agreement, or similar agreement.
(j) The Companies are classified, and have been classified for
more than 12 months prior to the date hereof, as disregarded entities
separate from their respective owners pursuant to Treasury Regulation
Section 301.7701-3. Alba Associates and Alba Plant LLC are classified
as partnerships pursuant to Treasury Regulation Section 301.7701-3.
Copies of Internal Revenue Service Forms 8832 filed by Seller with
respect to the Companies and the Alba Companies are attached hereto as
Schedule 4.14(j).
4.15 Bank Accounts. Schedule 4.15 sets forth the name of each bank and
trust company with which each Company and Alba Company have an account, safe
deposit box or vault and the names of all Persons authorized to draw upon such
account or who have authorized access to any such safe deposit box or vault, and
Buyer acknowledges that Seller may cause these accounts to be closed prior to
Closing; provided the amounts therein are transferred to new accounts for the
applicable company established by Buyer.
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4.16 Intellectual Property. The Companies and the Alba Companies own,
or have the right or license to use, all Intellectual Property used by the
Companies or the Alba Companies in the Business and such rights shall not be
adversely affected by the transactions contemplated under this Agreement.
4.17 Data Room and Information. To Seller's Knowledge and except for
(i) the Permitted Encumbrances (excluding item (i) of the definition of
Permitted Encumbrances) and (ii) matters disclosed in any Schedule to this
Agreement:
(a) all material written data and material written information of
CMS International, the Companies or the Alba Companies relating to the
Companies, the Alba Companies or the Business in CMS International's,
the Companies' or the Alba Companies' possession was contained in the
Data Room or subsequently disclosed or made available to Buyer or
Buyer's Affiliates (excluding any information described in Section
3.02(b)(ii)); and
(b) all written data and written information given to Buyer or
Buyer's Affiliates in the Data Room or subsequently disclosed or made
available by or on behalf of Seller concerning the Companies, the Alba
Companies or the Business is believed by Seller (i) not to be
misleading in any material respect, and (ii) to be accurate in all
material respects when given and by reference to the facts existing at
the time such information or data was created; provided that no
representation or warranty is made or given as to the accuracy or
completeness of any models, projections, opinions, interpretations,
estimates or forecasts (whether contained in any third party document
or otherwise) or any information or data contained in any of the
foregoing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER AND MARATHON
Buyer and Marathon represent and warrant to Seller as of the date
hereof as follows:
5.01 Existence and Qualification. Buyer is a company duly formed,
validly existing and in good standing under the laws of the Cayman Islands and
Marathon is a corporation duly incorporated, validly existing and in good
standing under the laws of Ohio. Each of Buyer and Marathon has all requisite
corporate power and authority to own, operate and lease its properties and to
carry on its business as presently conducted.
5.02 Authority, Approval and Enforceability. Each of Buyer and
Marathon has all requisite power and authority to execute and deliver this
Agreement and to perform its obligations under this Agreement. The execution and
delivery of this Agreement by each of Buyer and Marathon and the performance of
the transactions contemplated hereby by each of Buyer and Marathon have been
duly and validly approved by the boards of directors of Buyer and Marathon and
by all other action, if any, necessary on behalf of Buyer or Marathon. This
Agreement has been duly executed and delivered on behalf of Buyer and Marathon
and constitutes the legal, valid and binding obligation of Buyer and Marathon
enforceable in accordance with its terms, subject to Creditors' Rights. At the
Closing, all documents required hereunder to be executed and delivered by Buyer
will have been duly authorized, executed and delivered by Buyer and will
constitute legal,
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valid and binding obligations of Buyer, enforceable in accordance with their
terms, subject to Creditors' Rights.
5.03 No Conflicts. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated herein will:
(a) conflict with or result in a breach, default or violation of
the articles of incorporation or other governing documents of Buyer or
Marathon;
(b) conflict with or result in a breach, default or violation of
any material agreement, document, instrument, judgment, decree, order,
governmental permit, certificate or license to which Buyer or Marathon
is a party or is subject; or
(c) require Buyer or Marathon to obtain or make any waiver,
consent, action, approval clearance or authorization of, or
registration, declaration or filing with, any Governmental Authority,
except for filings under the HSR Act.
5.04 Investment. Marathon is an accredited investor as defined in
Regulation D of the United States Securities Act of 1933 and is causing Buyer to
acquire the Shares for its own account, to be held by Buyer for investment and
not with a view to, or for offer or resale in connection with, a distribution
thereof within the meaning of the Securities Act of 1933 or a distribution
thereof in violation of any applicable securities laws. Each of Buyer and
Marathon, together with its respective directors, executive officers and
advisors, are familiar with investments of the nature of the Shares and the
Business, understand that this investment involves substantial risks, have
adequately investigated the Companies and the Business and have substantial
knowledge and experience in financial and business matters and the international
oil and gas industry such that they are capable of evaluating, and have
evaluated, the merits and risks inherent in purchasing the Shares and are able
to bear the economic risks of such investment.
5.05 Financial Capacity. Marathon will cause Buyer to have cash on
hand or financing commitments that are sufficient to satisfy all of Buyer's
obligations under this Agreement to be performed at the Closing. Neither Buyer
nor Marathon is aware of any event or occurrence that would result in any of the
conditions to its right to funds under such financing commitments not to be
satisfied. Marathon will provide to Seller such documentation as Seller may
reasonably request to confirm Buyer's financial capacity.
5.06 Liability for Brokers' Fees. Seller will not directly or
indirectly incur any liability or expense as a result of any undertakings or
agreements of Buyer or Marathon for brokerage fees, finder's fees, agent's
commissions or other similar forms of compensation in connection with this
Agreement or any agreement or transaction contemplated hereby.
5.07 No Knowledge of Seller's Breach. As of the Execution Date,
neither Buyer nor Marathon has Knowledge of any breach by Seller of Seller's
representations and warranties or covenants hereunder.
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ARTICLE VI
COVENANTS OF SELLER AND BUYER
6.01 Access.
(a) During the period commencing with the Execution Date and
ending at 5:00 p.m., local time, on November 30, 2001 (the "DUE
DILIGENCE PERIOD"), Buyer shall have the right to conduct the
investigation described in Section 6.01(b).
(b) Upon reasonable notice from Buyer to Seller, Seller shall
permit, and shall cause the Companies and the Alba Companies to permit,
Buyer and its authorized employees, agents, accountants, legal counsel
and other representatives to have reasonable access, at Buyer's sole
expense, risk and cost, to the facilities, properties, personnel and
Records of the Companies and the Alba Companies (including all title,
land, geological, geophysical, seismic, engineering, production,
product sales, personnel-related documents and financial records and
data of the Companies and the Alba Companies) for the purpose of
conducting an investigation of their financial condition, corporate
status, business, properties and assets; provided however, that such
investigation shall be conducted in a manner that does not interfere
with normal operations of the Companies and the Alba Companies.
(c) Prior to Closing, (i) Buyer will not contact any Governmental
Authority of the Republic of Equatorial Guinea, or official thereof, or
any employee of Seller, the Companies, the Alba Companies or any of
their Affiliates, without, in each instance, first obtaining the
approval of an authorized representative of Seller (not to be
unreasonably withheld), and (ii) Seller will furnish, or cause the
Companies or the Alba Companies to furnish, Buyer with such additional
financial and operating data and other information pertaining to the
Companies and the Alba Companies and their assets and operations as
Buyer may reasonably request; provided however that nothing in this
Agreement shall obligate Seller to take any action that would disrupt
the normal course of its or any of its Affiliate's, or any of the
Companies' or the Alba Companies', business or violate the terms of any
applicable Law or agreement to which it or any of its Affiliates or any
Company or either Alba Company is a party or to which it or any of its
Affiliates, any Company, either Alba Company or any of their assets are
subject; and provided further, that the confidentiality of any data or
information to which Buyer is given access shall be maintained by Buyer
and its representatives in accordance with Section 11.01.
(d) Seller has made available to Buyer and Buyer shall review
prior to Closing copies of all agreements listed on Schedule 6.01 (the
"OTHER CONTRACTS").
(e) After the expiration of the Due Diligence Period and until
Closing or termination of this Agreement, Buyer shall continue to have
the right to conduct the investigation described in Section 6.01(b) to
the extent necessary for the purposes of preparing for an orderly
transition of ownership of the Companies.
6.02 Operation of Business.
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(a) Except (i) as set forth in Schedule 6.02 or as otherwise
contemplated in this Agreement, (ii) as otherwise consented to by Buyer
in writing (which consent will not be unreasonably delayed, withheld or
conditioned), (iii) as provided for in the Material Contracts, (iv) for
the negotiation and execution of any Pending Material Contract
(provided such Pending Material Contract is substantially in the form
of the draft listed on Schedule 4.06(a)(ii) and blanks are completed
with commercially reasonably terms), (v) compliance with the Block D
Rights of First Refusal and (vi) for curative actions contemplated by
the Decree 2001 listed as item 13 on Schedule 4.06(a)(ii), including
payment of commercially reasonable amounts with respect to the
acquisition of property rights, from the Execution Date through the
Closing Date, Seller will cause each of the Companies and the Alba
Companies to:
(A) conduct Business, in all material respects, in the
ordinary course of business, consistent with past practices;
(B) use its Reasonable Efforts to comply in all material
respects with all applicable Laws and use its Reasonable Efforts
to maintain compliance in all material respects with all of its
material agreements;
(C) continue its existing practices relating to the
maintenance and operation of its assets;
(D) not directly or indirectly purchase, redeem or otherwise
acquire or dispose of any share of its capital stock or any
subscriptions, warrants, options, calls or other commitments or
rights to acquire any shares of its capital stock or agree to
take any steps otherwise affecting or changing its capitalization
(except that CMS International may assign the Shares to Seller);
(E) not merge into or with or consolidate with any other
Person or acquire all or substantially all of the business or
assets of any Person;
(F) not make any change in its governing documents;
(G) not purchase any securities of any Person except for
short-term investments made in the ordinary course of business;
(H) not sell, lease or otherwise dispose of or grant rights
in respect of any of its assets or properties that have a fair
market value in excess of US $2,000,000 (or the equivalent in
local currency) (1) for less than fair market value and (2) other
than in the ordinary course of business;
(I) not create, incur, assume or guarantee any long-term debt
or capitalized lease obligation or, except in the ordinary course
of business and consistent with past practices, incur or assume
any short-term debt;
(J) not mortgage, pledge or subject to any lien, claim,
encumbrances or security interest any of its assets, tangible or
intangible, except for Permitted
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Encumbrances or other similar liens or encumbrances created in
the ordinary course of business consistent with past practices;
(K) not take any action or enter into any commitment with
respect to or in contemplation of any liquidation, dissolution,
recapitalization, reorganization or other winding up of its
Business;
(L) not grant any preferential right of purchase or similar
consent right to the transfer or assignment of the Business or
any of its assets;
(M) not take, or knowingly permit to be taken, any action in
the conduct of the Business that would be contrary to or in
breach of any of the terms or provisions of this Agreement; and
(N) not commit to do any of the foregoing.
(b) In addition to the foregoing, from the Execution Date until
the Closing or the termination of this Agreement, Seller agrees to keep
Buyer reasonably apprised, from time to time, of any significant
developments in the Business and to consult with Buyer prior to
adopting new work plans or budgets. To the extent any disruption occurs
to the Business prior to Closing as a result of the announcement by
Seller of its intention to sell the Companies, Seller agrees to use
Reasonable Efforts to minimize such disruption.
(c) Seller agrees to use Reasonable Efforts to cause Alba Plant
LLC and each of the current owners of the Alba JOA to enter into a Gas
Processing Agreement, substantially in the form of the agreement
executed on January 22, 1996, prior to the Closing Date; provided,
however, that the obtaining of such Gas Processing Agreement shall not
be a condition to Buyer's obligation to proceed with the Closing under
Section 8.02.
(d) Seller shall refrain and shall cause the Companies and the
Alba Companies to refrain from taking any action that would change the
classification for U.S. income tax purposes of the Companies or the
Alba Companies as described in Section 4.14(j).
(e) Seller shall cause the Companies not to dividend, loan or
otherwise distribute money to Seller at any time on or after the
Measurement Date until the earlier of termination of this Agreement and
the Closing.
6.03 Reasonable Efforts. Seller will use, and will cause the Companies
to use, their Reasonable Efforts to (i) obtain the satisfaction of the
conditions to the Closing set forth in Section 8.02 hereof and (ii) obtain the
Tax Settlement Agreement described in Section 8.01(f).
6.04 Press Releases. From the Execution Date through the Closing Date,
subject to applicable securities law or stock exchange requirements, each Party
shall promptly advise and consult with, and obtain the consent (which consent
will not be unreasonably delayed, withheld or conditioned) of, the other Party
before issuing, or permitting any of its directors, officers, employees, agents
or its Affiliates to issue, any press release with respect to this Agreement or
the transactions contemplated hereby.
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6.05 Insurance. Seller shall not voluntarily terminate and will
maintain in force and effect through the Closing Date the insurance coverages
set forth on Schedule 4.09 or will cause to be placed in force and effect
comparable insurance coverage. Buyer recognizes that the insurance coverages set
forth on Schedule 4.09 are policies covering the operations and assets of Seller
and its Affiliates and the limits of coverage available thereunder to the
Companies are subject to claims by Seller and its Affiliates. Buyer acknowledges
that no insurance coverage or policy maintained by Seller or its Affiliates will
extend beyond the Closing for the benefit of the Companies or Buyer.
6.06 Satisfaction of Seller's Conditions. Buyer will use its
Reasonable Efforts to obtain the satisfaction of the conditions to the Closing
set forth in Section 8.01 hereof (other than the condition described in Section
8.01(f)).
6.07 Breach Notice. If, prior to the Closing Date, Buyer obtains
Knowledge of a breach of any of Seller's representations and warranties or
covenants contained in this Agreement, Buyer shall notify Seller in writing of
such information (the "BREACH NOTICE") within five Business Days of such
discovery or the day prior to the Closing Date, whichever is earlier. The Breach
Notice shall contain reasonable details regarding the alleged breach and Buyer's
good faith estimate of the potential Losses associated with such breach. In the
event the breach is of a magnitude such that Losses attributable to such breach
(together with other such breaches discovered by Buyer with respect to which
Buyer has delivered the requisite Breach Notices) are reasonably likely to
exceed 5% of the Base Purchase Price and (x) Seller fails to deliver to Buyer a
written undertaking within five Business Days of receipt of such Breach Notice
that Seller intends to cure such breach within 90 days thereafter or (y) Seller
delivers such written undertaking but fails to cure such breach within such 90
days, (i) Buyer may terminate this Agreement upon written notice to Seller
(provided that Buyer has timely given Seller the requisite Breach Notices) and
(ii) Seller may terminate this Agreement upon written notice to Buyer.
6.08 Balance Sheet Adjustments and Other Pre-Closing Transfers. Prior
to the Closing Date, Seller (a) will cause all intercompany accounts (including
all receivables or payables for income tax charges) between any of the Companies
or the Alba Companies and Seller or between any of the Companies or the Alba
Companies and any of Seller's Affiliates to be eliminated without the transfer
of cash from Seller, any of the Companies or the Alba Companies and (b) will
cause all Intercompany Agreements to be terminated, except for agreements
between any of the Companies and (i) the Alba Companies or (ii) Atlantic
Methanol Company LLC or as otherwise provided in the Transition Services
Agreement.
6.09 Consents and Preferential Rights. Seller will use Reasonable
Efforts to obtain any consents listed in Schedule 4.13 prior to the Closing
Date, and Buyer agrees to use Reasonable Efforts to cooperate in such process,
as requested by Seller.
6.10 Preservation of Books and Records; Access. For a period of seven
years after the Closing Date, Buyer shall (a) preserve and retain the Records
and all other corporate, accounting, legal, auditing and other books and records
of the Companies (including any documents relating to any governmental or
non-governmental actions, suits, proceedings or investigations) relating to the
conduct of the business and operations of the Companies prior to the Closing
Date and (b) cause the Companies to permit Seller and its authorized
representatives to have reasonable access thereto on the same basis as applies
to Buyer pursuant to Section 6.01 and to meet with employees of Buyer
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and the Companies on a mutually convenient basis in order to obtain additional
information and explanations with respect to such books and records.
Notwithstanding the foregoing, during such seven-year period, Buyer may dispose
of any such Records that are offered to, but not accepted by, Seller.
6.11 Further Assurances. At and after the Closing, Seller and Buyer
will use Reasonable Efforts to take all appropriate action and execute any
documents or instruments of any kind that may be reasonably necessary to
effectuate the intent of this Agreement.
6.12 Casualty Loss. If, after the date hereof and prior to the Closing
Date, all or any part of the assets of the Companies or the Alba Companies shall
be destroyed by explosion, fire or other casualty, and if the Closing occurs,
Seller shall pay to Buyer at the Closing all sums paid to Seller or any of its
Affiliates by third parties by reason of the destruction of such assets, and in
addition, Seller shall, and shall ensure that its Affiliates shall, assign,
transfer and set over unto Buyer all of the right, title and interest of Seller
or the relevant Affiliate in and to any unpaid awards or other payments from
third parties arising out of such destruction. Seller shall not voluntarily
compromise, settle or adjust any amounts payable by reason of such destruction
without the prior written consent of Buyer. Seller shall use its Reasonable
Efforts to obtain payment from the relevant third party.
6.13 Change of Name. Within 90 days following the Closing Date, Buyer
shall cause the Companies to change their names and to cease using the letters
"CMS" in their names or in any way in connection with the business of Buyer, the
Companies or any of their Affiliates. Buyer shall protect, defend and indemnify
Seller and its Affiliates from and against any Losses arising out of the use of
the letters "CMS" as part of the name of any of the Companies or in connection
with the Business after Closing.
6.14 No Solicitation of Employees. Buyer shall, and shall cause its
Affiliates, for two years from the date hereof, not to directly or indirectly
solicit for employment or hire any employee of Seller or its Affiliates without
Seller's prior written consent.
6.15 Assignment of Contracts. On or before the Closing, Seller shall,
or, if applicable, shall cause its Affiliates to, deliver to Buyer executed
assignment and assumption agreements substantially in the form attached hereto
as Schedule 6.15(a), pursuant to which Seller or, if applicable, its Affiliates,
shall assign to the Companies all rights to the agreements listed on Schedule
6.15(b), and the Companies shall assume all obligations arising under such
agreements.
6.16 Bank Accounts. If permitted by the respective banks, on or before
the Closing, Seller shall, or, if applicable, shall cause its Affiliates to,
cause the "Authorized Drawers" to terminate their authority with respect to the
bank accounts listed on Schedule 4.15 and, to execute such documents as Buyer
may reasonably request in order to designate new Persons selected by Buyer as
"Authorized Drawers" with respect to such bank accounts.
6.17 Treatment of Certain Claims.
(a) Seller shall retain responsibility and liability for, and
shall prosecute, defend, arbitrate or otherwise pursue and resolve the
matters listed as Claims 1, 3, 4 and 7 on Schedule 4.10 and shall be
entitled to retain and receive the benefits of any counterclaims
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associated with any such claims. Furthermore, Seller shall retain
responsibility and liability for, and shall prosecute, defend,
arbitrate or otherwise pursue and resolve, the matter listed as Claim 5
on Schedule 4.10 but only to the extent claims described therein
against the Companies are attributable to periods prior to and
including the Measurement Date. After Closing, Buyer agrees to provide
Seller with full cooperation and access to documents and personnel of
the Companies and the Alba Companies as reasonably requested in
connection with any of the foregoing Claims. After Closing, Buyer shall
have the right to participate in the prosecution, defense, arbitration
or other pursuit or resolution of such matters at its own expense.
(b) Subject to Section 10.01(b)(vi), Buyer shall assume
responsibility and liability for, and shall prosecute, defend,
arbitrate or otherwise pursue and resolve, the matter listed as Claim 2
on Schedule 4.10. Seller agrees to provide Buyer with full cooperation
and access to documents and personnel as reasonably requested in
connection with such matter. Seller shall have the right to participate
in the prosecution, defense, arbitration or other pursuit or resolution
of such matters at its own expense. Buyer shall not voluntarily
compromise or settle such matter without the prior written consent of
Seller, which shall not be unreasonably withheld.
(c) Claims 5, 6 and 8 shall be handled in accordance with the
applicable provisions of Article VII.
6.18 Notices. Seller will deliver the notices described in matter 6 on
Schedule 4.13 prior to Closing.
6.19 HSR Filing. Each Party agrees to (or, if applicable, to cause its
appropriate Affiliate to), (a) make an appropriate filing of a Notification and
Report Form pursuant to the HSR Act with respect to the transactions
contemplated by this Agreement and to pay any fees it is required to pay with
respect thereto as promptly as practicable and in any event within 10 Business
Days of the date of this Agreement, (b) if the Federal Trade Commission or the
Department of Justice, as applicable, issues a request for additional
documentary material and information pursuant to the HSR Act (a "SECOND
REQUEST") in connection with the transactions contemplated by this Agreement,
respond to the Second Request as promptly as possible and, in any event, certify
compliance with the Second Request within 60 days of the date of issue of the
Second Request and (c) complete the review process under the HSR Act to permit
the consummation of the transactions contemplated by this Agreement including
causing the expiration or termination of the applicable waiting periods under
the HSR Act as soon as possible.
6.20 JOA Election. Seller agrees to use Reasonable Efforts to obtain
consents from the current parties to the Alba JOA to file a protective election
(in a form to be provided by Buyer) under Section 761 of the Code, reconfirming
their intent, as expressed in the Alba JOA, to be excluded from the provisions
of Subchapter K of the Code; provided, however, that the obtaining of such
consents shall not be a condition to Buyer's obligation to proceed with the
Closing under Section 8.02.
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ARTICLE VII
TAX MATTERS
7.01 Preparation and Filing of Tax Returns.
(a) Seller shall prepare all Tax Returns, other than U.S. Tax
Returns, for the Companies and the Alba Companies to be filed for
calendar year 2001 in accordance with all relevant Laws, including
those Tax Returns for which the due date is after the Closing. At least
30 days prior to the due date (including extensions) of each such Tax
Return, Seller shall deliver to Buyer for Buyer's review a copy of such
Tax Return. If the amount of Tax shown to be due on such Tax Return
exceeds the amount reflected as a liability for such Tax on the
Settlement Statement, Seller shall pay to Buyer the amount of such
excess Tax not less than five days prior to the due date of such Tax
Return, or if the amount of Tax shown to be due on such Tax Return is
less than the amount reflected as a liability for such Tax on the
Settlement Statement, Buyer shall pay to Seller the difference not less
than five days prior to the due date of such Tax Return. Buyer shall
cause the Companies and the Alba Companies to file timely such Tax
Return with the appropriate Governmental Authority and to pay timely
the amount of Taxes shown to be due on such Tax Return. Buyer shall
prepare all Tax Returns of the Companies and the Alba Companies for
calendar year 2002, although it is understood that Seller shall prepare
any Tax Return required to be filed between the date of this Agreement
and Closing as necessary. Buyer shall be responsible for all Taxes of
the Companies and the Alba Companies for calendar year 2002. However,
it is expressly understood that Seller shall be liable for all Taxes
associated with the transactions contemplated by this Agreement.
(b) Any Tax Return to be prepared pursuant to the provisions of
this Article VII shall be prepared in a manner consistent with
practices followed in prior years which are in accordance with
applicable Laws, except for changes required by changes in Law.
(c) Seller shall cause the Companies and the Alba Companies not
to make, revoke or amend any Tax election that would affect the period
after the Closing (other than any election that must be made
periodically and that is made consistently with past practice) without
the prior consent of Buyer.
(d) The Buyer Indemnified Parties shall not take any action, or
allow the Companies or the Alba Companies to take any action, on or
after the Closing Date, that would increase the liability of Seller or
its direct or indirect shareholders for Taxes during the period of time
prior to or ending on the Closing Date; provided, however, that nothing
in this Section 7.01(d) shall prevent the Buyer Indemnified Parties
from making any election under Sections 754 or 761 of the Code, and
Seller shall consent to and cooperate with the Buyer Indemnified
Parties in making any such Section 754 elections for periods beginning
on or after January 1, 2002.
(e) Seller shall be responsible for any Transfer Taxes.
(f) The Adjusted Purchase Price shall be allocated among the
assets of the Companies and the Alba Companies in the manner required
by Section 1060 of the Code. To
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facilitate such allocation, Buyer shall deliver to Seller, not later
than December 1, 2001, a schedule setting forth Buyer's proposed
allocation of the Base Purchase Price. Buyer and Seller shall use
Reasonable Efforts to agree upon a final allocation of the Adjusted
Purchase Price, not later than 120 days after Closing. Buyer and Seller
shall timely file IRS Form 8594 with respect to the transactions
contemplated by this Agreement.
(g) For U.S. Tax purposes, Seller intends to effect a liquidation
or deemed liquidation of CMS International prior to the Closing Date
such that, for U.S. Tax purposes, the transactions contemplated by this
Agreement will be a sale of assets by Seller on the Closing Date. Buyer
and Seller acknowledge that, for U.S. Tax purposes, the transactions
contemplated by this Agreement are treated as closed and completed on
the Closing Date, and that all items determined by reference to dates
other than the Closing Date are for administrative convenience and
shall be treated for U.S. Tax purposes, if applicable, as adjustments
to the Purchase Price, and the Parties agree to file their respective
U.S. Tax Returns in a manner consistent with this treatment. For U.S.
Tax purposes, Buyer and Seller shall report their respective allocable
shares of the items of income, gain, loss, deduction and credit of the
Alba Companies based on an interim closing of the books as of January
3, 2002.
7.02 Access to Information.
(a) After the Closing, Seller shall grant to Buyer (or its
designees) access at all reasonable times to all of the information,
books and records relating to the Companies or the Alba Companies
within the possession of Seller (including work papers and
correspondence with taxing authorities), and shall afford Buyer (or its
designees) the right (at Buyer's expense) to take extracts therefrom
and to make copies thereof, to the extent reasonably necessary to
permit Buyer (or its designees) to prepare Tax Returns, to conduct
negotiations with Tax authorities or to defend claims made by Tax
authorities or by third parties, and to implement the provisions of, or
to investigate or defend any claims between the Parties arising under,
this Agreement.
(b) After the Closing, Buyer shall grant or cause the Companies
and the Alba Companies to grant to Seller (or its designees) access at
all reasonable times to all of the information, books and records
relating to the Companies and the Alba Companies within the possession
of Buyer, the Companies or the Alba Companies (including work papers
and correspondence with Tax authorities), and shall afford Seller (or
its designees) the right (at Seller's expense) to take extracts
therefrom and to make copies thereof, to the extent reasonably
necessary to permit Seller (or its designees) to prepare Tax Returns,
to conduct negotiations with Tax authorities, to defend claims made by
Tax authorities or third parties, and to implement the provisions of,
or to investigate or defend any claims between the Parties arising
under, this Agreement.
(c) Each of the Parties will preserve and retain all schedules,
work papers and other documents relating to any Tax Returns of or with
respect to the Companies or the Alba Companies or to any claims, audits
or other proceedings affecting the Companies or the Alba Companies
until the expiration of the statute of limitations (including
extensions) applicable to the taxable period to which such documents
relate or until the final determination of any
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controversy with respect to such taxable period, and until the final
determination of any payments that may be required with respect to such
taxable period under this Agreement.
7.03 Indemnification by Seller. Seller hereby agrees to protect,
defend, indemnify and hold harmless the Buyer Indemnified Parties, the Companies
and the Alba Companies from and against, and agrees to pay (a) any Taxes (net of
any realized Tax benefits associated therewith) of the Companies or the Alba
Companies (but only in an amount proportional to Seller's direct or indirect
interest in the relevant Alba Company for the period to which such Taxes relate)
attributable to the time period prior to January 1, 2002 (including, for the
avoidance of doubt, any Taxes of the Companies or the Alba Companies for the
period prior to January 1, 2002 that are set forth on Schedule 4.14) but only to
the extent such Taxes exceed the amount reserved for Taxes on the Settlement
Statement, (b) any Taxes arising out of the transactions contemplated by this
Agreement (including the transactions described in Section 6.08(a)), (c) any
increase in Taxes of a Buyer Indemnified Party resulting from a breach by Seller
of its representation in Section 4.14(j) or its covenant in Section 6.02(d) and
(d) any Taxes of any corporation (other than the Companies and the Alba
Companies) that is or was an Affiliate of Seller at any time prior to January 1,
2002. Notwithstanding anything to the contrary in this Agreement, no claim for
Taxes shall be permitted under this Section 7.03 unless such claim is first made
before the expiration of the statute of limitations (including applicable
extensions) for the taxable period to which the claim relates or if no such
statute of limitations exists, prior to the date on which such claim is
otherwise barred by law.
7.04 Buyer Tax Indemnification. Subject to 7.03, Buyer agrees to
protect, defend, indemnify and hold harmless the Seller Indemnified Parties from
and against, and agrees to pay (a) any Taxes of the Companies or the Alba
Companies attributable to the time period on or after January 1, 2002 excluding,
for purposes of clarification, any Taxes arising out of the transactions
contemplated by this Agreement and (b) any liability arising from a breach by
Buyer of its covenants in Article VII.
7.05 Tax Indemnification Procedures.
(a) If a claim shall be made by any Tax authority that, if
successful, would result in the indemnification of a Party under this
Agreement (referred to herein as the "TAX INDEMNIFIED PARTY"), the Tax
Indemnified Party shall promptly notify the party obligated under this
Agreement to so indemnify (referred to herein as the "TAX INDEMNIFYING
PARTY") in writing of such fact.
(b) The Tax Indemnified Party shall take such action in
connection with contesting such claim as the Tax Indemnifying Party
shall reasonably request in writing from time to time, including the
selection of counsel and experts and the execution of powers of
attorney; provided that (i) within 30 days after the notice described
in Section 7.05(a) has been delivered (or such earlier date that any
payment of Taxes is due by the Tax Indemnified Party but in no event
sooner than five days after the Tax Indemnifying Party's receipt of
such notice), the Tax Indemnifying Party requests that such claim be
contested, (ii) the Tax Indemnifying Party shall have agreed to pay to
the Tax Indemnified Party all costs and expenses that the Tax
Indemnified Party incurs in connection with contesting such claim,
including reasonable attorneys' and accountants' fees and
disbursements, and (iii) if the Tax Indemnified Party is requested by
the Tax Indemnifying Party to pay the Tax claimed and
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sue for a refund, the Tax Indemnifying Party shall have advanced to the
Tax Indemnified Party, on an interest-free basis, the amount of such
claim. The Tax Indemnified Party shall not make any payment of such
claim for at least 30 days (or such shorter period as may be required
by applicable law) after the giving of the notice required by Section
7.05(a), shall give to the Tax Indemnifying Party any information
reasonably requested relating to such claim, and otherwise shall
cooperate with the Tax Indemnifying Party in good faith in order to
contest effectively any such claim.
(c) Subject to the provisions of Section 7.05(b), the Tax
Indemnified Party shall only enter into a settlement of such contest
with the applicable taxing authority or prosecute such contest to a
determination in a court or other tribunal of initial or appellate
jurisdiction as instructed by the Tax Indemnifying Party.
(d) If, after actual receipt by the Tax Indemnified Party of an
amount advanced by the Tax Indemnifying Party pursuant to this Section
7.05, the extent of the liability of the Tax Indemnified Party with
respect to the claim shall be established by the final judgment or
decree of a court or other tribunal or a final and binding settlement
with an administrative agency having jurisdiction thereof, the Tax
Indemnified Party shall promptly repay to the Tax Indemnifying Party
the amount advanced to the extent of any refund received by the Tax
Indemnified Party with respect to the claim together with any interest
received thereon from the applicable taxing authority and any recovery
of legal fees from such taxing authority, net of any Taxes as are
required to be paid by the Tax Indemnified Party with respect to such
refund, interest or legal fees. Notwithstanding the foregoing, the Tax
Indemnified Party shall not be required to make any payment hereunder
before such time as the Tax Indemnifying Party shall have made all
payments or indemnities then due with respect to the Tax Indemnified
Party pursuant to this Agreement.
7.06 Conflict. In the event of a conflict between the provisions of
this Article VII and any other provisions of this Agreement, this Article VII
shall control; provided, however, that any claims for indemnification for Taxes
relating to Claim No. 2 on Schedule 4.10 shall be limited by Section
10.01(b)(vi).
7.07 Mutual Cooperation. Seller on the one hand, and the Buyer and the
Companies or the Alba Companies, on the other, shall reasonably cooperate with
each other and with each other's agents, including accounting firms and legal
counsel, in connection with Tax matters relating to the Companies or the Alba
Companies, including (a) preparation and filing of Tax Returns, (b) determining
the liability and amount of any Taxes due or the right to and amount of any
refund of Taxes, (c) examinations of Tax Returns and (d) any administrative or
judicial proceedings in respect of Taxes assessed or proposed to be assessed.
Such cooperation shall include each Party's making all information and documents
in its possession relating to the Companies or the Alba Companies available to
the other Party and retaining all Tax Returns, schedules and work papers and all
material records and other documents relating thereto, until the expiration of
the applicable statute of limitations (including, to the extent notified by any
Party, any extension thereof) of the Tax period to which such Tax Returns and
other documents and information relate. Each of the Parties shall also make
available to the other Party, as reasonably requested and available, personnel
(including officers, directors, employees and agents) responsible for preparing,
maintaining, and interpreting information and documents relevant to Taxes, and
personnel reasonably required as witnesses or for
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purposes of providing information or documents in connection with any
administrative or judicial proceeding relating to Taxes. Each of the Parties
shall exert all appropriate efforts to preserve the confidentiality of all
non-public information and documents obtained or used in connection with such
cooperation or assistance. Any Party requesting any such cooperation or
assistance shall promptly reimburse any other Party providing any such
cooperation or assistance for the reasonable expenses incurred by such other
Party with respect thereto. Notwithstanding anything to the contrary in this
Agreement, neither Seller nor Buyer shall be required to provide to the other
party all or any portion of a U.S. consolidated federal income Tax Return filed
by the respective consolidated group in which Seller or Buyer is included.
7.08 Survival. The covenants of the Parties contained in this Article
VII shall survive the Closing and shall continue in full force and effect until
all applicable statutes of limitations, including waivers and extensions, have
expired with respect to the matters addressed therein, and if no statute of
limitations exists, until such matters are finally settled. Notwithstanding the
foregoing, any such covenant as to which a bona fide claim relating thereto is
asserted in writing (which states with specificity the basis therefor) during
such survival period shall, with respect only to such claim, continue in force
and effect beyond such survival period pending resolution of the claim.
7.09 Withholding. Buyer shall be entitled to withhold from any payment
made to Seller of the Adjusted Purchase Price and shall pay over to the
appropriate Governmental Authority, the amount of any Taxes specifically
required to be withheld from such payments pursuant to the Tax Settlement
Agreement, if any such agreement is obtained, with the Republic of Equatorial
Guinea.
ARTICLE VIII
CLOSING CONDITIONS
8.01 Conditions to Obligations of Seller. The obligations of Seller to
proceed with the Closing are subject to the satisfaction at or prior to the
Closing of all of the following conditions, any one or more of which may be
waived in writing in whole or in part by Seller (which waiver shall be deemed to
constitute a waiver of any liability Buyer may have under this Agreement with
respect to the event or condition causing such condition not to be satisfied at
the Closing):
(a) Compliance. Buyer and Marathon shall have complied in all
material respects with their covenants and agreements contained herein,
and Buyer's and Marathon's representations and warranties contained
herein, or in any certificate or similar instrument required to be
delivered by or on behalf of Buyer and Marathon pursuant hereto, shall
be true in all material respects on and as of the Closing Date, with
the same effect as though made at such time;
(b) Officers' Certificate. Seller shall have received
certificates dated as of the Closing Date and signed by (i) a Director,
President or Vice President of each of Buyer and Marathon, in his
representative capacity, to the effect that the conditions specified in
Section 8.01(a) have been fulfilled and (ii) the Secretary or Assistant
Secretary of each of Buyer and Marathon, in his representative
capacity, certifying the accuracy and completeness of the copies of, as
well as the current effectiveness of, the resolutions to be attached
thereto of the Board of Directors (or any committee thereof) of Buyer
or Marathon, as applicable, authorizing the execution, delivery and
performance of this Agreement and the
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consummation of the transactions contemplated herein, as well as to the
incumbency of the officers executing this Agreement on behalf of Buyer
or Marathon, as applicable, and any documents to be executed and
delivered by Buyer or Marathon, as applicable, at the Closing;
(c) No Orders. No order, writ, injunction or decree shall have
been entered and be in effect by any court of competent jurisdiction or
any governmental or regulatory instrumentality or authority, and no
statute, rule, regulation or other requirement shall have been
promulgated or enacted and be in effect, that restrains, enjoins or
invalidates the transactions contemplated hereby;
(d) No Suits. No suit or other proceeding shall be pending or
threatened by any third party before any court or governmental agency
seeking to restrain or prohibit or declare illegal, or seeking
substantial damages in connection with, the transactions contemplated
by this Agreement;
(e) Legal Opinion. Seller shall have received legal opinions
addressed to it from legal counsel of Buyer and of Marathon in the
forms attached hereto as Schedules 8.01(e)(i) and 8.01(e)(ii), to the
effect that this Agreement, and all other Closing documents, have been
duly authorized by Buyer or Marathon, as applicable;
(f) Tax Settlement Agreement. Seller shall have received from the
government of the Republic of Equatorial Guinea an executed statement
("TAX SETTLEMENT AGREEMENT") in form satisfactory to the Seller stating
that the Tax liabilities (if any) of the Seller, the Companies and the
Alba Companies with respect to the transactions contemplated by this
Agreement have been settled in full and no additional Taxes are owed
with respect to such transactions.
(g) Approvals. All Approvals (without any adverse conditions or
obligations) and waivers of preferential purchase and similar rights of
third parties in connection with the transactions contemplated by this
Agreement listed on Schedule 8.01(g) and all other Approvals required
by Law shall have been satisfied or obtained.
8.02 Conditions to Obligations of Buyer. The obligations of Buyer to
proceed with the Closing are subject to the satisfaction at or prior to the
Closing of all of the following conditions, any one or more of which may be
waived in writing in whole or in part by Buyer (which waiver shall be deemed to
constitute a waiver of any liability Seller may have under this Agreement (other
than liability for matters specified in a duly delivered Breach Notice) with
respect to the event or condition causing such condition not to be satisfied at
the Closing):
(a) Compliance. Seller and Enterprises shall have complied in all
material respects with their covenants and agreements contained herein,
and Seller's and Enterprises' representations and warranties contained
herein or in any certificate or similar instrument required to be
delivered by or on behalf of Seller and Enterprises pursuant hereto,
shall be true and correct in all material respects on and as of the
Closing Date, with the same effect as though made at such time except
to the extent Seller has been unable to cure a breach identified by
Buyer in a Breach Notice; provided that if a representation or warranty
is expressly made only as of a specific date, it need only be true and
correct in all material
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respects as of such date; provided, however, that Buyer's right not to
proceed with the Closing as a result of a breach of Seller's or
Enterprises' representations and warranties shall only arise in the
event that Buyer has a right to terminate this Agreement pursuant to
Section 6.07; and provided, further, that any failure of Seller's or
Enterprises' representations and warranties contained herein to be true
and correct or any breach of compliance by Seller or Enterprises with
its covenants herein, in either case, due solely to the exercise of the
Block D Rights of First Refusal and Seller's compliance therewith shall
be disregarded for purposes of this Section 8.02;
(b) Officers' Certificate. Buyer shall have received a
certificate dated as of the Closing Date and signed by (i) the
Director, President or Vice President of each of Seller and
Enterprises, in his representative capacity, to the effect that the
conditions specified in Section 8.02(a) have been fulfilled and (ii)
the Secretary or Assistant Secretary of each of Seller and Enterprises,
in his representative capacity, certifying the accuracy and
completeness of the copies of, as well as the current effectiveness of,
the resolutions to be attached thereto of the Board of Directors (or
any committee thereof) of Seller authorizing the execution, delivery
and performance of this Agreement and the consummation of the
transactions contemplated herein, as well as to the incumbency of the
officers executing this Agreement on behalf of Seller and any documents
to be executed and delivered by Seller at the Closing;
(c) Resignations. Seller shall have delivered to Buyer (i)
resignations substantially in the form attached hereto as Schedule
8.02(c), effective as of the Closing Date, of all of the members of the
boards of directors (or similar governing bodies), all officers of the
Companies and those members of the boards of directors and officers of
the Alba Companies appointed by Seller or its Affiliates, and (ii)
appointments, in a form reasonably satisfactory to Buyer, appointing
Buyer's designees to the vacant positions created by such resignations;
(d) No Orders. No order, writ, injunction or decree shall have
been entered and be in effect by any court of competent jurisdiction or
any governmental or regulatory instrumentality or authority, and no
statute, rule, regulation or other requirement shall have been
promulgated or enacted and be in effect, that restrains, enjoins or
invalidates the transactions contemplated hereby;
(e) No Suits. No suit or other proceeding shall be pending or
threatened by any third party before any court or governmental agency
seeking to restrain or prohibit or declare illegal, or seeking
substantial damages in connection with, the transactions contemplated
by this Agreement;
(f) Legal Opinion. Buyer shall have received legal opinions
addressed to it from Seller's and Enterprises' legal counsel in the
forms attached hereto as Schedule 8.02(f)(ii) and 8.02(f)(iii), to the
effect that this Agreement, and all other Closing documents, have been
duly authorized by Seller or Enterprises, as applicable and a legal
opinion of Seller's Cayman Islands legal counsel in the form attached
hereto as Schedule 8.02(f)(i) as to the effectiveness of the transfer
of the Shares; and
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(g) Approvals. All Approvals (without any adverse conditions or
obligations) and waivers of preferential purchase and similar rights of
third parties in connection with the transactions contemplated by this
Agreement listed on Schedule 8.02(g) and all other Approvals required
by Law shall have been satisfied or obtained.
(h) Methanol Closing. The closing of the transactions
contemplated under the Share Purchase Agreement by and between CMS
Methanol Company, Marathon and an Affiliate of Marathon, dated October
31, 2001 shall have occurred.
(i) Casualty Loss. None of the Companies or the Alba Companies
shall have experienced any casualty events between the Execution Date
and the Closing Date resulting in Losses exceeding, in the aggregate,
an amount equal to 5% of the Adjusted Purchase Price.
(j) Bank Consent or Waiver. Seller shall have delivered to Buyer
(i) a copy of the written consent of its lenders under the Credit
Agreement (as defined in Schedule 4.03(a)) to the transactions
contemplated hereby, (ii) a copy of a written waiver from such lenders
of any rights with respect thereto under the Credit Agreement or (iii)
a copy of a letter from such lenders indicating that the transactions
contemplated hereby do not violate the Credit Agreement.
ARTICLE IX
TERMINATION
9.01 Termination. This Agreement may be terminated in the following
instances:
(a) by Seller, if through no fault of Seller, the Closing does
not occur on or before January 3, 2002 (or April 2, 2002, if the
Closing is extended pursuant to Section 3.01);
(b) by Buyer, if through no fault of Buyer, the Closing does not
occur on or before (i) January 3, 2002 or (ii) April 2, 2002, if Seller
has delivered the written undertaking referenced in Section 6.07 or if
the Closing is extended pursuant to Section 3.01;
(c) by Seller or Buyer, as applicable, in accordance with Section
6.07; or
(d) at any time by the mutual written agreement of Buyer and
Seller.
9.02 Effect of Termination. The following provisions shall apply in
the event of a termination of this Agreement:
(a) If this Agreement is terminated by either Party for any
reason except pursuant to an express right to do so set forth herein,
the other Party shall be entitled to exercise all rights and remedies
available at law or in equity as a result of such wrongful termination;
provided in no event shall such other Party ever be entitled to any
consequential or speculative damages including lost profits and,
provided further, that if this Agreement is terminated by either Party
due to the failure of the conditions to the obligations of such Party
to close in Article VIII to be satisfied and the other Party has
exercised Reasonable Efforts to satisfy such conditions, any recovery
for claims arising in connection therewith shall be
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limited to actual out-of-pocket expenses actually incurred by the
terminating Party in connection with this Agreement prior thereto. Upon
termination of this Agreement by Seller pursuant to an express right to
do so set forth herein, Seller shall be free to enjoy immediately all
rights of ownership of the Shares and to sell, transfer, encumber and
otherwise dispose of the Shares to any Party without any restriction
under this Agreement.
(b) Seller and Buyer hereby agree that the provisions of Sections
6.14, 9.02 and Articles X and XI shall survive any termination of this
Agreement pursuant to the provisions of this Article IX.
ARTICLE X
INDEMNIFICATION; SCOPE OF REPRESENTATIONS; LIMITATIONS
10.01 Indemnification.
(a) Subject to the limitations of this Article X, Seller agrees
to indemnify, defend and hold harmless the Buyer Indemnified Parties
from and against any and all Indemnified Losses resulting from or
arising out of any of the following:
(i) any breach of any of the representations and warranties
of Seller contained in this Agreement or in any instrument
executed pursuant hereto;
(ii) any breach of any covenant of Seller contained in this
Agreement; and
(iii) out-of-pocket costs incurred by Buyer in prosecuting,
defending, arbitrating or otherwise pursuing and resolving the
matter listed as Claim 2 on Schedule 4.10.
(b) Notwithstanding anything to the contrary in Section 10.01(a),
in no event shall any amounts be recovered from Seller or any of its
Affiliates:
(i) relating to any breach of a representation or warranty or
covenant by Seller of which Buyer had Knowledge prior to the
Closing Date and, with respect to such breach, Buyer failed to
timely provide a Breach Notice to Seller in accordance with
Section 6.07;
(ii) for any matter under Section 10.01(a) for which a
written notice of claim specifying in reasonable detail the
specific nature of and specific basis of the Losses and the
estimated amount of such Indemnified Losses ("CLAIM NOTICE") is
not delivered to Seller prior to the close of business on the day
24 months following the Closing Date, and the indemnities granted
by Seller in Section 10.01(a) shall terminate on such date;
provided, however, that such indemnities shall survive with
respect only to the specific matter that is the subject of any
Claim Notice delivered in good faith in compliance with the
requirements of this Section 10.01(b)(ii) prior to such 24 month
anniversary until the earlier to occur of (x) the date on which a
final nonappealable resolution of the matter described in such
Claim Notice has been
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reached or (y) the date on which the matter described in such
Claim Notice has otherwise reached final resolution;
(iii) under Section 10.01(a) for any Tax Claim, Buyer's
exclusive remedy for any Tax Claim being set forth in Article
VII, which shall not be subject to any Deductible or maximum
claim amount;
(iv) for any Indemnified Losses resulting from matters
described in Section 10.01(a)(i) until the aggregate amount of
Indemnified Losses incurred by the Buyer Indemnified Parties in
respect of all matters giving rise to such Indemnified Losses
exceeds US$2,000,000 (the "DEDUCTIBLE") in which event Seller
will be obligated, subject to the other provisions of this
Section 10.01(b), to indemnify the Buyer Indemnified Parties to
the extent and only to the extent such Indemnified Losses exceed
the Deductible;
(v) for any Indemnified Losses resulting from matters
described in Section 10.01(a)(i) that in the aggregate exceed an
amount equal to 20% of the Adjusted Purchase Price (including the
Deductible); provided, however, that this Section 10.01(b)(v)
shall not apply to Indemnified Losses arising from a breach of
Seller's representations or warranties set forth in Sections
4.03, 4.06(e) or 4.06(f) or to actions grounded in fraud. For the
avoidance of doubt, the limitation described in this Section
10.01(b)(v) permits a maximum possible recovery by Buyer under
Section 10.01(a)(i) (other than Indemnified Losses arising from a
breach of Seller's representations or warranties set forth in
Section 4.03, 4.06(e) or 4.06(f) or actions grounded in fraud) of
an aggregate amount equal to 20% of the Adjusted Purchase Price
minus the Deductible;
(vi) for any Indemnified Losses resulting from matters
described in Section 10.01(a)(iii) in excess of US$10,000,000;
and
(vii) due to the failure of any representation or warranty of
Seller contained herein to be true and correct or the breach by
Seller of any covenant contained herein due solely to the Block D
Rights of First Refusal or Seller's compliance therewith.
In addition to the foregoing limitations of this Section 10.01(b),
except for actions grounded in fraud, the maximum amount in the
aggregate that the Buyer Indemnified Parties shall be able to recover
from Seller or any of its Affiliates for any and all Indemnified Losses
resulting from matters described in Section 10.01(a)(i) or
10.01(a)(iii) (including with respect to Sections 4.03, 4.06(e) and
4.06(f)), shall in no event exceed an amount equal to 100% of the
Adjusted Purchase Price.
(c) Subject to the limitations of this Article X, Buyer agrees to
indemnify, defend and hold harmless the Seller Indemnified Parties from
and against any and all Indemnified Losses resulting from or arising
out of any of the following:
(i) any breach of any of the representations and warranties
of Buyer contained in this Agreement or in any instrument
executed pursuant hereto;
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(ii) any breach of any covenant of Buyer contained in this
Agreement; and
(iii) any Third Party Claim in respect of the conduct of the
Business or any part thereof, and any liability or obligation of
the Companies that arises after the Closing Date including, but
not limited to, all obligations to properly plug and abandon all
wells now or hereafter located on the property subject to any
Material Contracts (regardless of whether any such obligation to
plug and abandon is attributable to periods of time prior to or
after the Closing Date) and the obligation to pay all costs and
expenses incurred with respect to the Business after the Closing
Date, but only to the extent that such Third Party Claim did not
result from the breach of a warranty or representation of Seller
made pursuant hereto.
Notwithstanding anything to the contrary contained in this Section
10.01(c), in no event shall any amounts be recovered from Buyer under
this Section 10.01(c) for any Tax Claim, Seller's exclusive remedy with
respect to Tax Claims being set forth in Article VII.
(d) Notwithstanding anything to the contrary contained in this
Agreement, in no event shall Indemnified Losses include any exemplary,
punitive, special, indirect, consequential, remote or speculative
damages.
10.02 Indemnification Procedures. Except for claims for indemnification
pursuant to Section 10.01(a)(iii), which shall be resolved pursuant to Section
10.03, all claims for indemnification under Article X shall be asserted and
resolved pursuant to this Section 10.02. Any Person claiming indemnification
hereunder is hereinafter referred to as the "INDEMNIFIED PARTY" and any Person
against whom such claims are asserted hereunder is hereinafter referred to as
the "INDEMNIFYING PARTY." In the event that any Indemnified Losses are asserted
against or sought to be collected from an Indemnified Party by a third party,
said Indemnified Party shall with reasonable promptness provide to the
Indemnifying Party a Claim Notice. The Indemnifying Party shall have 30 days
from the personal delivery or receipt of the Claim Notice (the "NOTICE PERIOD")
to notify the Indemnified Party (a) whether or not it disputes the liability of
the Indemnifying Party to the Indemnified Party hereunder with respect to such
Losses and (b) whether or not it desires, at the sole cost and expense of the
Indemnifying Party, to defend the Indemnified Party against such Losses;
provided, however, that any Indemnified Party is hereby authorized prior to and
during the Notice Period to file any motion, answer or other pleading that it
shall deem necessary or appropriate to protect its interests or those of the
Indemnifying Party (and of which it shall have given notice and opportunity to
comment to the Indemnifying Party) and not prejudicial to the Indemnifying
Party. In the event that the Indemnifying Party notifies the Indemnified Party
within the Notice Period that it desires to defend the Indemnified Party against
such Losses, the Indemnifying Party shall have the right to defend all
appropriate proceedings, and with counsel of its own choosing, which proceedings
shall be promptly settled or prosecuted by them to a final conclusion. If the
Indemnified Party desires to participate in, but not control, any such defense
or settlement it may do so at its sole cost and expense. If requested by the
Indemnifying Party, the Indemnified Party agrees to cooperate with the
Indemnifying Party and its counsel in contesting any Losses that the
Indemnifying Party elects to contest or, if appropriate and related to the claim
in question, in making any counterclaim against the person asserting the third
party Losses, or any cross-complaint against any Person. No claim may be settled
or otherwise compromised without the prior written consent of the Indemnifying
Party.
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10.03 Arbitration.
(a) Any dispute between the Parties regarding Indemnified Losses
resulting from or arising out of the matter described in Section
10.01(a)(iii) only and any claims by either Party for indemnification
with respect thereto shall be settled exclusively by arbitration in
Houston, Texas, by a sole arbitrator and in accordance with the
Commercial Arbitration Rules of the American Arbitration Association.
(b) The arbitrator in such proceeding shall be a certified public
accountant or petroleum engineer mutually agreeable to both Parties
having a minimum of 10 years of experience in the oil and gas industry.
(c) Except as otherwise provided in the second sentence of this
Section 10.03(c), the fees and expenses of the arbitrator shall be
borne equally by the Parties. Notwithstanding the foregoing, the
decision of the arbitrator may include such award of the arbitrator's
fees and expenses and of other costs and attorneys' fees as the
arbitrator determines to be appropriate.
(d) The award of the arbitrator shall be binding upon the Parties
and final and nonappealable to the maximum extent permitted by
applicable Law, and judgment thereon may be entered in a court of
competent jurisdiction and enforced by any Party as a final judgment of
such court.
10.04 Exclusive Remedy. THE PARTIES ACKNOWLEDGE AND AGREE THAT THE
REMEDIES SET FORTH IN THIS ARTICLE X AND ARTICLE VII, INCLUDING THE DEDUCTIBLES,
LIABILITY LIMITS, SURVIVAL PERIODS, DISCLAIMERS AND LIMITATIONS ON SUCH
REMEDIES, ARE INTENDED TO BE, AND SHALL BE, THE EXCLUSIVE REMEDIES WITH RESPECT
TO ANY ASPECT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY
HEREBY RELEASES, WAIVES AND DISCHARGES, AND COVENANTS NOT TO SUE WITH RESPECT
TO, ANY CAUSE OF ACTION OR CLAIM NOT EXPRESSLY PROVIDED FOR IN THIS AGREEMENT
INCLUDING CLAIMS UNDER STATE OR FEDERAL SECURITIES LAWS, AVAILABLE AT COMMON LAW
OR BY STATUTE (EXCLUDING FRAUD CLAIMS).
10.05 Independent Investigation. Buyer acknowledges and affirms that
(a) it has had full access to the Data Room and the information contained in, or
made available or provided with respect to materials contained in, the Data Room
and has been provided access to the Material Contracts and the Other Contracts,
(b) provided Seller complies with Seller's obligations pursuant to Section 6.01,
it has had access to the personnel, officers, professional advisors, operations
and Records of the Companies and (c) in making the decision to enter into this
Agreement and to consummate the transactions contemplated hereby, it has relied
on the representations, warranties, covenants and agreements of Seller set forth
in this Agreement and in the certificate provided for in Section 8.02(b), and
other than such reliance, it has relied solely on the basis of its own
independent investigation, analysis and evaluation of the Companies and their
assets (including Buyer's own estimate and appraisal of the extent and value of
the Companies' hydrocarbon reserves, pipelines and undeveloped properties),
business, financial condition, operations and prospects.
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10.06 Scope of Representations. Except to the extent expressly set
forth in this Agreement, Seller makes no representations or warranties
whatsoever and disclaims all liability and responsibility for any other
representation, warranty, statement or information made or communicated (orally
or in writing) to Buyer. Without limiting the generality of the foregoing,
except as expressly set forth in this Agreement, Seller makes no representation
or warranty as to title to any of the assets or properties of the Companies or
the Alba Companies and, with respect to any personal property and equipment
included within such assets or properties, SELLER EXPRESSLY DISCLAIMS AND
NEGATES ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, OF FITNESS FOR A
PARTICULAR PURPOSE, AND OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS.
Further, Seller makes no representations or warranties as to (i) the amounts of
or values with respect to any hydrocarbon reserves attributable to the
Companies, the Alba Companies or the Business or (ii) the results of the
drilling of any wells prior to Closing.
ARTICLE XI
MISCELLANEOUS
11.01 Confidentiality.
(a) Until the Closing Date, the confidentiality of any data or
information received by Buyer, its Affiliates and representatives
regarding the Business and assets of the Companies and the Alba
Companies shall be maintained by Buyer, its Affiliates and its
representatives in accordance with the confidentiality provisions of
the confidentiality agreement dated July 20, 2001 executed by Seller,
CMS EG LTD and Buyer (the "CONFIDENTIALITY AGREEMENT"). Solely for the
purposes of this Section 11.01(a), the Parties and their Affiliates
agree to treat Seller, CMS EG LDC and CMS Alba as additional parties to
the Confidentiality Agreement. From and after the Closing, Buyer shall
have no further obligations under this Section 11.01(a) or the
Confidentiality Agreement with respect to information relating to the
Companies or the Alba Companies.
(b) From and after the Closing, any data or information received
at any time by Seller from Buyer and any data or information regarding
the Companies and the Alba Companies, including data or information
regarding their assets and operations, shall be maintained by Seller
and its representatives in confidence for a period of 24 months from
the Closing Date, except (i) to the extent necessary to resolve any
matters relating to Governmental Authorities (including Tax
controversies) or disputes with Buyer pursuant to this Agreement or
(ii) if such information (x) is already in possession of the public or
becomes available to the public, other than through the act or omission
of Seller in violation of this Agreement; (y) is required to be
disclosed under an applicable Law, order, decree, regulation or rule of
(A) a governmental entity or court or (B) any regulatory entity,
securities commission or stock exchange; or (z) is acquired
independently and without a confidential restriction from a third party
who represents that it has the right to disseminate it at the time it
is acquired by Seller.
11.02 Brokers. Regardless of whether the Closing shall occur, (a)
Seller shall indemnify and hold harmless Buyer and the Companies and their
Affiliates from and against any and all liability for any brokers' or finders'
fees (and any court costs and attorneys' fees) arising with
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respect to brokers or finders retained or engaged by Seller or any of its
Affiliates in respect of the transactions contemplated by this Agreement and (b)
Buyer shall indemnify and hold harmless Seller and its Affiliates from and
against any and all liability for any brokers' or finders' fees (and court costs
and attorneys' fees) arising with respect to brokers or finders retained or
engaged by Buyer or any of its Affiliates in respect of the transactions
contemplated by this Agreement.
11.03 Expenses. Except as specifically provided herein, each Party
hereto shall pay all legal and other costs and expenses incurred by such Party
or any of its Affiliates in connection with this Agreement and the transactions
contemplated hereby.
11.04 Notices. Any notice, request, instruction, correspondence or
other communication to be given or made hereunder by either Party to the other
(herein collectively called "NOTICE") shall be in writing and (a) delivered by
hand, (b) mailed by certified mail, postage prepaid and return receipt
requested, (c) sent by telecopier or (d) sent by Express Mail, Federal Express
or other express delivery service, as follows:
If to Seller, addressed to:
CMS Oil and Gas Company
1021 Main Street, Suite 2800
Houston, Texas 77002-6606
Attention: William H. Stephens III
Telephone: (713) 651-1700
Telecopier: (713) 230-7161
If to Enterprises, addressed to:
CMS Enterprises Company
300 Town Center Drive, Suite 1100
Fairlane Plaza South
Dearborn, Michigan 48126
Attention: Belinda Foxworth
Telephone: 313-436-9458
Telecopier: 313-436-9225
If to Buyer, addressed to:
Marathon E.G. Holding Limited
c/o Caledonian Bank & Trust Limited
PO Box 1043
George Town, Grand Cayman, British West Indies
Attention: Fiona M. Barrie
Telephone: 345-949-0050
Telecopier: 345-949-8062
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with a copy to:
Marathon Oil Company
5555 San Felipe Street
Houston, Texas 77056-2799
Attention: Richard L. Horstman
Telephone: (713) 296-2500
Telecopier: (713) 513-4172
Notice given by hand, Federal Express or other express delivery service or by
mail shall be effective upon actual receipt. Notice given by telecopier shall be
effective upon actual receipt if received during the recipient's normal business
hours, or at the beginning of the recipient's next business day after receipt if
not received during the recipient's normal business hours. All Notices by
facsimile shall be confirmed promptly after transmission in writing by certified
mail or personal delivery. No Notice shall be given to or by the Companies. Any
Party may change any address to which Notice is to be given to it by giving
Notice as provided above of such change of address.
11.05 Governing Law. THE PROVISIONS OF THIS AGREEMENT, THE SCHEDULES
HERETO AND THE DOCUMENTS DELIVERED PURSUANT HERETO SHALL BE GOVERNED BY,
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS
(EXCLUDING ANY CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER SUCH MATTERS
TO THE LAWS OF ANOTHER JURISDICTION), EXCEPT TO THE EXTENT THAT SUCH MATTERS ARE
MANDATORILY SUBJECT TO THE LAWS OF ANOTHER JURISDICTION PURSUANT TO THE LAWS OF
SUCH OTHER JURISDICTION. THE PARTIES IRREVOCABLY CONSENT AND SUBMIT TO THE STATE
AND FEDERAL COURTS IN THE STATE OF TEXAS AS THE EXCLUSIVE VENUE FOR ANY DISPUTE
ARISING OUT OF OR RELATING TO THIS AGREEMENT (EXCEPT FOR MATTERS SUBJECT TO
RESOLUTION BY ERNST & YOUNG UNDER SECTION 2.05 OR SUBJECT TO ARBITRATION UNDER
SECTION 10.03).
11.06 Waiver of Jury Trial. THE PARTIES VOLUNTARILY AND INTENTIONALLY
WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR
ANY OTHER TRANSACTION DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY OF THE PARTIES HERETO.
THE PARTIES HERETO HEREBY AGREE THAT THEY WILL NOT SEEK TO CONSOLIDATE ANY SUCH
LITIGATION WITH ANY OTHER LITIGATION IN WHICH A JURY TRIAL HAS NOT OR CANNOT BE
WAIVED. THE PROVISIONS OF THIS SECTION 11.06 HAVE BEEN FULLY NEGOTIATED BY THE
PARTIES HERETO AND SHALL BE SUBJECT TO NO EXCEPTIONS.
11.07 Entire Agreement; Amendments and Waivers. This Agreement,
together with all Schedules hereto and the Confidentiality Agreement,
constitutes the entire agreement between the Parties pertaining to the subject
matter hereof and supersedes all prior agreements, understandings, negotiations
and discussions, whether oral or written, of the Parties. No supplement,
modification or waiver 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
-43-
waiver of any other provision hereof (regardless of whether similar), nor shall
any such waiver constitute a continuing waiver unless otherwise expressly
provided.
11.08 Binding Effect and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties and their respective permitted
successors and assigns. Neither this Agreement nor any of the rights, benefits
or obligations hereunder shall be assigned, by operation of law or otherwise, by
any Party hereto prior to the Closing without the prior written consent of the
other Party, except that Seller may assign all of its rights, benefits and
obligations hereunder to an Affiliate without being released from its
obligations hereunder. Except as expressly provided herein, nothing in this
Agreement is intended to confer upon any Person other than the Parties and their
respective permitted successors and assigns, any rights, benefits or obligations
hereunder.
11.09 Severability. If any one or more of the provisions contained in
this Agreement or in any other document delivered pursuant hereto shall for any
reason, be held to be invalid, illegal or unenforceable in any material respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement or any other such document.
11.10 Headings and Schedules. The headings of the several Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
11.11 Survival of Representations. The representations and warranties
in this Agreement shall survive the Closing except for the representations and
warranties of Seller, that shall terminate 24 months after the Closing.
11.12 Time of the Essence. The Parties agree and acknowledge that time
is of the essence of this Agreement.
11.13 Counterparts; Facsimile. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute but one agreement. The Parties hereto agree that any document
or signature delivered by facsimile transmission shall be deemed an original
executed document for all purposes hereof.
11.14 No Third Party Beneficiaries. This Agreement is not intended to
and shall not confer upon any Person, other than the Parties hereto (and Persons
specifically granted indemnification rights hereunder), any rights or remedies
with respect to the subject matter or any provision hereof.
[Remainder of page intentionally left blank. Signature page follows.]
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IN WITNESS WHEREOF, the Parties have duly executed this Agreement the
day and year first written above.
SELLER: CMS OIL AND GAS COMPANY
By: /s/ William H. Stephens III
------------------------------------
William H. Stephens III
Executive Vice President
BUYER: MARATHON E.G. HOLDING LIMITED
By: /s/ J.F. Meara
------------------------------------
J.F. Meara
Director
[SIGNATURE PAGE 1 TO STOCK PURCHASE AGREEMENT]
Marathon, in consideration of the premises, the agreements and the
covenants contained herein, and the benefits it is deriving from the execution
and delivery of this Agreement and the transactions contemplated hereby, the
receipt and sufficiency of which is hereby acknowledged, hereby unconditionally
and irrevocably guarantees payment to Seller and Enterprises and performance by
Buyer of the obligations of Buyer under this Agreement (the "BUYER
OBLIGATIONS"), subject to any defenses of Buyer under this Agreement (except
those enumerated hereafter), but Marathon waives (i) any defense that may arise
by reason of incapacity, lack of authority, invalidity, bankruptcy or insolvency
of Buyer, (ii) any defense based on election of remedies, (iii) any requirement
that Seller or Enterprises pursue or exhaust any remedy against Buyer or (iv)
any defense based on or any right to consent to any amendment, waiver,
modification or supplement of this Agreement or any provision hereof or of the
Buyer Obligations. Marathon acknowledges and agrees that the guaranty set forth
above is a guaranty of payment and performance and not merely a guaranty of
collection, that Marathon is liable as a primary obligor and, except as provided
in the first sentence of this paragraph, that the obligations of Marathon under
the guaranty set forth above shall not be released, discharged or in any way
affected by any circumstance or condition whatsoever that might otherwise
constitute a legal or equitable defense or discharge of a guarantor, indemnitor
or surety or that might otherwise limit recourse against Marathon under any
applicable law. Should Seller or Enterprises be obligated by an reorganization,
insolvency, bankruptcy or other law to repay to Buyer, Marathon or to any
guarantor or surety or to any trustee, receiver or other representative of any
of them, any amounts previously paid by Buyer or Marathon pursuant to this
Agreement, then the guaranty of Marathon set forth above shall be reinstated in
the amount of such repayments. Marathon consents to and agrees to be bound by
the provisions of Articles VII, X and XI (as if it were Buyer) with respect to
any claims under this guaranty.
MARATHON OIL COMPANY
By: /s/ S. J. Lowden
-------------------------------------
S. J. Lowden
Senior Vice President
[SIGNATURE PAGE 2 TO STOCK PURCHASE AGREEMENT]
Enterprises, in consideration of the premises, the agreements and the
covenants contained herein, and the benefits it is deriving from the execution
and delivery of this Agreement and the transactions contemplated hereby, the
receipt and sufficiency of which is hereby acknowledged, hereby unconditionally
and irrevocably guarantees payment to Buyer and Marathon and performance by
Seller of the obligations of Seller under this Agreement (the "SELLER
OBLIGATIONS"), subject to any defenses of Seller under this Agreement (except
those enumerated hereafter), but Enterprises waives (i) any defense that may
arise by reason of incapacity, lack of authority, invalidity, bankruptcy or
insolvency of Seller, (ii) any defense based on election of remedies, (iii) any
requirement that Buyer or Marathon pursue or exhaust any remedy against Seller
or (iv) any defense based on or any right to consent to any amendment, waiver,
modification or supplement of this Agreement or any provision hereof or of the
Seller Obligations. Enterprises acknowledges and agrees that the guaranty set
forth above is a guaranty of payment and performance and not merely a guaranty
of collection, that Enterprises is liable as a primary obligor and, except as
provided in the first sentence of this paragraph, that the obligations of
Enterprises under the guaranty set forth above shall not be released, discharged
or in any way affected by any circumstance or condition whatsoever that might
otherwise constitute a legal or equitable defense or discharge of a guarantor,
indemnitor or surety or that might otherwise limit recourse against Enterprises
under any applicable law. Should Buyer or Marathon be obligated by an
reorganization, insolvency, bankruptcy or other law to repay to Seller,
Enterprises or to any guarantor or surety or to any trustee, receiver or other
representative of any of them, any amounts previously paid by Seller or
Enterprises pursuant to this Agreement, then the guaranty of Enterprises set
forth above shall be reinstated in the amount of such repayments. Enterprises
consents to and agrees to be bound by the provisions of Articles VII, X and XI
(as if it were Seller) with respect to any claims under this guaranty.
CMS ENTERPRISES COMPANY
By: /s/ Alan M. Wright
-------------------------------------
Alan M. Wright
Executive Vice President and
Chief Financial Officer
[SIGNATURE PAGE 3 TO STOCK PURCHASE AGREEMENT]
PURCHASE AND SALE AGREEMENT
BY AND BETWEEN
CMS GAS TRANSMISSION COMPANY
AND
MARATHON OIL COMPANY
OCTOBER 31, 2001
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION...............................1
1.01 Definitions.........................................................1
1.02 Construction........................................................6
ARTICLE II PURCHASE AND SALE..................................................6
2.01 Transfer of Ownership Interest......................................6
2.02 Purchase Price......................................................6
2.03 Estimate of Working Capital.........................................7
2.04 Working Capital Adjustments.........................................7
2.05 Settlement Statement................................................7
ARTICLE III CLOSING...........................................................8
3.01 Time and Place of Closing...........................................8
3.02 Deliveries by Seller................................................8
3.03 Deliveries by Buyer.................................................9
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER...........................9
4.01 Existence and Qualification.........................................9
4.02 Authority, Approval and Enforceability..............................9
4.03 Capitalization of the AMPCO Companies..............................10
4.04 No Conflicts.......................................................10
4.05 Financial Statements...............................................11
4.06 Material Contracts.................................................11
4.07 Absence of Certain Changes.........................................12
4.08 Employees..........................................................13
4.09 Insurance..........................................................13
4.10 Litigation.........................................................13
4.11 Liability for Brokers' Fees........................................13
4.12 Compliance with Laws...............................................13
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4.13 Consents and Preferential Rights....................................13
4.14 Taxes...............................................................14
4.15 Intellectual Property...............................................15
4.16 Data Room and Information...........................................15
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER.............................15
5.01 Corporate Existence and Qualification...............................15
5.02 Authority, Approval and Enforceability..............................15
5.03 No Default or Consents..............................................16
5.04 Investment..........................................................16
5.05 Financial Capacity..................................................16
5.06 Liability for Brokers' Fees.........................................16
5.07 No Knowledge of Seller's Breach.....................................16
ARTICLE VI COVENANTS OF SELLER AND BUYER......................................17
6.01 Access..............................................................17
6.02 Operation of Business...............................................17
6.03 Satisfaction of Buyer's Conditions..................................19
6.04 Press Releases......................................................19
6.05 Insurance...........................................................19
6.06 Satisfaction of Seller's Conditions.................................19
6.07 Breach Notice.......................................................20
6.08 Uncollected Accounts Receivable.....................................20
6.09 Consents and Preferential Rights....................................20
6.10 Preservation of Books and Records; Access...........................20
6.11 Further Assurances..................................................20
6.12 Casualty Loss.......................................................20
ARTICLE VII TAX MATTERS.......................................................21
7.01 Preparation and Filing of Tax Returns...............................21
7.02 Retention of Information............................................22
7.03 Indemnification by Seller...........................................22
7.04 Buyer Tax Indemnification...........................................22
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7.05 Tax Indemnification Procedures......................................23
7.06 Mutual Cooperation..................................................23
7.07 Survival............................................................24
7.08 Conflict............................................................24
ARTICLE VIII CLOSING CONDITIONS...............................................24
8.01 Conditions to Obligations of Seller.................................24
8.02 Conditions to Obligations of Buyer..................................25
ARTICLE IX TERMINATION........................................................27
9.01 Termination.........................................................27
9.02 Effect of Termination...............................................27
ARTICLE X INDEMNIFICATION; SCOPE OF REPRESENTATIONS; LIMITATIONS..............28
10.01 Indemnification...................................................28
10.02 Indemnification Procedures........................................29
10.03 Exclusive Remedy..................................................30
10.04 Independent Investigation.........................................30
10.05 Scope of Representations..........................................30
ARTICLE XI MISCELLANEOUS......................................................31
11.01 Confidentiality...................................................31
11.02 Brokers...........................................................31
11.03 Expenses..........................................................31
11.04 Notices...........................................................31
11.05 Governing Law.....................................................32
11.06 Waiver of Jury Trial..............................................32
11.07 Entire Agreement; Amendments and Waivers..........................33
11.08 Binding Effect and Assignment.....................................33
11.09 Severability......................................................33
11.10 Headings and Schedules............................................33
11.11 Survival of Representations.......................................33
11.12 Time of the Essence...............................................33
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11.13 Counterparts; Facsimile...........................................33
11.14 No Third Party Beneficiaries......................................33
SCHEDULES
1.01(a) - Knowledge of Persons of Buyer
1.01(b) - Knowledge of Persons of Seller
2.03(a) - Statement of Preliminary Working Capital Adjustment
2.03(b) - Estimate of Working Capital as of September 30, 2001
3.02(a)(i) - Form of Marketing Instrument of Conveyance
3.02(a)(ii) - Form of Services Instrument of Conveyance
4.05 - Financial Statements
4.06(a)(i) - Material Contracts
4.06(a)(ii) - Pending Material Contracts
4.06(c) - Matters Relating to Material Contracts
4.08 - Employees
4.09 - Policies of Insurance
4.10 - Claims and Litigation
4.12 - Compliance with Law
4.13 - Consents and Preferential Purchase Rights
4.14 - Tax Matters
8.01(e) - Certain Approvals (Seller's Closing Conditions)
8.02(c) - Form of Resignation
8.02(f) - Certain Approvals (Buyer's Closing Conditions)
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PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT (this "AGREEMENT"), executed as of
October 31, 2001 (the "EXECUTION DATE"), is by and between CMS GAS TRANSMISSION
COMPANY, a company formed under the laws of the State of Michigan ("SELLER"),
and MARATHON OIL COMPANY, a corporation formed under the laws of the State of
Ohio ("BUYER"). Seller and Buyer shall be referred to herein each as a "PARTY"
and collectively as the "PARTIES."
RECITALS
A. Seller owns fifty percent (50%) of AMPCO Marketing, L.L.C., a
limited liability company organized under the laws of the State of Michigan
("MARKETING"), and fifty percent (50%) of AMPCO Services, L.L.C., a limited
liability company organized under the laws of the State of Michigan ("SERVICES"
and, together with Marketing, the "AMPCO COMPANIES").
B. Buyer desires to purchase from Seller, and Seller desires to sell to
Buyer, all of Seller's ownership interest in the AMPCO Companies, upon the terms
and subject to the conditions contained herein.
NOW, THEREFORE, in consideration of the premises, agreements and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller and Buyer
agree, upon the terms and subject to the conditions contained herein, as
follows:
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
1.01 Definitions. Capitalized terms used herein shall have the meaning
ascribed to them in this Article I unless such terms are defined elsewhere in
this Agreement.
"ACTUAL WORKING CAPITAL AMOUNT" shall have the meaning ascribed to such
term in Section 2.05(e).
"ADJUSTED PURCHASE PRICE" shall have the meaning ascribed to such term
in Section 2.02.
"AFFILIATE" shall mean, with respect to any Person, any other Person
controlling, controlled by or under common control with such Person. The term
"control" as used in the preceding sentence means, with respect to a
corporation, the right to exercise, directly or indirectly, fifty percent (50%)
or more of the voting rights attributable to the shares of the controlled
corporation, or with respect to any Person other than a corporation, the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person. The AMPCO Companies
shall not be considered Affiliates of Buyer (or any of its Affiliates) or Seller
(or any of its Affiliates), and neither Buyer (nor its Affiliates) nor Seller
(nor its Affiliates) shall be considered Affiliates of either of the AMPCO
Companies.
"AGREEMENT" shall have the meaning ascribed to such term in the
preamble.
"AMPCO COMPANIES" shall have the meaning ascribed to such term in
Recital A.
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"APPROVAL" shall mean an authorization, consent, approval or waiver of,
clearance by, required notice to or registration or filing with, a Governmental
Authority or other Person and the expiration or termination of all prescribed
waiting or review periods with respect to any of the foregoing.
"ASSOCIATES AGREEMENT" shall mean the Share Purchase Agreement dated
October 31, 2001 pursuant to which, among other things, CMS Methanol Company has
agreed to sell, and Marathon E.G. Holding Limited has agreed to purchase, CMS
Methanol Company's right, title, and interest in and to Atlantic Methanol
Associates LLC.
"BASE PURCHASE PRICE" shall have the meaning ascribed to such term in
Section 2.02.
"BREACH NOTICE" shall have the meaning ascribed to such term in Section
6.07.
"BUSINESS" shall mean the business and operations of the AMPCO
Companies.
"BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a
United States federal or Texas state banking holiday.
"BUYER" shall have the meaning ascribed to such term in the preamble.
"BUYER INDEMNIFIED PARTIES" shall mean Buyer, its Affiliates and their
respective directors, officers, employees, agents and representatives.
"CLAIM NOTICE" shall have the meaning ascribed to such term in Section
10.01(b)(ii).
"CLOSING" shall have the meaning ascribed to such term in Section 3.01.
"CLOSING DATE" shall have the meaning ascribed to such term in Section
3.01.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, and
the applicable Treasury Regulations thereunder.
"CONFIDENTIALITY AGREEMENT" shall have the meaning ascribed thereto in
Section 11.01.
"CREDITORS' RIGHTS" shall have the meaning ascribed to such term in
Section 4.02.
"DATA ROOM" shall mean that data room located in Houston, Texas,
prepared by Seller to assist Persons interested in acquiring the AMPCO Companies
with an evaluation of the AMPCO Companies.
"DEDUCTIBLE" shall have the meaning ascribed to such term in Section
10.01(b)(iv).
"DOLLARS," "US$" or "$" shall mean the lawful currency of the United
States of America.
"DUE DILIGENCE PERIOD" shall have the meaning ascribed to such term in
Section 6.01.
"EXECUTION DATE" shall have the meaning ascribed to such term in the
preamble.
"FINANCIAL STATEMENTS" shall have the meaning ascribed to such term in
Section 4.05.
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"GAAP" shall mean generally accepted accounting principles in effect in
the United States of America.
"GOVERNMENTAL AUTHORITY" shall mean any government, governmental
agency, authority, entity or instrumentality or any court thereof.
"INDEMNIFIED LOSSES" shall mean any and all Losses reduced by any Tax
benefit actually realized and by the amount of the amount of any insurance
proceeds actually recovered from any Person that is not an Affiliate of any
Person entitled to indemnification hereunder, but only to the extent that the
Person entitled to indemnification did not negligently or intentionally take
actions that materially exacerbated such Losses, provided that Indemnified
Losses shall not include any Losses attributable to matters for which an
adjustment to the Base Purchase Price has been made pursuant to Section 2.03 or
2.05.
"INDEMNIFIED PARTY" shall have the meaning ascribed to such term in
Section 10.02.
"INDEMNIFYING PARTY" shall have the meaning ascribed to such term in
Section 10.02.
"INTELLECTUAL PROPERTY" shall mean all trademarks, service marks, trade
names, patents, trade secrets and copyrights used by either of the Companies
that, in each case, is material to the Business of either of the Companies.
"INTERCOMPANY AGREEMENTS" shall have the meaning ascribed to such term
in Section 4.06(a)(ix).
"KNOWLEDGE" shall mean the actual knowledge of the persons listed in
Schedule 1.01(a), in the case of Buyer, and those listed on Schedule 1.01(b), in
the case of Seller; provided, however, that such persons shall be assumed to
have actual knowledge of items if there is persuasive evidence that such persons
must have had knowledge by virtue of their respective roles and functions.
"LAW" shall mean any constitution, statute, code, regulation, rule,
injunction, judgment, order, decree, ruling (including any agreement with a
Governmental Authority having the force of law), charge or other restriction of
any applicable Governmental Authority.
"LOSSES" shall mean all losses, costs, and expenses, including
attorneys' fees and expenses; provided, however, that for the avoidance of
doubt, any Losses suffered by either or both of the AMPCO Companies shall only
constitute Losses to Buyer to the extent of the fifty percent (50%) ownership
interest in the AMPCO Companies.
"MARKETING" shall have the meaning given to such term in Recital A.
"MARKETING INSTRUMENT OF CONVEYANCE" shall have the meaning ascribed to
such term in Section 3.02(a)(i).
"MARKETING MEMBERS' AGREEMENT" shall mean the Members' Agreement for
Marketing effective December 22, 1998.
"MATERIAL ADVERSE EFFECT" shall mean an adverse effect on the business,
financial condition or assets of the AMPCO Companies that results in Losses to
Buyer or the AMPCO Companies of
3
$1,000,000 or more, excluding matters (such as, without limitation, decreases in
the prices received by Marketing for methanol) that are general, regional,
industry-wide or economy-wide developments and excluding political events and
conditions; provided, however, that for the avoidance of doubt Buyer shall be
deemed to suffer Losses as a result of adverse effects on the AMPCO Companies to
the extent of the percentage ownership interest in such Companies that is being
acquired by Buyer.
"MATERIAL CONTRACTS" shall have the meaning ascribed to such term in
Section 4.06(a).
"MEASUREMENT DATE" shall mean 7:01 a.m. Equatorial Guinea time on
January 1, 2002.
"NOTICE" shall have the meaning ascribed to such term in Section 11.04.
"NOTICE PERIOD" shall have the meaning ascribed to such term in Section
10.02.
"PARTY" or "PARTIES" shall have the meaning ascribed to such term in
the preamble.
"PERMITTED ENCUMBRANCES" shall mean (i) the terms and conditions of the
Material Contracts and the Pending Material Contracts, (ii) matters disclosed in
any Schedule to this Agreement, (iii) sales contracts terminable without penalty
upon no more than thirty (30) days' notice to the purchaser of methanol; (iv)
materialman's, mechanic's, repairman's, employee's, contractor's, tax, and other
similar liens or charges arising in the ordinary course of business for
obligations that are not yet due; (v) easements, rights-of-way, servitudes,
permits, surface leases and other rights of third parties in respect of surface
operations, to the extent the same do not have a Material Adverse Effect on the
conduct of the Business of the AMPCO Companies; (vi) rights reserved to or
vested in a Governmental Authority having jurisdiction to control or regulate
the Business of the AMPCO Companies in any manner whatsoever, and all Laws of
such Governmental Authorities, and (vii) any other matters that do not
materially interfere with the normal and ordinary course of the Business of the
AMPCO Companies and that would not be considered material when applying general
standards in the methanol industry.
"PERSON" shall mean an individual, partnership, corporation,
joint-venture, trust, estate, unincorporated organization or association or
other legal entity.
"PRELIMINARY WORKING CAPITAL AMOUNT" shall have the meaning ascribed to
such term in Section 2.03.
"REASONABLE EFFORTS" shall mean the taking by a Party of such action as
would be in accordance with reasonable commercial practices as applied to the
particular matter in question; provided, however, that such action shall not
include the incurrence of unreasonable expense.
"RECORDS" shall mean and include all originals and copies (except where
the context indicates that only originals or copies are being referred to) of
minute books, tax records, agreements, documents, computer files and tapes,
maps, books, records, accounts and files of the AMPCO Companies relating to the
AMPCO Companies and the Business.
"SCHEDULE" shall mean any schedule attached to and made a part of this
Agreement.
"SELLER" shall have the meaning ascribed to such term in the preamble.
4
"SELLER INDEMNIFIED PARTIES" shall mean Seller, its Affiliates and
their respective directors, officers, employees, agents and representatives.
"SERVICES" shall have the meaning given to such term in Recital A.
"SERVICES INSTRUMENT OF CONVEYANCE" shall have the meaning ascribed to
such term in Section 3.02(a)(ii).
"SERVICES MEMBERS' AGREEMENT" shall mean the Members' Agreement for
Services effective December 22, 1998.
"SETTLEMENT STATEMENT" shall have the meaning ascribed to such term in
Section 2.05(a).
"TAX" or "TAXES" shall mean any federal, state, local or foreign
income, gross receipts, license, payroll, employment, excise, severance, premium
windfall profits, environmental, customs duties, capital stock, capital gain,
petroleum profits, value added, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, minimum, alternative or add-on minimum, estimated
or other tax of any kind whatsoever, including any interest, penalty or addition
thereto, whether disputed or not.
"TAX CLAIM" shall mean any Losses arising out of a breach of the
representations and warranties in Section 4.14 or any of the provisions of
Article VII.
"TAX INDEMNIFIED PARTY" shall have the meaning ascribed to that term in
Section 7.05(a).
"TAX INDEMNIFYING PARTY" shall have the meaning ascribed to that term
in Section 7.05(a).
"TAX ITEMS" shall have the meaning ascribed to that term in Section
4.14(a).
"TAX RETURN" shall have the meaning ascribed to that term in Section
4.14(a).
"THIRD PARTY CLAIM" shall mean any claim, action or proceeding made or
brought by any Person who or that is not a Party or an Affiliate of the Party
seeking indemnification.
"TRANSFER TAXES" shall mean all transfer, sales, use, stamp,
registration or other similar Taxes or fees resulting from the transactions
contemplated by this Agreement.
"UNCOLLECTED ACCOUNTS RECEIVABLE" shall have the meaning ascribed to
such term in Section 2.05(b).
"UPSTREAM AGREEMENT" shall mean the Stock Purchase Agreement dated
October 31, by and between CMS Oil and Gas Company, CMS Enterprises Company,
Marathon E.G. Holding Limited and Marathon.
"WORKING CAPITAL" shall mean the combined total current assets,
including inventory, less combined total current liabilities of the AMPCO
Companies as defined by GAAP
5
1.02 Construction.
(a) All article, section, subsection, schedule and exhibit
references used in this Agreement are to articles, sections, subsections,
schedules and exhibits to this Agreement unless otherwise specified.
(b) The schedules and exhibits attached to this Agreement
constitute a part of this Agreement and are incorporated herein for all
purposes.
(c) Unless the context of this Agreement clearly requires
otherwise (i) the singular shall include the plural and the plural shall
include the singular wherever and as often as may be appropriate, (ii)
the words "includes" or "including" shall mean "including without
limitation," (iii) the words "hereof," "hereby," "herein," "hereunder"
and similar terms in this Agreement shall refer to this Agreement as a
whole and not any particular section or article in which such words
appear and (iv) any reference to a statute, regulation or law shall
include any amendment thereof or any successor thereto and any rules and
regulations promulgated thereunder.
(d) Currency amounts referenced herein, unless otherwise
specified, are in United States Dollars.
(e) Whenever this Agreement refers to a number of days, such
number shall refer to calendar days unless Business Days are specified.
(f) All accounting terms used herein and not expressly defined
herein shall have the meanings given to them under GAAP. References to
GAAP herein shall refer to such principles in effect in the United States
of America as of the date of the statement to which such phrase refers.
ARTICLE II
PURCHASE AND SALE
2.01 Transfer of Ownership Interest. Upon the terms and subject to the
conditions of this Agreement, at the Closing, Buyer agrees to purchase all of
Seller's right, title, and interest in and to the AMPCO Companies and to deliver
payment for such interests as provided in Section 2.02, and Seller agrees to
sell, assign and deliver to Buyer all of Seller's right, title, and interest in
and to the AMPCO Companies, subject to the receipt of payment as provided in
Section 2.02.
2.02 Purchase Price. The consideration to be paid by Buyer to Seller at
Closing for interest in the AMPCO Companies shall be Ten Dollars ($10.00) (the
"BASE PURCHASE PRICE") as adjusted by fifty percent (50%) of the Preliminary
Working Capital Amount according to Section 2.04 (the Base Purchase price, as
adjusted, shall be referred to herein as the "ADJUSTED PURCHASE PRICE"). In
addition, if the Closing occurs later than January 3, 2002 pursuant to the
provisions of Section 3.01, the Adjusted Purchase Price shall be increased by an
amount equal to the capital contributions, if any, made by Seller to the AMPCO
Companies on or after the Measurement Date and interest on the Adjusted Purchase
Price from and including January 3, 2002 up to but excluding the Closing Date
calculated at a per annum interest rate of five percent (5%).
6
2.03 Estimate of Working Capital. Seller shall deliver to Buyer no later
than five (5) Business Days prior to the Closing Date a statement setting forth
Seller's reasonable estimate of the Working Capital of the AMPCO Companies as of
the Measurement Date in the format set forth in Schedule 2.03(a) (the
"PRELIMINARY WORKING CAPITAL AMOUNT"). Attached as Schedule 2.03(b) for
illustrative purposes only is a completed statement setting forth the Working
Capital of AMPCO Companies as of September 30, 2001. Such statement shall be
accompanied by a worksheet setting forth in reasonable detail Seller's
calculations used to estimate the Preliminary Working Capital Amount. Seller
shall provide Buyer with reasonable access to the data used to prepare the
Preliminary Working Capital Adjustment and the worksheet.
2.04 Working Capital Adjustments. If the Preliminary Working Capital
Amount is positive, Buyer shall pay Seller, at the Closing, in addition to the
Base Purchase Price, an amount equal to fifty percent (50%) of such Preliminary
Working Capital Amount. If the Preliminary Working Capital Amount is negative,
the Base Purchase Price payment by Buyer to Seller pursuant to Section 2.02
shall be reduced by fifty percent (50%) of the amount of such Preliminary
Working Capital Amount.
2.05 Settlement Statement.
(a) Within 120 days following the Closing Date, Seller and Buyer
shall jointly prepare a statement (the "SETTLEMENT STATEMENT"), which
shall provide the actual Working Capital of the AMPCO Companies as of the
Measurement Date based on actual revenues earned and obligations incurred
up to and including the Measurement Date, subject to the adjustment
provided for in Section 2.05(b); provided, however, that for purposes of
this Section 2.05 the value of the AMPCO Companies' inventory of methanol
included in the determination of Working Capital shall be the value
determined by multiplying the volume of methanol as of the Measurement
Date as established by a review of the AMPCO Companies' records, by the
U.S. average spot price for methanol on the Measurement Date as published
in the bi-weekly DeWitt Methanol and Derivatives newsletter. The
Settlement Statement shall also specify any adjustments to the Adjusted
Purchase Price made pursuant to the last sentence of Section 2.02 if the
Closing Date occurs after January 3, 2002.
(b) Except for accounts receivable from Atlantic Methanol
Associates LLC and Atlantic Methanol Production Company LLC or between
the AMPCO Companies, any accounts receivable as of the Measurement Date
that have not been collected (net of any payables due to any company as
to which there is such an account receivable) as of the date of the
Settlement Statement (the "UNCOLLECTED ACCOUNTS RECEIVABLE") shall be
deemed to have zero value and will not be included in the Settlement
Statement.
(c) If Buyer and Seller shall be unable to agree on the Settlement
Statement within 120 days after the Closing Date, the public accounting
firm of Ernst & Young, or such other nationally recognized public
accounting firm as is mutually acceptable to Buyer and Seller, shall be
engaged to make its determination of any amounts in dispute (and only
such amounts). Each Party shall bear and pay one-half of the fees and
other costs charged by such accounting firm.
(d) If any accounting firm is engaged as provided in Section
2.05(b), Seller and Buyer agree to provide such accounting firm with a
detailed statement itemizing any amounts in dispute and all books,
Records and other information relevant to the
7
determination of the amounts in dispute. Such accounting firm shall be
instructed to use a materiality standard as such firm may determine to be
reasonable under the circumstances, in light of the cost to be incurred
and the amounts at issue. Each Party shall each be permitted to provide
expert testimony to such accounting firm supporting such Party's
position, and such accounting firm shall take such testimony into
account. Such accounting firm shall be instructed to make such
calculations as soon as practicable. The final determination of any of
the aforesaid disputed items pursuant to this Section 2.05(d) shall be
binding on the Parties.
(e) If the actual Working Capital of the AMPCO Companies on the
Measurement Date as agreed by the Parties or determined by the
aforementioned accounting firm (the "ACTUAL WORKING CAPITAL AMOUNT")
differs from the Preliminary Working Capital Amount, then Buyer shall pay
Seller, or Seller shall pay Buyer, as the case may be, by wire transfer
in immediately available funds, within five (5) Business Days after final
determination of the Actual Working Capital Amount, the sum of (i) fifty
percent (50%) of the difference (whether positive or negative) between
the Preliminary Working Capital Amount and the Actual Working Capital
Amount and interest on such amount at a rate of eight percent (8%) per
annum, compounded monthly, from the Closing Date to the date of payment.
ARTICLE III
CLOSING
3.01 Time and Place of Closing. Subject to fulfillment or waiver of the
conditions precedent specified in Sections 8.01 and 8.02, the consummation of
the transactions contemplated by this Agreement (the "CLOSING") shall take place
at the offices of Vinson & Elkins L.L.P., 1001 Fannin, Houston, Texas commencing
at 8:00 a.m. local time (a) on January 3, 2002 (provided, however, that such
date shall be extended (i) for any period of time that Seller is attempting to
cure a breach in accordance with the provisions of Section 6.07 or (ii) for any
period of time that the respective Affiliate of Seller has extended the date for
closing the transactions contemplated by the Associates Agreement or the
Upstream Agreement, in each case through and including, but no later than, April
2, 2002) or (b) on such other date as Buyer and Seller may mutually agree in
writing. The date upon which the Closing occurs shall be referred to herein as
the "CLOSING DATE."
3.02 Deliveries by Seller.
(a) Delivery of Documents. At the Closing, Seller shall deliver to
Buyer:
(i) Two (2) originals of an assumption agreement duly
executed by Seller in substantially the form attached hereto
as Schedule 3.02(a)(i) with respect to the interest of Seller
in and to Marketing (the "MARKETING INSTRUMENT OF
CONVEYANCE");
(ii) Two (2) originals of an assumption agreement
duly executed by Seller in substantially the form attached
hereto as Schedule 3.02(a)(ii) with respect to the interest of
Seller in and to Services (the "SERVICES INSTRUMENT OF
CONVEYANCE"); and
(iii) All other documents, instruments and writings
required to be delivered by Seller at the Closing pursuant to
the terms of this Agreement.
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(b) Delivery of Records. On the Closing Date (or as soon
thereafter as practicable), Seller shall deliver or cause to be delivered
to Buyer all Records of the AMPCO Companies in Seller's possession,
subject to the following provisions:
(i) Seller may retain the originals of all Records
that contain information relating to the AMPCO Companies but
principally relate to Seller or its Affiliates (with Buyer to
receive copies thereof), and Seller may retain copies of all
Records that contain information relating to Seller or its
Affiliates but principally relate to the AMPCO Companies; and;
(ii) Seller may retain all Records prepared in
connection with the sale of its interest in the AMPCO
Companies, including offers received from prospective
purchasers of such interests and any information relating to
such offers, and need not deliver to Buyer or grant Buyer
access to any such Records.
3.03 Deliveries by Buyer. At the Closing, Buyer shall deliver to
Seller:
(a) The Adjusted Purchase Price no later than 1:00 p.m., Houston
time, on the Closing Date, by wire transfer of immediately available
funds to an account designated by Seller;
(b) Two (2) originals of the Marketing Instrument of Conveyance
duly executed by Buyer;
(c) Two (2) originals of the Services Instrument of Conveyance
duly executed by Buyer; and
(d) All other documents, instruments and writings required to be
delivered by Buyer at the Closing pursuant to the terms of this
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as of the date hereof as
follows:
4.01 Existence and Qualification. Each of Seller and the AMPCO Companies
is a corporation or company duly organized and validly existing under the laws
of the State of Michigan. Each of Seller and the AMPCO Companies is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the lack of such
qualification would not have a Material Adverse Effect. Each of the AMCPO
Companies has all requisite power and authority to own, operate and lease its
properties and to carry on the Business as presently conducted by it.
4.02 Authority, Approval and Enforceability. Seller has all requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations under this Agreement. The execution and delivery of this
Agreement by Seller and the performance of the transactions contemplated hereby
by Seller have been duly and validly approved by the Board of Directors of
Seller and by all other corporate action, if any, necessary on behalf of Seller.
This Agreement has been duly executed and delivered on behalf of Seller and
constitutes the legal, valid and binding
9
obligation of Seller, enforceable against Seller in accordance with its terms,
subject to applicable bankruptcy, insolvency or other similar laws relating to
or affecting the enforcement of creditors' rights generally and to general
principles of equity ("CREDITORS' RIGHTS"). At the Closing all documents
required hereunder to be executed and delivered by Seller will have been duly
authorized, executed and delivered by Seller and will constitute legal, valid
and binding obligations of Seller, enforceable in accordance with their terms,
subject to Creditors' Rights.
4.03 Capitalization of the AMPCO Companies.
(a) The aggregate shareholders equity in Marketing as of
September 30, 2001 was $24,982,704, as to $12,491,352 was
allocable to Seller. Seller owns beneficially and of record fifty
percent (50%) of the ownership interests in Marketing. Except as
otherwise provided in the Marketing Members' Agreement, (i) the
ownership interest of Seller in Marketing is free and clear of all
mortgages, pledges, security interests, liens or encumbrances of
any kind and are not subject to any agreements or understandings
among any Persons with respect to the voting or transfer thereof,
and (ii) there are no outstanding subscriptions, options,
convertible securities, warrants, calls or other securities
granting rights to purchase or otherwise acquire such ownership
interest or any or any commitments or agreements of any character
obligating Seller or Marketing to issue or transfer any ownership
interest in Marketing.
(b) The aggregate shareholders equity in Services as of
September 30, 2001 was $3,421,963, as to which $1,710,981.50 was
allocable to Seller. Seller owns beneficially and of record fifty
percent (50%) of the ownership interests in Services. Except as
otherwise provided in the Services Members' Agreement, (i) the
ownership interest of Seller in Services is free and clear of all
mortgages, pledges, security interests, liens or encumbrances of
any kind and are not subject to any agreements or understandings
among any Persons with respect to the voting or transfer thereof
and (ii) there are no outstanding subscriptions, options,
convertible securities, warrants, calls or other securities
granting rights to purchase or otherwise acquire such ownership
interest or any commitments or agreements of any character
obligating Seller or Services to issue or transfer any ownership
interest in Services.
4.04 No Conflicts. Except as provided in Schedule 4.13, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated herein will:
(a) conflict with or result in a breach, default or
violation of the articles of incorporation or other governing
documents of Seller or either of the AMPCO Companies;
(b) conflict with or result in a breach, default or
violation of, any material agreement, document, instrument,
judgment, decree, order, governmental permit, certificate or
license to which Seller or either of the AMPCO Companies is a
party or is subject that would have a Material Adverse Effect; or
(c) result in the creation of any lien, charge or other
encumbrance upon any of the properties or assets of either of the
AMPCO Companies that would have a Material Adverse Effect.
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4.05 Financial Statements.
(a) Attached as Schedule 4.05 are the unaudited balance
sheet of each of the AMPCO Companies as of September 30, 2001 and
the related statements of income for the period then ended. Such
balance sheets and statements of income fairly present in all
material respects the financial position of the AMPCO Companies as
of such date and the results of their respective operations for
such period and have been prepared in accordance with GAAP, except
that footnotes and related schedules otherwise required by GAAP
have not been included with such unaudited financial statements.
(b) The financial statements referred to in clause(a) above
are hereinafter referred to as the "FINANCIAL STATEMENTS."
4.06 Material Contracts.
(a) Except as listed on Schedule 4.06(a) (collectively, the
"MATERIAL CONTRACTS"), neither of the AMPCO Companies is a party
to or bound by any lease, agreement or other contract of the type
described below currently in effect (except for those entered into
after the Execution Date and prior to the Closing in accordance
with Section 6.02):
(i) any agreements whereby either of the AMPCO
Companies guarantees any material obligation of Seller, any
of its Affiliates, or any other Person;
(ii) any employment agreements;
(iii) any agreement for capital expenditures or the
acquisition or construction of fixed assets that requires
future payments in excess of $50,000 (or the equivalent in
local currency);
(iv) any collective bargaining agreement with any
labor union;
(v) agreements, indentures or other instruments
relating to the borrowing, or the guarantee of any
borrowing, by either of the AMPCO Companies;
(vi) any agreement for the purchase or sale of
natural gas, methanol, or associated products with a term
of more than ninety (90) days;
(vii) any agreement for the sale of any asset (other
than sales of methanol or associated products in the
ordinary course of business) of either of the AMPCO
Companies for more than $250,000 (or the equivalent in
local currency);
(viii) any agreement that constitutes a lease under
which either of the AMPCO Companies is the lessor or lessee
of real or personal property, which lease (A) cannot be
terminated without penalty upon not more than thirty (30)
days notice and (B) involves an annual base rental in
excess of $50,000 (or the equivalent in local currency) or
whereby such a lease constitutes a capital lease for Tax or
GAAP purposes;
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(ix) any agreement with Seller or its Affiliates
relating to the provision of goods or services or the
payment of funds or the advancing or borrowing of money
(the "INTERCOMPANY AGREEMENTS");
(x) any agency, consultancy or similar agreement
requiring payment in excess of $50,000 per annum (or the
equivalent in local currency);
(xi) any agreement concerning a partnership or joint
venture; or
(xii) any commodity futures agreement.
Attached as Schedule 4.06(a)(ii) is a list of certain agreements that, as
of the Execution Date, have not been executed and are under negotiation
(the "PENDING MATERIAL CONTRACTS"). True and complete copies of each
Pending Material Contract have been made available to Buyer, and the
draft date of each such draft so made available is listed on Schedule
4.06(a)(ii).
(b) True and complete copies of each Material Contract have been
made available to Buyer.
(c) To the Knowledge of Seller, except as set forth in Schedule
4.06(c), (i) each of the Material Contracts is in full force and effect,
except to the extent that the failure to be in full force and effect
would not have a Material Adverse Effect, and (ii) neither of the AMPCO
Companies is in default with respect to any Material Contract other than
exceptions to the foregoing that would not have a Material Adverse
Effect.
4.07 Absence of Certain Changes. Since the date of the September 30, 2001
Financial Statements, neither of the AMPCO Companies has:
(a) transferred any of its assets, including any right under any
lease or Material Contract or any proprietary right or other intangible
asset, in each case having a value in excess of $100,000 except for fair
consideration and in the ordinary course of business;
(b) waived, released, canceled, settled or compromised any debt,
claim or right having a value in excess of $100,000 in each case except
in the ordinary course of business;
(c) suffered (i) any damage, destruction or casualty of property
if the anticipated cost to repair such property, after application of all
insurance proceeds with respect thereto, exceeds $100,000 in the
aggregate or (ii) any taking by condemnation or eminent domain of any of
its property or assets having a historical cost or fair market value that
exceeds $100,000;
(d) conducted any of its affairs in a manner that is outside the
ordinary course of business and inconsistent with its past practices;
except for (i) any event described in any of Sections 4.07(a) through (c)
hereof (disregarding the applicable dollar thresholds in any of such
sections), (ii) as otherwise contemplated by this Agreement, or (iii) as
results from announcements by Seller of intention to sell its ownership
interest in the AMPCO Companies;
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(e) changed any accounting methods or principles used in recording
transactions on the books of either Company or in preparing the financial
statements of either Company other than as required by GAAP; or
(f) entered into any contract committing itself with respect to
any of the foregoing.
4.08 Employees. Except as set forth on Schedule 4.08, (i) the AMPCO
Companies have no employees, and (ii) the AMPCO Companies do not administer or
sponsor any employee pension benefit plan or employee welfare benefit plan. For
the purposes of this Section 4.08, an employee pension benefit plan includes any
plan, fund or program providing either retirement income to employees, former
employees or their beneficiaries or a deferral of income to employees, former
employees or their beneficiaries beyond termination of employment. Also, for
purposes of this Section 4.08, an employee welfare benefit plan includes any
plan, fund or program providing employees, former employees or their
beneficiaries with health, sickness, accident, disability, death, unemployment
or other similar benefits.
4.09 Insurance. Schedule 4.09 contains a list of all material policies of
property damage, liability and other forms of insurance (other than officer's
and director's liability policies) that cover occurrences as of, or claims made
on, the date hereof and maintained by either of the AMPCO Companies or by Seller
or any Affiliate thereof to the extent applicable to either of the AMPCO
Companies.
4.10 Litigation. Except for (a) claims listed in Schedule 4.10, (b)
claims under worker's compensation and similar Laws, (c) routine claims for
employee benefits and (d) claims for money damages alone of less than $250,000
(or the equivalent in local currency) in respect of any claim, there are no
lawsuits, claims, arbitrative, governmental investigations or other legal
proceedings pending or, to the Knowledge of Seller, threatened against either of
the AMPCO Companies or otherwise relating to the conduct of the Business that
would have a Material Adverse Effect.
4.11 Liability for Brokers' Fees. Buyer will not directly or indirectly
incur any liability or expense as a result of any undertakings or agreements of
Seller or Seller's Affiliates for brokerage fees, finder's fees, agent's
commissions or other similar forms of compensation in connection with this
Agreement or any agreement or transaction contemplated hereby.
4.12 Compliance with Laws. Except as listed in Schedule 4.12, neither of
the AMPCO Companies has received any written notice of any violation of any
applicable Law other than such violations as would not have a Material Adverse
Effect. Except as would not have a Material Adverse Effect, (a) the AMPCO
Companies are in compliance with all applicable Laws and (b) neither of the
AMPCO Companies has entered into or agreed to any court decree or order or is
subject to any judgment, decree or order relating to compliance with any
applicable Laws.
4.13 Consents and Preferential Rights. Except as disclosed in Schedule
4.13, (i) no consents are required to be obtained by Seller or either of the
AMPCO Companies in connection with the transfer of Seller's ownership interest
in the AMPCO Companies to Buyer, and (ii) there are no preferential purchase
rights applicable to the transfer of Seller's ownership interest in the AMPCO
Companies to Buyer.
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4.14 Taxes. Except as set forth on Schedule 4.14 or as would not
otherwise have a Material Adverse Effect,
(a) To the Knowledge of Seller, all returns, reports, declarations
of estimated Tax of or with respect to any Tax that are required to be
filed on or prior to the Closing with respect to the AMPCO Companies
("TAX RETURNS") have been or will be duly and properly filed, all items
of income, gain, loss, deduction, credit, or other items ("TAX ITEMS")
required to be included in each such Tax Return have been so included,
and all such Tax Items and any other information provided in each such
Tax Return are true, correct, complete, and in accordance with applicable
Laws, and all such Tax Returns reflect all liabilities for Taxes for the
periods covered by such returns, all Taxes shown as due on each such Tax
Return have been or will be timely paid in full, no penalty, interest, or
other charge is or will become due with respect to the late filing of any
such Tax Return or late payment of any such Tax or any estimate relating
to the Tax, and all Tax withholdings and deposit requirements imposed on
or with regard to the AMPCO Companies have been satisfied in full in all
respects.
(b) There is no investigation or other proceeding pending with
respect to the Companies for any Tax in any jurisdiction where the AMPCO
Companies do not file Tax Returns.
(c) There are no pending audits, assessments or claims for any Tax
deficiency of the Companies. There are no pending claims for refund of
any Tax for the AMPCO Companies.
(d) There are no outstanding agreements, rulings, or requests for
rulings applicable to any Tax that are, or if issued would be, binding
upon the AMPCO Companies for any post-Closing period.
(e) The AMPCO Companies do not have in force any waiver of any
statute of limitations in respect of any Tax or any extension of time
with respect to a Tax assessment or deficiency.
(f) There are no liens for any Tax upon any of the assets of the
AMPCO Companies except for liens for Taxes not yet due.
(g) Except as reflected in the AMPCO Companies Tax Returns, there
are no elections with respect to any Tax affecting the AMPCO Companies.
(h) Any Tax required to be withheld by the AMPCO Companies and
paid in connection with amounts paid or owing to any lender, creditor,
employee, contractor, service provider, or any other Person has in fact
been withheld and paid in full, and all Tax withholding, reporting, and
payment obligations have been complied with in accordance with applicable
Law.
(i) Neither of the AMPCO Companies is party to, bound by, or has
any obligation under any Tax sharing agreement, Tax indemnification
agreement, or similar agreement.
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(j) Each of the AMPCO Companies is classified as a partnership
pursuant to Treasury Regulation Section 301.7701-3.
4.15 Intellectual Property. Each of the AMPCO Companies owns or has valid
rights or licenses for all Intellectual Property used by it in the conduct of
its Business and such rights shall not be adversely affected by the transactions
contemplated under this Agreement.
4.16 Data Room and Information. To Seller's Knowledge and except for (i)
the Permitted Encumbrances (excluding item (i) of the definition of Permitted
Encumbrances) and (ii) matters disclosed in any Schedule to this Agreement:
(a) all material written data and written information of Seller
the Companies relating to the Companies or the Business of the Companies
in Seller's or the Companies' possession was contained in the Data Room
or subsequently disclosed or made available to Buyer or Buyer's
Affiliates (excluding any information described in Section 3.02(b)(ii);
and
(b) all written data and written information given to Buyer or
Buyer's Affiliates in the Data Room or subsequently disclosed or made
available by or on behalf of Seller concerning the Companies or the
Business is believed by Seller (i) not to be misleading in any material
respect, and (ii) to be accurate in all material respects when given and
by reference to the facts existing at the time such information or data
was created; provided that no representation or warranty is made or given
as to the accuracy or completeness of any models, projections, opinions,
interpretations, estimates or forecasts (whether contained in any third
party document or otherwise) or any information or data contained in any
of the foregoing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as of the date hereof as
follows:
5.01 Corporate Existence and Qualification. Buyer is a corporation duly
incorporated and validly existing under the laws of the State of Ohio, and Buyer
has all requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as presently conducted.
5.02 Authority, Approval and Enforceability. Buyer has all requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations under this Agreement. The execution and delivery of this
Agreement by Buyer and the performance of the transactions contemplated hereby
by Buyer have been duly and validly approved by the Board of Directors of Buyer
and by all other corporate action, if any, necessary on behalf of Buyer. This
Agreement has been duly executed and delivered on behalf of Buyer and
constitutes the legal, valid and binding obligation of Buyer enforceable in
accordance with its terms, subject to Creditors' Rights. At the Closing, all
documents required hereunder to be executed and delivered by Buyer will have
been duly authorized, executed and delivered by Buyer and will constitute legal,
valid and binding obligations of Buyer, enforceable in accordance with their
terms, subject to Creditors' Rights.
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5.03 No Default or Consents. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated herein will:
(a) conflict with or result in a breach, default or violation of
the articles of incorporation or other governing documents of Buyer;
(b) conflict with or result in a breach, default or violation of
any material agreement, document, instrument, judgment, decree, order,
governmental permit, certificate or license to which Buyer is a party or
is subject; or
(c) require Buyer to obtain or make any waiver, consent, action,
approval clearance or authorization of, or registration, declaration or
filing with, any Governmental Authority.
5.04 Investment. Buyer is an accredited investor as defined in Regulation
D of the United States Securities Act of 1933 and is acquiring Seller's
ownership interest in the AMPCO Companies for its own account, for investment
and not with a view to, or for offer or resale in connection with, a
distribution thereof within the meaning of the Securities Act of 1933 or a
distribution thereof in violation of any applicable securities laws. Buyer,
together with its directors, executive officers and advisors, is familiar with
investments of the nature of Seller's ownership interest in the AMPCO Companies
and the Business, understands that this investment involves substantial risks,
has adequately investigated the AMPCO Companies and the Business and has
substantial knowledge and experience in financial and business matters such that
it is capable of evaluating, and has evaluated, the merits and risks inherent in
purchasing Seller's ownership interest in the AMPCO Companies and is able to
bear the economic risks of such investment.
5.05 Financial Capacity. Buyer has cash on hand or financing commitments,
copies of which are attached hereto as Schedule 5.05, that are sufficient to
satisfy all of its obligations under this Agreement to be performed at the
Closing. Buyer is not aware of any event or occurrence that would result in any
of the conditions to its right to funds under such financing commitments not to
be satisfied. Buyer will provide to Seller such documentation as Seller may
reasonably request to confirm Buyer's financial capacity.
5.06 Liability for Brokers' Fees. Seller will not directly or indirectly
incur any liability or expense as a result of any undertakings or agreements of
Buyer or Buyer's Affiliates for brokerage fees, finder's fees, agent's
commissions or other similar forms of compensation in connection with this
Agreement or any agreement or transaction contemplated hereby.
5.07 No Knowledge of Seller's Breach. As of the Execution Date, Buyer
has no Knowledge of any breach by Seller of Seller's representations and
warranties hereunder.
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ARTICLE VI
COVENANTS OF SELLER AND BUYER
6.01 Access.
(a) During the period commencing with the Execution Date and
ending at 5:00 p.m., local time, on November 30, 2001 (the "DUE DILIGENCE
PERIOD"), Buyer shall have the right to conduct the investigation
described in Section 6.01(b).
(b) Upon reasonable notice from Buyer to Seller, Seller shall
permit, and shall exercise its rights under the Marketing Members'
Agreement and the Services Members' Agreement to cause the AMPCO
Companies to permit, Buyer and its authorized employees, agents,
accountants, legal counsel and other representatives to have reasonable
access, at Buyer's sole expense, risk and cost, to the facilities,
properties, personnel and Records of the AMPCO Companies (including all
product sales, personnel-related documents and financial records and data
of the AMPCO Companies) for the purpose of conducting an investigation of
their financial condition, corporate status, business, properties and
assets; provided however, that such investigation shall be conducted in a
manner that does not interfere with normal operations of the AMPCO
Companies.
(c) Prior to Closing, (i) Buyer will not contact any employee of
Seller, either of the AMPCO Companies, or any of their Affiliates,
without first obtaining the approval of an authorized representative of
Seller (not to be unreasonably withheld), and (ii) Seller will furnish,
or exercise its rights under the Marketing Members' Agreement and the
Services Members' Agreement to cause the AMPCO Companies to furnish,
Buyer with such additional financial and operating data and other
information pertaining to the AMPCO Companies and their assets and
operations as Buyer may reasonably request; provided however that nothing
in this Agreement shall obligate Seller to take any action that would
disrupt the normal course of its or any of its Affiliate's, or either of
the AMPCO Companies', business or violate the terms of any applicable Law
or agreement to which it or any of its Affiliates or either AMPCO Company
is a party or to which it or any of its Affiliates, either AMPCO Company
or any of their assets are subject; and provided further, that the
confidentiality of any data or information to which Buyer is given access
shall be maintained by Buyer and its representatives in accordance with
Section 11.01.
(d) After the expiration of the Due Diligence Period and until
Closing or termination of this Agreement, Buyer shall continue to have
the right to conduct the investigation described in Section 6.01 to the
extent necessary for the purposes of preparing for an orderly transition
of ownership of the AMPCO Companies.
6.02 Operation of Business.
(a) Except (i) as contemplated in this Agreement, (ii) as
otherwise consented to by Buyer in writing (which consent will not be
unreasonably delayed, withheld or conditioned), (iii) as provided for in
the Material Contracts, or (iv) for the execution by the AMPCO Companies
of any Pending Material Contract (provided such Pending Material Contract
is substantially in the form of the draft listed on Schedule
4.06(a)(ii)), from the Execution Date through the Closing Date, Seller
will, to the extent of Seller's voting and other rights under the
Marketing Members' Agreement and the Services Members'
17
Agreement and the participation by representatives of Seller on the
management committees of the AMPCO Companies, use Reasonable Efforts to
cause each of the AMPCO Companies to:
(A) conduct its Business, in all material respects, in the
ordinary course of business, consistent with past practices;
(B) use its Reasonable Efforts to comply in all material
respects with all applicable Laws and use its Reasonable Efforts
to maintain compliance in all material respects with all of its
material agreements;
(C) continue its existing practices relating to the
maintenance and operation of its assets;
(D) not directly or indirectly take any steps affecting or
changing its capitalization;
(E) not merge into or with or consolidate with any other
Person or acquire all or substantially all of the business or
assets of any Person;
(F) not make any change in its governing documents;
(G) not purchase any securities of any Person except for
short-term investments made in the ordinary course of business;
(H) not sell, lease or otherwise dispose of or grant rights
in respect of any of its assets or properties that have a fair
market value in excess of $1,000,000 (or the equivalent in local
currency) (1) for less than fair market value and (2) other than
in the ordinary course of business;
(I) not create, incur, assume or guarantee any long-term
debt or capitalized lease obligation or, except in the ordinary
course of business and consistent with past practices, incur or
assume any short-term debt;
(J) not mortgage, pledge or subject to any lien, claim,
encumbrances or security interest any of its assets, tangible or
intangible, except for Permitted Encumbrances or other similar
liens or encumbrances created in the ordinary course of business
consistent with past practices;
(K) not take any action or enter into any commitment with
respect to or in contemplation of any liquidation, dissolution,
recapitalization, reorganization or other winding up of its
Business;
(L) not grant any preferential right of purchase or similar
consent right to the transfer or assignment of its Business or any
of its assets;
(M) not take, or knowingly permit to be taken, any action
in the conduct of the Business that would be contrary to or in
breach of any of the terms or provisions of this Agreement; and
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(N) not commit to do any of the foregoing.
(b) In addition to the foregoing, from the Execution Date until
the Closing or the termination of this Agreement, Seller agrees to keep
Buyer reasonably apprised, from time to time, of any significant
developments in the Business of the AMPCO Companies and to consult with
Buyer with regard to such developments. To the extent any disruption
occurs to the Business of the AMPCO Companies prior to Closing as a
result of the announcement by Seller of its intention to sell its
ownership interest in the AMPCO Companies, Seller agrees to use
Reasonable Efforts to minimize such disruption.
(c) Seller shall refrain and, to the extent of Seller's voting and
other rights under the Marketing Members' Agreement and the Services
Members' Agreement and the participation by representatives of Seller on
the management committees of the AMPCO Companies, shall cause the AMPCO
Companies to refrain from taking any action that would change the
classification for U.S. income tax purposes of the AMPCO Companies as
described in Section 4.14(j).
(d) Seller shall refrain and, to the extent of Seller's voting and
other rights under the Marketing Members' Agreement and the Services
Members' Agreement and the participation by representatives of Seller on
the management committees of the AMPCO Companies, shall cause the AMPCO
Companies not to dividend, loan, or otherwise distribute money to or for
the benefit of Seller at any time on or after the Measurement Date.
6.03 Satisfaction of Buyer's Conditions. Seller will use its, and will,
to the extent of Seller's voting and other rights under the Marketing Members'
Agreement and the Services Members' Agreement and the participation by
representatives of Seller on the management committees of the AMPCO Companies,
cause each of the AMPCO Companies to use their, Reasonable Efforts to obtain the
satisfaction of the conditions to the Closing set forth in Section 8.02 hereof.
6.04 Press Releases. From the Execution Date through the Closing Date,
subject to applicable securities law or stock exchange requirements, each Party
shall promptly advise and consult with, and obtain the consent (which consent
will not be unreasonably delayed, withheld or conditioned) of, the other Party
before issuing, or permitting any of its directors, officers, employees, agents
or its Affiliates to issue, any press release with respect to this Agreement or
the transactions contemplated hereby.
6.05 Insurance. Seller shall, to the extent of Seller's voting and other
rights under the Marketing Members' Agreement and the Services Members'
Agreement and the participation by representatives of Seller on the management
committees of the AMPCO Companies, use its Reasonable Efforts to cause each of
the AMPCO Companies to not voluntarily terminate and to maintain in force and
effect through the Closing Date the insurance coverages set forth on Schedule
4.09 or to cause to be placed in force and effect comparable insurance coverage.
Buyer acknowledges that no insurance coverage or policy maintained by Seller or
its Affiliates will extend beyond the Closing for the benefit of the AMPCO
Companies or Buyer.
6.06 Satisfaction of Seller's Conditions. Buyer will use its Reasonable
Efforts to obtain the satisfaction of the conditions to the Closing set forth in
Section 8.01 hereof.
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6.07 Breach Notice. If, prior to the Closing Date, Buyer obtains
Knowledge of a breach of any of Seller's representations and warranties or of
any of Seller's covenants contained in this Agreement, Buyer shall notify Seller
in writing of such information (the "BREACH NOTICE") within five (5) Business
Days of such discovery or the day prior to the Closing Date, whichever is
earlier. The Breach Notice shall contain reasonable details regarding the
alleged breach and Buyer's good faith estimate of the potential Losses
associated with such breach. In the event the breach is of a magnitude such that
Losses attributable to such breach (together with other such breaches discovered
by Buyer with respect to which Buyer has delivered the requisite Breach Notices)
are reasonably likely to exceed $13,000,000 and (x) Seller fails to deliver to
Buyer a written undertaking within five Business Days of receipt of such Breach
Notice that Seller intends to cure such breach prior to the Closing Date or (y)
Seller delivers such written undertaking but fails to cure such breach prior to
the Closing Date, (i) Buyer may terminate this Agreement upon written notice to
Seller (provided that Buyer has timely given Seller the requisite Breach
Notices) and (ii) Seller may terminate this Agreement upon written notice to
Buyer.
6.08 Uncollected Accounts Receivable. Following the Closing Date, Buyer
will use its, and will, to the extent of Buyer's voting and other rights under
the Marketing Members' Agreement and the Services Members' Agreement and the
participation by representatives of Buyer on the management committees of the
AMPCO Companies, cause the AMPCO Companies to use their, Reasonable Efforts to
collect any Uncollected Accounts Receivable. If either of the AMPCO Companies
receives all or any portion of any Uncollected Accounts Receivable, Buyer shall
promptly pay to Seller, by wire transfer in immediately available funds to an
account designated by Seller, fifty percent (50%) of such amounts received (net
of any offsets for accounts payable used in the calculation of Uncollected
Accounts Receivable) that are allocable to either of the AMPCO Companies.
6.09 Consents and Preferential Rights. Seller will use Reasonable Efforts
to obtain any consent listed in Schedule 4.13 prior to the Closing Date, and
Buyer agrees to use Reasonable Efforts to cooperate in such process, as
requested by Seller.
6.10 Preservation of Books and Records; Access. For a period of seven (7)
years after the Closing Date, Buyer shall (a) preserve and retain the Records
and all other corporate, accounting, legal, auditing and other books and records
of the AMPCO Companies (including any documents relating to any governmental or
non-governmental actions, suits, proceedings or investigations) relating to the
conduct of the business and operations of the AMPCO Companies prior to the
Closing Date and (b) cause the AMPCO Companies to permit Seller and its
authorized representatives to have reasonable access thereto on the same basis
as applies to Buyer pursuant to Section 6.01 and to meet with employees of Buyer
and the AMPCO Companies on a mutually convenient basis in order to obtain
additional information and explanations with respect to such books and records.
Notwithstanding the foregoing, during such seven-year period, Buyer may dispose
of any such Records that are offered to, but not accepted by, Seller.
6.11 Further Assurances. At and after the Closing, Seller and Buyer will
use Reasonable Efforts to take all appropriate action and execute any documents
or instruments of any kind that may be reasonably necessary to effectuate the
intent of this Agreement.
6.12 Casualty Loss. If, after the date hereof and prior to the Closing
Date, all or any part of the assets of either of the AMPCO Companies shall be
destroyed by explosion, fire or other
20
casualty, and if the Closing occurs, Seller shall pay to Buyer at the Closing
all sums paid to Seller or any of its Affiliates by third parties by reason of
the destruction of such assets. In addition, Seller shall, and shall ensure that
its Affiliates shall, assign, transfer and set over unto Buyer all of the right,
title and interest of Seller or the relevant Affiliate in and to any unpaid
awards or other payments from third parties arising out of such destruction.
Seller shall not voluntarily compromise, settle or adjust any amounts payable by
reason of such destruction without the prior written consent of Buyer. Seller
shall use its Reasonable Efforts to obtain payment from the relevant third
party.
ARTICLE VII
TAX MATTERS
7.01 Preparation and Filing of Tax Returns.
(a) After the Closing Date, each of Seller and Buyer shall provide
each other, and Buyer, to the extent of its voting and other rights under
the Marketing Members' Agreement and the Services Members' Agreement and
the participation by its representatives on the management committees of
the AMPCO Companies, shall cause each of the AMPCO Companies to provide
to Seller, such cooperation and information relating to the AMPCO
Companies as may reasonably be requested in connection with filing any
Tax Return or refund claim, determining any Tax liability or a right to a
refund, conducting or defending any audit or other proceeding in respect
of Taxes related to the business of the AMPCO Companies, or effectuating
the terms of this Agreement. Buyer shall, to the extent of Buyer's voting
and other rights under the Marketing Members' Agreement and the Services
Members' Agreement and the participation by representatives of Buyer on
the management committees of the AMPCO Companies, cause each of the AMPCO
Companies to file timely with the appropriate taxing authority all Tax
Returns required to be filed with respect to the AMPCO Companies
following the Closing Date regardless of whether the subject of such Tax
Returns relate partially or wholly to the time period prior to the
Closing Date. Such Tax Returns shall be prepared in a manner consistent
with practices and the Laws followed in prior years with respect to
similar Tax Returns, except for changes required by changes in Law.
(b) Buyer and Seller shall report their respective allocable
shares of the items of income, gain, loss, deduction, and credit of the
AMPCO Companies based on an interim closing of the books as of January 3,
2002.
(c) Seller shall, to the extent of its voting and other rights
under the Marketing Members' Agreement and the Services Members'
Agreement and the participation by its representatives on the management
committees of the AMPCO Companies, cause the AMPCO Companies not to make,
revoke, or amend any Tax election that would affect the period after the
Closing (other than any election that must be made periodically and that
is made consistently with past practice) without the prior consent of
Buyer.
(d) The Buyer Indemnified Parties shall not take any action, and,
to the extent of Buyer's voting and other rights under the Marketing
Members' Agreement and the Services Members' Agreement and the
participation by representatives of Buyer on the management committees of
the AMPCO Companies, shall not allow either of the AMPCO Companies to
take any action, on or after the Closing Date, that would increase the
liability of the Seller or its direct or indirect shareholders for Taxes
during the period of time prior to or ending on
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the Closing Date; provided, however, that nothing in this Section 7.01(d)
shall prevent the Buyer Indemnified Parties from making any election
under Section 754 of the Code. Seller shall consent to, and cooperate
with the Buyer Indemnified Parties in making, any such Section 754
elections for periods beginning on or after January 1, 2002.
(e) Seller shall be responsible for any Transfer Taxes, including
the filing of any Tax Return with respect thereto.
(f) The Adjusted Purchase Price shall be allocated in the manner
required by Section 1060 of the Code. To facilitate such allocation,
Buyer shall deliver to Seller, not later than December 1, 2001, a
schedule setting forth Buyer's proposed allocation of the Base Purchase
Price. Buyer and Seller shall work in good faith to agree upon a final
allocation of the Adjusted Purchase Price not later than 120 days after
Closing. Buyer and Seller shall timely file IRS form 8594 in accordance
with such final allocation with respect to the transactions contemplated
by this Agreement.
7.02 Retention of Information. Each of the Parties will preserve and
retain all schedules, work papers and other documents relating to any Tax
Returns of or with respect to the AMPCO Companies or to any claims, audits or
other proceedings affecting the AMPCO Companies until the expiration of the
statute of limitations (including extensions) applicable to the taxable period
to which such documents relate or until the final determination of any
controversy with respect to such taxable period, and until the final
determination of any payments that may be required with respect to such taxable
period under this Agreement.
7.03 Indemnification by Seller. Seller hereby agrees to protect, defend,
indemnify and hold harmless the Buyer Indemnified Parties, and each of the AMPCO
Companies from and against, and agrees to pay (a) any Taxes (net of any realized
Tax benefits associated therewith) of the AMPCO Companies (but only in an amount
proportional to Seller's direct or indirect interest in the relevant AMPCO
Company for the period to which such Taxes relate) attributable to the time
period prior to January 1, 2002 (including for the avoidance of doubt any Taxes
of the AMPCO Companies for the period prior to January 1, 2002 that are set
forth on Schedule 4.14), but only to the extent such Taxes exceed the amount
reserved for such Taxes on the Settlement Statement, (b) any Taxes arising out
of the transactions contemplated by this Agreement, (c) any increase in Taxes of
a Buyer Indemnified Party resulting from a breach by Seller of its
representations in Section 4.14(j) or its covenant in Section 6.02(c), and (d)
any Taxes of any company (other than the AMPCO Companies) that is or was an
Affiliate of Seller at any time prior to prior to January 1, 2002.
Notwithstanding anything to the contrary in this Agreement, no claim for Taxes
shall be permitted under this Section 7.03 unless such claim is first made
before the expiration of the statute of limitations (including applicable
extensions) for the taxable period to which the claim relates or, if no such
statute of limitation exists, prior to the date on which such claim is otherwise
barred by Law.
7.04 Buyer Tax Indemnification. Buyer agrees to protect, defend,
indemnify and hold harmless the Seller Indemnified Parties from and against, and
agrees to pay (a) any Taxes of the AMPCO Companies (but only in an amount
proportional to Seller's interest in the relevant AMPCO Company for the period
to which such Taxes relate) attributable to the time period from and after
January 1, 2002, excluding for purposes of clarification any Taxes arising out
of the transactions contemplated by this Agreement, and (b) any liability
arising from a breach by Buyer of its covenants in this Article VII.
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7.05 Tax Indemnification Procedures.
(a) If a claim shall be made by any Tax authority that, if
successful, would result in the indemnification of a Party under this
Agreement (referred to herein as the "TAX INDEMNIFIED PARTY"), the Tax
Indemnified Party shall promptly notify the party obligated under this
Agreement to so indemnify (referred to herein as the "TAX INDEMNIFYING
PARTY") in writing of such fact.
(b) The Tax Indemnified Party shall take such action in connection
with contesting such claim as the Tax Indemnifying Party shall reasonably
request in writing from time to time, including the selection of counsel
and experts and the execution of powers of attorney; provided that (i)
within thirty (30) days after the notice described in Section 7.05(a) has
been delivered (or such earlier date that any payment of Taxes is due by
the Tax Indemnified Party but in no event sooner than five (5) days after
the Tax Indemnifying Party's receipt of such notice), the Tax
Indemnifying Party requests that such claim be contested, (ii) the Tax
Indemnifying Party shall have agreed to pay to the Tax Indemnified Party
all costs and expenses that the Tax Indemnified Party incurs in
connection with contesting such claim, including reasonable attorneys'
and accountants' fees and disbursements, and (iii) if the Tax Indemnified
Party is requested by the Tax Indemnifying Party to pay the Tax claimed
and sue for a refund, the Tax Indemnifying Party shall have advanced to
the Tax Indemnified Party, on an interest-free basis, the amount of such
claim. The Tax Indemnified Party shall not make any payment of such claim
for at least thirty (30) days (or such shorter period as may be required
by applicable law) after the giving of the notice required by Section
7.05(a), shall give to the Tax Indemnifying Party any information
reasonably requested relating to such claim, and otherwise shall
cooperate with the Tax Indemnifying Party in good faith in order to
contest effectively any such claim.
(c) Subject to the provisions of Section 7.05(b), the Tax
Indemnified Party shall only enter into a settlement of such contest with
the applicable taxing authority or prosecute such contest to a
determination in a court or other tribunal of initial or appellate
jurisdiction as instructed by the Tax Indemnifying Party.
(d) If, after actual receipt by the Tax Indemnified Party of an
amount advanced by the Tax Indemnifying Party pursuant to Section
7.05(b)(iii), the extent of the liability of the Tax Indemnified Party
with respect to the claim shall be established by the final judgment or
decree of a court or other tribunal or a final and binding settlement
with an administrative agency having jurisdiction thereof, the Tax
Indemnified Party shall promptly repay to the Tax Indemnifying Party the
amount advanced to the extent of any refund received by the Tax
Indemnified Party with respect to the claim together with any interest
received thereon from the applicable taxing authority and any recovery of
legal fees from such taxing authority, net of any Taxes as are required
to be paid by the Tax Indemnified Party with respect to such refund,
interest or legal fees. Notwithstanding the foregoing, the Tax
Indemnified Party shall not be required to make any payment hereunder
before such time as the Tax Indemnifying Party shall have made all
payments or indemnities then due with respect to the Tax Indemnified
Party pursuant to this Agreement.
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7.06 Mutual Cooperation. Seller and Buyer shall reasonably cooperate with
each other and with each other's agents, including accounting firms and legal
counsel, in connection with Tax matters relating to the AMPCO Companies,
including (i) preparation and filing of Tax Returns, (ii) determining the
liability and amount of any Taxes due or the right to and amount of any refund
of Taxes, (iii) examinations of Tax Returns, and (iv) any administrative or
judicial proceedings in respect of Taxes assessed or proposed to be assessed.
Such cooperation shall include each Party's making all information and documents
in its possession relating to the AMPCO Companies available to the other Party
and retaining all Tax Returns, schedules and work papers, and all material
records and other documents relating thereto, until the expiration of the
applicable statute of limitations (including, to the extent notified by any
Party, any extension thereof) of the Tax period to which such Tax Returns and
other documents and information relate. Each of the Parties shall also make
available to the other Party, as reasonably requested and available, personnel
(including officers, directors, employees, and agents) responsible for
preparing, maintaining, and interpreting information and documents relevant to
Taxes, and personnel reasonably required as witnesses or for purposes of
providing information or documents in connection with any administrative or
judicial proceeding relating to Taxes. Each of the Parties shall exert all
appropriate efforts to preserve the confidentiality of all non-public
information and documents obtained or used in connection with such cooperation
or assistance. Any Party requesting any such cooperation or assistance shall
promptly reimburse any other Party providing any such cooperation or assistance
for the reasonable expenses incurred by such other Party with respect thereto.
Notwithstanding anything to the contrary in this Agreement, neither Seller nor
Buyer shall be required to provide to the other party all or any portion of a
U.S. consolidated federal income Tax Return filed by the respective consolidated
group in which Seller or Buyer is included.
7.07 Survival. The covenants, representations and warranties of the
Parties contained in this Article VII shall survive the Closing and shall
continue in full force and effect until all applicable statutes of limitations,
including waivers and extensions, have expired with respect to the matters
addressed therein, and if no statute of limitations exists, forever thereafter.
Notwithstanding the foregoing, any such representation or warranty as to which a
bona fide claim relating thereto is asserted in writing (which states with
specificity the basis therefor) during such survival period shall, with respect
only to such claim, continue in force and effect beyond such survival period
pending resolution of the claim.
7.08 Conflict. In the event of a conflict between the provisions of this
Article VII and any other provisions of this Agreement, this Article VII shall
control.
ARTICLE VIII
CLOSING CONDITIONS
8.01 Conditions to Obligations of Seller. The obligations of Seller to
proceed with the Closing are subject to the satisfaction at or prior to the
Closing of all of the following conditions, any one or more of which may be
waived in writing in whole or in part by Seller (which waiver shall be deemed to
constitute a waiver of any liability Buyer may have under this Agreement with
respect to the event or condition causing such condition not to be satisfied at
the Closing):
(a) Compliance. Buyer shall have complied in all material respects
with its covenants and agreements contained herein, and Buyer's
representations and warranties
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contained herein, or in any certificate or similar instrument required to
be delivered by or on behalf of Buyer pursuant hereto, shall be true in
all material respects on and as of the Closing Date, with the same effect
as though made at such time;
(b) Officers' Certificate. Seller shall have received certificates
dated as of the Closing Date and signed by (i) the Director, President,
or Vice President of Buyer, in his or her representative capacity, to the
effect that the conditions specified in Section 8.01(a) have been
fulfilled and (ii) the Secretary or an Assistant Secretary of Buyer, in
his or her representative capacity, certifying the accuracy and
completeness of the copies of, as well as the current effectiveness of,
the resolutions to be attached thereto of the board of directors (or any
committee thereof) of Buyer authorizing the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein, as well as to the incumbency of the officers
executing this Agreement on behalf of Buyer and any documents to be
executed and delivered by Buyer at the Closing;
(c) No Orders. No order, writ, injunction or decree shall have
been entered and be in effect by any court of competent jurisdiction or
any governmental or regulatory instrumentality or authority, and no
statute, rule, regulation or other requirement shall have been
promulgated or enacted and be in effect, that restrains, enjoins or
invalidates the transactions contemplated hereby;
(d) No Suits. No suit or other proceeding shall be pending or
threatened by any third party before any court or governmental agency
seeking to restrain or prohibit or declare illegal, or seeking
substantial damages in connection with, the transactions contemplated by
this Agreement; and
(e) Approvals. All Approvals (without any adverse conditions or
obligations) and waivers of preferential purchase and similar rights of
third parties in connection with the transactions contemplated by this
Agreement listed on Schedule 8.01(e) and all other Approvals required by
Law shall have been satisfied or obtained.
(f) Simultaneous Closing. The simultaneous closing of the
transactions contemplated by (i) the Associates Agreement and (ii) the
Upstream Agreement.
8.02 Conditions to Obligations of Buyer. The obligations of Buyer to
proceed with the Closing are subject to the satisfaction at or prior to the
Closing of all of the following conditions, any one or more of which may be
waived in writing in whole or in part by Buyer (which waiver shall be deemed to
constitute a waiver of any liability Seller may have under this Agreement (other
than liability for matters specified in a duly delivered Breach Notice) with
respect to the event or condition causing such condition not to be satisfied at
the Closing):
(a) Compliance. Seller shall have complied in all material
respects with its covenants and agreements contained herein, and Seller's
representations and warranties contained herein or in any certificate or
similar instrument required to be delivered by or on behalf of Seller
pursuant hereto, shall be true and correct in all material respects on
and as of the Closing Date, with the same effect as though made at such
time except to the extent Seller has been unable to cure a breach
identified by Buyer in a Breach Notice; provided that if a representation
or warranty is expressly made only as of a specific date, it need only be
true and correct in all material respects as of such date; provided,
however, that Buyer's right
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not to proceed with the Closing as a result of a breach of Seller's
representations and warranties shall only arise in the event that Buyer
has a right to terminate this Agreement pursuant to Section 6.07.
(b) Officers' Certificate. Buyer shall have received a certificate
dated as of the Closing Date and signed by (i) a Director, President, or
Vice President of Seller, in his or her representative capacity, to the
effect that the conditions specified in Section 8.02(a) have been
fulfilled and (ii) the Secretary or an Assistant Secretary of Seller, in
his or her representative capacity, certifying the accuracy and
completeness of the copies of, as well as the current effectiveness of,
the resolutions to be attached thereto of the board of directors (or any
committee thereof) of Seller authorizing the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein, as well as to the incumbency of the officers
executing this Agreement on behalf of Seller and any documents to be
executed and delivered by Seller at the Closing;
(c) Resignations. Seller shall have delivered to Buyer (i)
resignations substantially in the form attached hereto as Schedule
8.02(c), effective as of the Closing Date, of all of the members of the
management committees and officers of the AMPCO Companies nominated or
appointed by Seller, and (ii) appointments, in a form reasonably
satisfactory to Buyer, appointing Buyer's designees to the vacant
positions created by such resignations (it being acknowledged that
chairmanship of the management committees of the AMPCO Companies shall
pass to a designees of Samedan of North Africa, Inc. following
consummation of the transactions contemplated by this Agreement);
(d) No Orders. No order, writ, injunction or decree shall have
been entered and be in effect by any court of competent jurisdiction or
any governmental or regulatory instrumentality or authority, and no
statute, rule, regulation or other requirement shall have been
promulgated or enacted and be in effect, that restrains, enjoins or
invalidates the transactions contemplated hereby;
(e) No Suits. No suit or other proceeding shall be pending or
threatened by any third party before any court or governmental agency
seeking to restrain or prohibit or declare illegal, or seeking
substantial damages in connection with, the transactions contemplated by
this Agreement;
(f) Approvals. All Approvals (without any adverse conditions or
obligations) and waivers of preferential purchase and similar rights of
third parties in connection with the transactions contemplated by this
Agreement listed on Schedule 8.02(f) and all other Approvals required by
Law shall have been satisfied or obtained.
(g) Simultaneous Closing. The simultaneous closing of the
transactions contemplated by (i) the Associates Agreement and (ii) the
Upstream Agreement.
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ARTICLE IX
TERMINATION
9.01 Termination. This Agreement may be terminated in the following
instances:
(a) by Seller, if through no fault of Seller, the Closing does not
occur on or before January 3, 2002 (or on or before such later date if
the Closing Date has been extended pursuant to Section 3.01 as a result
of Seller's attempts to cure a breach pursuant to Section 6.07);
(b) by Buyer, if through no fault of Buyer, the Closing does not
occur on or before January 3, 2002 (or on or before such later date if
the Closing Date has been extended pursuant to Section 3.01 as a result
of Seller's attempts to cure a breach pursuant to Section 6.07);
(c) by Seller or Buyer, as applicable, in accordance with Section
6.07; or
(d) at any time by the mutual written agreement of Buyer and
Seller.
9.02 Effect of Termination. The following provisions shall apply in the
event of a termination of this Agreement:
(a) If this Agreement is terminated by either Party for any reason
except pursuant to an express right to do so set forth herein, the other
Party shall be entitled to exercise all rights and remedies available at
law or in equity as a result of such wrongful termination; provided in no
event shall such other Party ever be entitled to any consequential or
speculative damages including lost profits and, provided further, that if
this Agreement is terminated by either Party due to the failure of the
conditions to the obligations of such Party to close in Article VIII to
be satisfied and the other Party has exercised Reasonable Efforts to
satisfy such conditions, any recovery for claims arising in connection
therewith shall be limited to actual out-of-pocket expenses actually
incurred by the terminating Party in connection with this Agreement prior
thereto. Upon termination of this Agreement by Seller pursuant to an
express right to do so set forth herein, Seller shall be free to enjoy
immediately all rights of ownership in the AMPCO Companies and to sell,
transfer, encumber and otherwise dispose of its ownership interest in the
AMPCO Companies to any Party without any restriction under this
Agreement.
(b) Seller and Buyer hereby agree that the provisions of Section
9.02 and Articles X and XI shall survive any termination of this
Agreement pursuant to the provisions of this Article IX.
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ARTICLE X
INDEMNIFICATION; SCOPE OF REPRESENTATIONS; LIMITATIONS
10.01 Indemnification.
(a) Subject to the limitations of this Article X, Seller agrees to
indemnify, defend and hold harmless the Buyer Indemnified Parties from
and against any and all Indemnified Losses resulting from or arising out
of any of the following:
(i) any breach of any of the representations and warranties
of Seller contained in this Agreement or in any instrument
executed pursuant hereto; and
(ii) any breach of any covenant of Seller contained in this
Agreement.
(b) Notwithstanding anything to the contrary in Section 10.01(a),
in no event shall any amounts be recovered from Seller or any of its
Affiliates:
(i) relating to any breach of a representation or warranty
by Seller or a covenant of Seller of which Buyer had Knowledge
prior to the Closing Date and, with respect to such breach, Buyer
failed to timely provide a Breach Notice to Seller in accordance
with Section 6.07;
(ii) for any matter under Section 10.01(a) for which a
written notice of claim specifying in reasonable detail the
specific nature of and specific basis of the Losses and the
estimated amount of such Indemnified Losses ("CLAIM NOTICE") is
not delivered to Seller prior to the close of business on the day
twenty-four (24) months following the Closing Date, and the
indemnities granted by Seller in Section 10.01(a) shall terminate
on such date; provided, however, that such indemnities shall
survive with respect only to the specific matter that is the
subject of any Claim Notice delivered in good faith in compliance
with the requirements of this Section 10.01(b)(ii) prior to such
twenty-four (24) month anniversary until the earlier to occur of
(x) the date on which a final nonappealable resolution of the
matter described in such Claim Notice has been reached or (y) the
date on which the matter described in such Claim Notice has
otherwise reached final resolution;
(iii) under Section 10.01(a) for any Tax Claim, Buyer's
exclusive remedy for any Tax Claim being set forth in Article VII,
which shall not be subject to any Deductible or maximum claim
amount;
(iv) for any Indemnified Losses resulting from matters
described in Section 10.01(a)(i) until the aggregate amount of
Indemnified Losses incurred by the Buyer Indemnified Parties in
respect of all matters giving rise to such Indemnified Losses
exceeds $1,000,000 (the "DEDUCTIBLE") in which event Seller will
be obligated, subject to the other provisions of this Section
10.01(b), to indemnify the Buyer Indemnified Parties to the extent
and only to the extent such Indemnified Losses exceed the
Deductible; and
(v) for any Indemnified Losses resulting from matters
described in Section 10.01(a)(i) that in the aggregate exceed
twenty percent (20%) of the
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Adjusted Purchase Price (including the Deductible); provided,
however, that this Section 10.01(b)(v) shall not apply to
Indemnified Losses arising from a breach of Seller's
representations or warranties set forth in Section 4.03 or to
actions grounded in fraud. For the avoidance of doubt, the
limitation described in this Section 10.01(b)(v) permits a maximum
possible recovery by Buyer under Section 10.01(a)(i) (other than
Indemnified Losses arising from a breach of Seller's
representations or warranties set forth in Section 4.03 or actions
grounded in fraud) of an aggregate amount equal to twenty percent
(20%) of the Adjusted Purchase Price minus the Deductible.
In addition to the foregoing limitations of this Section 10.01(b), except
for actions grounded in fraud, the maximum amount in the aggregate that
the Buyer Indemnified Parties shall be able to recover from Seller or any
of its Affiliates for any and all Indemnified Losses resulting from
matters described in Section 10.01(a)(i) (including with respect to
Sections 4.03) shall in no event exceed an amount equal to 100% of the
Adjusted Purchase Price.
(c) Subject to the limitations of this Article X, Buyer agrees to
indemnify, defend and hold harmless the Seller Indemnified Parties from
and against any and all Indemnified Losses resulting from or arising out
of any of the following:
(i) any breach of any of the representations and warranties
of Buyer contained in this Agreement or in any instrument executed
pursuant hereto;
(ii) any breach of any covenant of Buyer contained in this
Agreement; and
(iii) any Third Party Claim in respect of the conduct of
the Business or any part thereof, and any liability or obligation
of either of the AMPCO Companies that arises after the Closing
Date, including, but not limited to, the obligation to pay all
costs and expenses incurred with respect to the Business after the
Closing Date, but only to the extent that such Third Party Claim
did not result from the breach of a representation or warranty of
Seller made pursuant hereto.
Notwithstanding anything to the contrary contained in this Section
10.01(c), in no event shall any amounts be recovered from Buyer under
this Section 10.01(c) for any Tax Claim, Seller's exclusive remedy with
respect to Tax Claims being set forth in Article VII.
(d) Notwithstanding anything to the contrary contained in this
Agreement, in no event shall Indemnified Losses include any exemplary,
punitive, special, indirect, consequential, remote or speculative
damages.
10.02 Indemnification Procedures. All claims for indemnification under
this Section 10.02 shall be asserted and resolved pursuant to this Section
10.02. Any Person claiming indemnification hereunder is hereinafter referred to
as the "INDEMNIFIED PARTY" and any Person against whom such claims are asserted
hereunder is hereinafter referred to as the "INDEMNIFYING PARTY." In the event
that any Indemnified Losses are asserted against or sought to be collected from
an Indemnified Party by a third party, said Indemnified Party shall with
reasonable promptness provide to the Indemnifying Party a Claim Notice. The
Indemnifying Party shall have thirty (30) days from the
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personal delivery or receipt of the Claim Notice (the "NOTICE PERIOD") to notify
the Indemnified Party (a) whether or not it disputes the liability of the
Indemnifying Party to the Indemnified Party hereunder with respect to such
Losses and (b) whether or not it desires, at the sole cost and expense of the
Indemnifying Party, to defend the Indemnified Party against such Losses;
provided, however, that any Indemnified Party is hereby authorized prior to and
during the Notice Period to file any motion, answer or other pleading that it
shall deem necessary or appropriate to protect its interests or those of the
Indemnifying Party (and of which it shall have given notice and opportunity to
comment to the Indemnifying Party) and not prejudicial to the Indemnifying
Party. In the event that the Indemnifying Party notifies the Indemnified Party
within the Notice Period that it desires to defend the Indemnified Party against
such Losses, the Indemnifying Party shall have the right to defend all
appropriate proceedings, and with counsel of its own choosing, which proceedings
shall be promptly settled or prosecuted by them to a final conclusion. If the
Indemnified Party desires to participate in, but not control, any such defense
or settlement it may do so at its sole cost and expense. If requested by the
Indemnifying Party, the Indemnified Party agrees to cooperate with the
Indemnifying Party and its counsel in contesting any Losses that the
Indemnifying Party elects to contest or, if appropriate and related to the claim
in question, in making any counterclaim against the person asserting the third
party Losses, or any cross-complaint against any Person. No claim may be settled
or otherwise compromised without the prior written consent of the Indemnifying
Party.
10.03 Exclusive Remedy. THE PARTIES ACKNOWLEDGE AND AGREE THAT THE
REMEDIES SET FORTH IN ARTICLE VII AND ARTICLE X, INCLUDING THE DEDUCTIBLES,
LIABILITY LIMITS, SURVIVAL PERIODS, DISCLAIMERS AND LIMITATIONS ON SUCH
REMEDIES, ARE INTENDED TO BE, AND SHALL BE, THE EXCLUSIVE REMEDIES WITH RESPECT
TO ANY ASPECT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY
HEREBY RELEASES, WAIVES AND DISCHARGES, AND COVENANTS NOT TO SUE WITH RESPECT
TO, ANY CAUSE OF ACTION OR CLAIM NOT EXPRESSLY PROVIDED FOR IN THIS AGREEMENT
INCLUDING CLAIMS UNDER STATE OR FEDERAL SECURITIES LAWS, AVAILABLE AT COMMON LAW
OR BY STATUTE (EXCLUDING FRAUD CLAIMS).
10.04 Independent Investigation. Buyer acknowledges and affirms that (a)
it has had full access to the Data Room and the information contained in, or
made available or provided with respect to materials contained in, the Data
Room, (b) provided Seller complies with Seller's obligations pursuant to Section
6.01, it has had access to the personnel, officers, professional advisors,
operations and Records of the AMPCO Companies and (c) in making the decision to
enter into this Agreement and to consummate the transactions contemplated
hereby, it has relied on the representations, warranties, covenants and
agreements of Seller set forth in this Agreement and in the certificate provided
for in Section 8.02(b), and other than such reliance, it has relied solely on
the basis of its own independent investigation, analysis and evaluation of the
AMPCO Companies and their assets, business, financial condition, operations and
prospects.
10.05 Scope of Representations. Except to the extent expressly set forth
in this Agreement, Seller makes no representations or warranties whatsoever and
disclaims all liability and responsibility for any other representation,
warranty, statement or information made or communicated (orally or in writing)
to Buyer. Without limiting the generality of the foregoing, except as expressly
set forth in this Agreement, Seller makes no representation or warranty as to
title to any of the assets or properties of the AMPCO Companies and, with
respect to any personal
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property and equipment included within such assets or properties, SELLER
EXPRESSLY DISCLAIMS AND NEGATES ANY IMPLIED OR EXPRESS WARRANTY OF
MERCHANTABILITY, OF FITNESS FOR A PARTICULAR PURPOSE, AND OF CONFORMITY TO
MODELS OR SAMPLES OF MATERIALS.
ARTICLE XI
MISCELLANEOUS
11.01 Confidentiality.
(a) Until the Closing Date, all data or information received by
Buyer or its Affiliates pursuant to this Agreement or in connection with
the transactions contemplated thereby shall be subject to that certain
confidentiality agreement countersigned on July 20, 2001 between the
Buyer and Seller (the "CONFIDENTIALITY AGREEMENT"), the terms and
conditions of which are hereby incorporated by reference as if Buyer were
party to such agreement.
(b) From and after the Closing, any data or information received
at any time by Seller from Buyer and any data or information regarding
the AMPCO Companies, including data or information regarding their assets
and operations, shall be maintained by Seller and its representatives in
confidence for a period of twenty-four (24) months from the Closing Date,
except (i) to the extent necessary to resolve any matters relating to
Governmental Authorities (including Tax controversies) or disputes with
Buyer pursuant to this Agreement or (ii) if such information (x) is
already in possession of the public or becomes available to the public,
other than through the act or omission of Seller in violation of this
Agreement; (y) is required to be disclosed under any applicable Law,
order, decree, regulation or rule of (A) a Governmental Authority or
court or (B) any regulatory entity, securities commission or stock
exchange; or (z) is acquired independently and without a confidential
restriction from a third party who represents that it has the right to
disseminate it at the time it is acquired by Seller.
11.02 Brokers. Regardless of whether the Closing shall occur, (a) Seller
shall indemnify and hold harmless Buyer and each of the AMPCO Companies and
their Affiliates from and against any and all liability for any brokers' or
finders' fees (and any court costs and attorneys' fees) arising with respect to
brokers or finders retained or engaged by Seller or any of its Affiliates in
respect of the transactions contemplated by this Agreement and (b) Buyer shall
indemnify and hold harmless Seller and its Affiliates from and against any and
all liability for any brokers' or finders' fees (and court costs and attorneys'
fees) arising with respect to brokers or finders retained or engaged by Buyer or
any of its Affiliates in respect of the transactions contemplated by this
Agreement.
11.03 Expenses. Except as specifically provided herein, each Party hereto
shall pay all legal and other costs and expenses incurred by such Party or any
of its Affiliates in connection with this Agreement and the transactions
contemplated hereby.
11.04 Notices. Any notice, request, instruction, correspondence or other
communication to be given or made hereunder by either Party to the other (herein
collectively called "NOTICE") shall be in writing and (a) delivered by hand, (b)
mailed by certified mail, postage prepaid and return receipt requested, (c) sent
by telecopier or (d) sent by Express Mail, Federal Express or other express
delivery service, as follows:
31
If to Seller, addressed to:
CMS Gas Transmission Company
Fairlane Plaza South
330 Town Center Drive
Dearborn, MI 48126
Attention: President
Telephone: (313) 436-9222
Telecopier: (313) 982-8815
If to Buyer, addressed to:
Marathon Oil Company
5555 San Felipe Street
Houston, Texas 77056-2799
Attention: Richard L. Horstmann
Telephone: (713) 296 2500
Telecopier: (713) 513-4172
Notice given by hand, Federal Express or other express delivery service or by
mail shall be effective upon actual receipt. Notice given by telecopier shall be
effective upon actual receipt if received during the recipient's normal business
hours, or at the beginning of the recipient's next business day after receipt if
not received during the recipient's normal business hours. All Notices by
facsimile shall be confirmed promptly after transmission in writing by certified
mail or personal delivery. No Notice shall be given to or by the AMPCO
Companies. Any Party may change any address to which Notice is to be given to it
by giving Notice as provided above of such change of address.
11.05 Governing Law. THE PROVISIONS OF THIS AGREEMENT, THE SCHEDULES
HERETO AND THE DOCUMENTS DELIVERED PURSUANT HERETO SHALL BE GOVERNED BY,
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS
(EXCLUDING ANY CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER SUCH MATTERS
TO THE LAWS OF ANOTHER JURISDICTION), EXCEPT TO THE EXTENT THAT SUCH MATTERS ARE
MANDATORILY SUBJECT TO THE LAWS OF ANOTHER JURISDICTION PURSUANT TO THE LAWS OF
SUCH OTHER JURISDICTION. THE PARTIES IRREVOCABLY CONSENT AND SUBMIT TO THE
EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS IN THE STATE OF TEXAS.
11.06 Waiver of Jury Trial. THE PARTIES VOLUNTARILY AND INTENTIONALLY
WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR
ANY OTHER TRANSACTION DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY OF THE PARTIES HERETO.
THE PARTIES HERETO HEREBY AGREE THAT THEY WILL NOT SEEK TO CONSOLIDATE ANY SUCH
LITIGATION WITH ANY OTHER LITIGATION IN WHICH A JURY TRIAL HAS NOT OR CANNOT BE
WAIVED. THE PROVISIONS OF
32
THIS SECTION 11.06 HAVE BEEN FULLY NEGOTIATED BY THE PARTIES HERETO AND SHALL BE
SUBJECT TO NO EXCEPTIONS.
11.07 Entire Agreement; Amendments and Waivers. This Agreement, together
with all Schedules hereto, constitutes the entire agreement between the Parties
pertaining to the subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
Parties. No supplement, modification or waiver 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 hereof (regardless of whether similar), nor shall
any such waiver constitute a continuing waiver unless otherwise expressly
provided.
11.08 Binding Effect and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties and their respective permitted
successors and assigns. Neither this Agreement nor any of the rights, benefits
or obligations hereunder shall be assigned, by operation of law or otherwise, by
any Party hereto prior to the Closing without the prior written consent of the
other Party, except that Seller may assign all of its rights, benefits and
obligations hereunder to an Affiliate without being released from its
obligations hereunder.
11.09 Severability. If any one or more of the provisions contained in
this Agreement or in any other document delivered pursuant hereto shall for any
reason, be held to be invalid, illegal or unenforceable in any material respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement or any other such document.
11.10 Headings and Schedules. The headings of the several Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
11.11 Survival of Representations. The representations and warranties in
this Agreement shall survive the Closing except for the representations and
warranties of Seller, which shall terminate twenty-four (24) months after the
Closing.
11.12 Time of the Essence. The Parties agree and acknowledge that time is
of the essence of this Agreement.
11.13 Counterparts; Facsimile. This Agreement may be executed in two (2)
or more counterparts, each of which shall be deemed an original, but all of
which shall constitute but one agreement. The Parties hereto agree that any
document or signature delivered by facsimile transmission shall be deemed an
original executed document for all purposes hereof.
11.14 No Third Party Beneficiaries. This Agreement is not intended to and
shall not confer upon any Person, other than the Parties hereto (and Persons
specifically granted indemnification rights hereunder), any rights or remedies
with respect to the subject matter or any provision hereof.
33
IN WITNESS WHEREOF, the Parties have duly executed this Agreement the
day and year first written above.
SELLER: CMS GAS TRANSMISSION COMPANY
By: /s/ Thomas L. Miller
--------------------------------------
Thomas L. Miller
Vice President
BUYER: MARATHON OIL COMPANY
By: /s/ S.J. Lowden
---------------------------------------
S.J. Lowden
Senior Vice President
SHARE PURCHASE AGREEMENT
BY AND AMONG
CMS METHANOL COMPANY,
CMS ENTERPRISES COMPANY,
MARATHON E.G. METHANOL LIMITED,
AND
MARATHON OIL COMPANY
OCTOBER 31, 2001
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION ......................... 1
1.01 Definitions ..................................................... 1
1.02 Construction .................................................... 6
ARTICLE II PURCHASE AND SALE ............................................ 7
2.01 Transfer of Shares .............................................. 7
2.02 Purchase Price .................................................. 7
2.03 Estimate of Working Capital Adjustment .......................... 7
2.04 Working Capital Adjustments ..................................... 7
2.05 Settlement Statement ............................................ 8
ARTICLE III CLOSING ..................................................... 9
3.01 Time and Place of Closing ....................................... 9
3.02 Deliveries by Seller ............................................ 9
3.03 Deliveries by Buyer ............................................. 10
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER AND CMS ............. 11
4.01 Existence and Qualification ..................................... 11
4.02 Authority, Approval and Enforceability .......................... 11
4.03 Capitalization of the Companies ................................. 12
4.04 No Conflicts .................................................... 12
4.05 Financial Statements ............................................ 13
4.06 Material Contracts .............................................. 13
4.07 Absence of Certain Changes ...................................... 15
4.08 Employees ....................................................... 15
4.09 Insurance ....................................................... 16
4.10 Litigation ...................................................... 16
4.11 Liability for Brokers' Fees ..................................... 16
4.12 Compliance with Laws ............................................ 16
-i-
4.13 Consents and Preferential Rights ................................ 16
4.14 Taxes ........................................................... 16
4.15 Intellectual Property ........................................... 17
4.16 Data Room and Information ....................................... 17
ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER AND MARATHON .......... 18
5.01 Corporate Existence and Qualification ........................... 18
5.02 Authority, Approval and Enforceability .......................... 18
5.03 No Default or Consents .......................................... 18
5.04 Investment ...................................................... 18
5.05 Financial Capacity .............................................. 19
5.06 Liability for Brokers' Fees ..................................... 19
5.07 No Knowledge of Seller's Breach ................................. 19
ARTICLE VI COVENANTS OF SELLER AND BUYER ................................ 19
6.01 Access .......................................................... 19
6.02 Operation of Business ........................................... 20
6.03 Satisfaction of Buyer's Conditions .............................. 22
6.04 Press Releases .................................................. 22
6.05 Insurance ....................................................... 22
6.06 Satisfaction of Seller's Conditions ............................. 22
6.07 Breach Notice ................................................... 22
6.08 Uncollected Accounts Receivable ................................. 22
6.09 Consents and Preferential Rights ................................ 23
6.10 Release of Guaranties ........................................... 23
6.11 Preservation of Books and Records; Access ....................... 23
6.12 Further Assurances .............................................. 23
6.13 Casualty Loss ................................................... 23
ARTICLE VII TAX MATTERS ................................................. 24
7.01 Preparation and Filing of Tax Returns ........................... 24
7.02 Retention of Information ........................................ 25
7.03 Indemnification by Seller ....................................... 25
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7.04 Buyer Tax Indemnification ....................................... 25
7.05 Tax Indemnification Procedures .................................. 25
7.06 Mutual Cooperation .............................................. 26
7.07 Survival ........................................................ 27
7.08 Conflict ........................................................ 27
ARTICLE VIII CLOSING CONDITIONS ......................................... 27
8.01 Conditions to Obligations of Seller ............................. 27
8.02 Conditions to Obligations of Buyer .............................. 28
ARTICLE IX TERMINATION .................................................. 30
9.01 Termination ..................................................... 30
9.02 Effect of Termination ........................................... 31
ARTICLE X INDEMNIFICATION; SCOPE OF REPRESENTATIONS; LIMITATIONS ........ 31
10.01 Indemnification ............................................... 31
10.02 Indemnification Procedures .................................... 33
10.03 Exclusive Remedy .............................................. 33
10.04 Independent Investigation ..................................... 34
10.05 Scope of Representations ...................................... 34
ARTICLE XI MISCELLANEOUS ................................................ 34
11.01 Confidentiality ............................................... 34
11.02 Brokers ....................................................... 35
11.03 Expenses ...................................................... 35
11.04 Notices ....................................................... 35
11.05 Governing Law ................................................. 36
11.06 Waiver of Jury Trial .......................................... 37
11.07 Entire Agreement; Amendments and Waivers ...................... 37
11.08 Binding Effect and Assignment ................................. 37
11.09 Severability .................................................. 37
11.10 Headings and Schedules ........................................ 37
11.11 Survival of Representations ................................... 37
-iii-
11.12 Time of the Essence ........................................... 37
11.13 Counterparts; Facsimile ....................................... 38
11.14 No Third Party Beneficiaries .................................. 38
SCHEDULES
1.01(a) -- Knowledge Persons of Buyer
1.01(b) -- Knowledge Persons of Seller
2.03(a) -- Form of Preliminary Working Capital Adjustment Statement
2.03(b) -- Estimate of Working Capital as of September 30, 2001
3.02(a)(ii) -- Form of Instrument of Conveyance
4.05(b) -- Unaudited Financial Statements
4.06(a)(i) -- Material Contracts
4.06(a)(ii) -- Pending Material Contracts
4.06(c) -- Matters Relating to Material Contracts
4.06(d) -- Matters Relating to AMPCO Plant
4.08 -- Employees
4.09 -- Policies of Insurance
4.10 -- Claims and Litigation
4.12 -- Compliance with Laws
4.13 -- Consents and Preferential Purchase Rights
4.14 -- Tax Matters
4.14(j) -- IRS Form 8832 for the Companies
6.10 -- Guarantees to be Released
8.01(f) -- Certain Approvals (Seller's Closing Conditions)
8.02(c) -- Form of Resignation
8.02(f) -- Certain Approvals (Buyer's Closing Conditions)
-iv-
STOCK PURCHASE AGREEMENT
This SHARE PURCHASE AGREEMENT (this "AGREEMENT"), executed as of October
31, 2001 (the "EXECUTION DATE"), is by and among CMS METHANOL Company, a company
incorporated under the laws of the Cayman Islands ("Seller"), CMS ENTERPRISES
COMPANY, a company formed under the laws of the State of Michigan ("CMS"),
MARATHON E.G. METHANOL LIMITED, a company formed under the laws of the Cayman
Islands ("BUYER"), and MARATHON OIL COMPANY, a company formed under the laws of
the State of Ohio ("MARATHON"). Seller and Buyer shall be referred to herein
each as a "PARTY" and collectively as the "PARTIES."
RECITALS
A. Seller is the owner of 5,000 of the issued and outstanding shares (the
"SHARES") in Atlantic Methanol Associates LLC, an exempted company with limited
liability incorporated under the laws of the Cayman Islands ("ASSOCIATES"),
which Shares constitute fifty percent (50%) of the ownership interests in
Associates, with the remaining fifty percent (50%) of the shares and ownership
interest in Associates being held by Samedan Methanol, a company incorporated
under the laws of the Cayman Islands.
B. Associates is the owner of 9,000 of the issued and outstanding shares
in Atlantic Methanol Production Company LLC, an exempted company with limited
liability incorporated under the laws of the Cayman Islands ("AMPCO" and,
together with Associates, the "COMPANIES"), which shares constitute ninety
percent (90%) of the ownership interests in AMPCO, with the remaining ten
percent (10%) of the shares and ownership interest being held by Guinea
Equatorial Oil and Gas Marketing Ltd, a company organized under the laws of
Equatorial Guinea.
C. Buyer desires to purchase from Seller, and Seller desires to sell to
Buyer, the Shares, upon the terms and subject to the conditions contained
herein.
NOW, THEREFORE, in consideration of the premises, agreements and covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Seller and Buyer agree, upon the
terms and subject to the conditions contained herein, as follows:
ARTICLE I
DEFINITIONS AND RULES OF CONSTRUCTION
1.01 Definitions. Capitalized terms used herein shall have the meaning
ascribed to them in this Article I unless such terms are defined elsewhere in
this Agreement.
"ACTUAL WORKING CAPITAL ADJUSTMENT" shall have the meaning ascribed to
such term in Section 2.05(f).
"ADJUSTED PURCHASE PRICE" shall have the meaning ascribed to such term in
Section 2.02.
"AFFILIATE" shall mean, with respect to any Person, any other Person
controlling, controlled by or under common control with such Person. The term
"control" as used in the preceding sentence means, with respect to a
corporation, the right to exercise, directly or indirectly, fifty percent (50%)
or more of the voting rights attributable to the shares of the controlled
corporation, or with respect to any Person other than a corporation, the
possession, directly or indirectly, of the power to direct or
1
cause the direction of the management or policies of such Person. The Companies
shall not be considered Affiliates of Buyer (or any of its Affiliates) or Seller
(or any of its Affiliates), and neither Buyer (nor its Affiliates) nor Seller
(nor its Affiliates) shall be considered Affiliates of either of the Companies.
"AGREEMENT" shall have the meaning ascribed to such term in the preamble.
"AMPCO" shall have the meaning ascribed to such term in Recital B.
"AMPCO AGREEMENT" shall mean the Purchase and Sale Agreement dated October
31, 2001 pursuant to which CMS has agreed to sell, and Marathon has agreed to
purchase, all of CMS' right, title, and ownership interest in and to AMPCO
Marketing, L.L.C., and AMPCO Services, L.L.C.
"AMPCO MEMBERS' AGREEMENT" shall mean the Members' Agreement for AMPCO
dated April 21, 1998.
"AMPCO PLANT" shall have the meaning ascribed to such term in Section
4.06(d).
"AMPCO SHARES" shall have the meaning ascribed to such term in Section
4.03(b).
"APPROVAL" shall mean an authorization, consent, approval or waiver of,
clearance by, required notice to or registration or filing with, a Governmental
Authority or other Person and the expiration or termination of all prescribed
waiting or review periods with respect to any of the foregoing.
"ASSOCIATES" shall have the meaning given to such term in Recital A.
"ASSOCIATES MEMBERS' AGREEMENT" shall mean the Members' Agreement for
Associates dated April 21, 1998, as amended by the First Amendment dated August
29, 2001.
"BASE PURCHASE PRICE" shall have the meaning ascribed to such term in
Section 2.02.
"BREACH NOTICE" shall have the meaning ascribed to such term in Section
6.07.
"BUSINESS" shall mean the business and operations of the Companies.
"BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a
United States federal or Texas state banking holiday.
"BUYER" shall have the meaning ascribed to such term in the preamble.
"BUYER INDEMNIFIED PARTIES" shall mean Buyer, its Affiliates and their
respective directors, officers, employees, agents and representatives.
"CLAIM NOTICE" shall have the meaning ascribed to such term in Section
10.01(b)(ii).
"CLOSING" shall have the meaning ascribed to such term in Section 3.01.
"CLOSING DATE" shall have the meaning ascribed to such term in Section
3.01.
"CMS" shall have the meaning ascribed to such term in the preamble.
2
"CODE" shall mean the Internal Revenue Code of 1986, as amended, and the
applicable Treasury Regulations thereunder.
"COMPANIES" shall have the meaning ascribed to such term in Recital B.
"CONFIDENTIALITY AGREEMENT" shall have the meaning ascribed thereto in
Section 11.01.
"CREDITORS' RIGHTS" shall have the meaning ascribed to such term in
Section 4.02.
"DATA ROOM" shall mean that data room located in Houston, Texas, prepared
by Seller to assist Persons interested in acquiring the Companies with an
evaluation of the Companies.
"DEDUCTIBLE" shall have the meaning ascribed to such term in Section
10.01(b)(iv).
"DOLLARS," "US$" or "$" shall mean the lawful currency of the United
States of America.
"DUE DILIGENCE PERIOD" shall have the meaning ascribed to such term in
Section 6.01.
"EXECUTION DATE" shall have the meaning ascribed to such term in the
preamble.
"ENVIRONMENTAL LAW" shall mean any Law issued, promulgated or entered into
by any Governmental Authority of the Republic of Equatorial Guinea relating to
the environment or preservation or reclamation of natural resources.
"FINANCIAL STATEMENTS" shall have the meaning ascribed to such term in
Section 4.05.
"GAAP" shall mean generally accepted accounting principles in effect in
the United States of America.
"GOVERNMENTAL AUTHORITY" shall mean any government, governmental agency,
authority, entity or instrumentality or any court thereof.
"INDEMNIFIED LOSSES" shall mean any and all Losses reduced by the amount
of any Tax benefit actually realized and by the amount of any insurance proceeds
actually recovered from any Person that is not an Affiliate of any Person
entitled to indemnification hereunder, but only to the extent that the Person
entitled to indemnification did not negligently or intentionally take actions
that materially exacerbated such Losses, provided that Indemnified Losses shall
not include any Losses attributable to matters for which an adjustment to the
Base Purchase Price has been made pursuant to Section 2.03 or 2.05.
"INDEMNIFIED PARTY" shall have the meaning ascribed to such term in
Section 10.02.
"INDEMNIFYING PARTY" shall have the meaning ascribed to such term in
Section 10.02.
"INTELLECTUAL PROPERTY" shall mean all trademarks, service marks, trade
names, patents, trade secrets, and copyrights used by either of the Companies
that, in each case, is material to the Business of either of the Companies.
"INSTRUMENT OF CONVEYANCE" shall have the meaning ascribed to such term in
Section 3.02(a)(ii).
3
"INTERCOMPANY AGREEMENTS" shall have the meaning ascribed to such term in
Section 4.06(a)(x).
"KNOWLEDGE" shall mean the actual knowledge of the persons listed in
Schedule 1.01(a), in the case of Buyer, and those listed on Schedule 1.01(b), in
the case of Seller; provided, however, that such persons shall be assumed to
have actual knowledge of items if there is persuasive evidence that such persons
must have had knowledge by virtue of their respective roles and functions.
"LAW" shall mean any constitution, statute, code, regulation, rule,
injunction, judgment, order, decree, ruling (including any agreement with a
Governmental Authority having the force of law), charge or other restriction of
any applicable Governmental Authority.
"LOSSES" shall mean all losses, costs, and expenses, including attorneys'
fees and expenses; provided, however, that for the avoidance of doubt, any
Losses suffered by the Companies shall only constitute Losses to Buyer to the
extent of the fifty percent (50%) ownership interest in Associates and the
indirect forty-five percent (45%) ownership interest in AMPCO that is being
acquired by Buyer pursuant to this Agreement.
"MARATHON" shall have the meaning ascribed to such term in the preamble.
"MATERIAL ADVERSE EFFECT" shall mean an adverse effect on the business,
financial condition or assets of the Companies that results in Losses to Buyer
or the Companies of $1,000,000 or more, excluding matters (such as, without
limitation, decreases in the prices received by AMPCO for methanol produced)
that are general, regional, industry-wide or economy-wide developments and
excluding political events and conditions; provided, however, that for the
avoidance of doubt Buyer shall only be deemed to suffer Losses as a result of
adverse effects on the Companies to the extent of the fifty percent (50%)
ownership interest in Associates and the indirect forty-five percent (45%)
ownership interest in AMPCO that is being acquired by Buyer pursuant to this
Agreement.
"MATERIAL CONTRACTS" shall have the meaning ascribed to such term in
Section 4.06(a).
"MEASUREMENT DATE" shall mean 7:01 a.m. Equatorial Guinea time on January
1, 2002.
"NET METHANOL PRICE" shall mean the price per ton for methanol payable to
AMPCO for the subject methanol less the unit rates for storage and terminalling,
inspections and surveys, finance charges, commission, and shipping and any other
deductions necessary to arrive at a realized net price to AMPCO.
"NOTICE" shall have the meaning ascribed to such term in Section 11.04.
"NOTICE PERIOD" shall have the meaning ascribed to such term in Section
10.02.
"OPIC FINANCING" shall mean the limited recourse financing in the original
principal amount of $173,000,000 proposed to be provided by the United States
Overseas Private Investment Corporation to AMPCO.
"PARTY" or "PARTIES" shall have the meaning ascribed to such term in the
preamble.
"PERSON" shall mean an individual, partnership, corporation,
joint-venture, trust, estate, unincorporated organization or association or
other legal entity.
4
"PENDING MATERIAL CONTRACTS" shall have the meaning ascribed to such term
in Section 4.06(a).
"PERMITTED ENCUMBRANCES" shall mean (i) the terms and conditions of the
Material Contracts and the Pending Material Contracts, (ii) matters disclosed in
any Schedule to this Agreement, (iii) sales contracts terminable without penalty
upon no more than thirty (30) days' notice to the purchaser of methanol; (iv)
materialman's, mechanic's, repairman's, employee's, contractor's, tax, and other
similar liens or charges arising in the ordinary course of business for
obligations that are not yet due; (v) easements, rights-of-way, servitudes,
permits, surface leases and other rights of third parties in respect of surface
operations, to the extent the same do not have a Material Adverse Effect on the
conduct of the Business of the Companies; (vi) rights reserved to or vested in a
Governmental Authority having jurisdiction to control or regulate the Business
of the Companies in any manner whatsoever, and all Laws of such Governmental
Authorities, and (vii) any other matters that do not materially interfere with
the normal and ordinary course of the Business of the Companies and that would
not be considered material when applying general standards in the international
petrochemical industry.
"PRELIMINARY WORKING CAPITAL ADJUSTMENT" shall have the meaning ascribed
to such term in Section 2.03.
"REASONABLE EFFORTS" shall mean the taking by a Party of such action as
would be in accordance with reasonable commercial practices as applied to the
particular matter in question; provided, however, that such action shall not
include the incurrence of unreasonable expense.
"RECORDS" shall mean and include all originals and copies (except where
the context indicates that only originals or copies are being referred to) of
minute books, tax records, agreements, documents, computer files and tapes,
maps, books, records, accounts and files of the Companies relating to the
Companies and the Business.
"SCHEDULE" shall mean any schedule attached to and made a part of this
Agreement.
"SELLER" shall have the meaning ascribed to such term in the preamble.
"SELLER INDEMNIFIED PARTIES" shall mean Seller, its Affiliates and their
respective directors, officers, employees, agents and representatives.
"SETTLEMENT STATEMENT" shall have the meaning ascribed to such term in
Section 2.05(a).
"SHARES" shall have the meaning ascribed to such term in Recital A.
"TAX" or "TAXES" shall mean any federal, state, local or foreign income,
gross receipts, license, payroll, employment, excise, severance, premium
windfall profits, environmental, customs duties, capital stock, capital gain,
petroleum profits, value added, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, minimum, alternative or add-on minimum, estimated
or other tax of any kind whatsoever, including any interest, penalty or addition
thereto, whether disputed or not.
"TAX CLAIM" shall mean any Losses arising out of a breach of the
representations and warranties in Section 4.14 or any of the provisions of
Article VII.
5
"TAX INDEMNIFIED PARTY" shall have the meaning ascribed to that term in
Section 7.05(a).
"TAX ITEMS" shall have the meaning ascribed to that term in Section
4.14(a).
"TAX INDEMNIFYING PARTY" shall have the meaning ascribed to that term in
Section 7.05(a).
"TAX RETURN" shall have the meaning ascribed to that term in Section
4.14(a).
"THIRD PARTY CLAIM" shall mean any claim, action or proceeding made or
brought by any Person who or that is not a Party or an Affiliate of the Party
seeking indemnification.
"TRANSFER TAXES" shall mean all transfer, sales, use, stamp, registration
or other similar Taxes or fees resulting from the transactions contemplated by
this Agreement.
"UNCOLLECTED ACCOUNTS RECEIVABLE" shall have the meaning ascribed to such
term in Section 2.05(c).
"UPSTREAM AGREEMENT" shall mean the Stock Purchase Agreement dated October
31, by and among CMS Oil and Gas Company, CMS, Marathon E.G. Holding Limited and
Marathon.
"WORKING CAPITAL" shall mean the combined total current assets of
Associates less combined current liabilities of Associates as defined by GAAP.
1.02 Construction.
(a) All article, section, subsection, schedule and exhibit
references used in this Agreement are to articles, sections, subsections,
schedules and exhibits to this Agreement unless otherwise specified.
(b) The schedules and exhibits attached to this Agreement constitute
a part of this Agreement and are incorporated herein for all purposes.
(c) Unless the context of this Agreement clearly requires otherwise
(i) the singular shall include the plural and the plural shall include the
singular wherever and as often as may be appropriate, (ii) the words
"includes" or "including" shall mean "including without limitation," (iii)
the words "hereof," "hereby," "herein," "hereunder" and similar terms in
this Agreement shall refer to this Agreement as a whole and not any
particular section or article in which such words appear and (iv) any
reference to a statute, regulation or law shall include any amendment
thereof or any successor thereto and any rules and regulations promulgated
thereunder.
(d) Currency amounts referenced herein, unless otherwise specified,
are in United States Dollars.
(e) Whenever this Agreement refers to a number of days, such number
shall refer to calendar days unless Business Days are specified.
(f) All accounting terms used herein and not expressly defined
herein shall have the meanings given to them under GAAP. References to
GAAP herein shall refer to such
6
principles in effect in the United States of America as of the date of the
statement to which such phrase refers.
ARTICLE II
PURCHASE AND SALE
2.01 Transfer of Shares. Upon the terms and subject to the conditions of
this Agreement, at the Closing, Buyer agrees to purchase the Shares from Seller
and to deliver payment for such Shares as provided in Section 2.02, and Seller
agrees to sell, assign and deliver the Shares to Buyer, subject to the receipt
of payment for such Shares as provided in Section 2.02.
2.02 Purchase Price. The consideration to be paid by Buyer to Seller at
Closing for the Shares shall be Two Hundred Seventy-One Million Five Hundred
Thousand Dollars ($271,500,000) (the "BASE PURCHASE PRICE") as adjusted by
forty-five percent (45%) of the Preliminary Working Capital Adjustment according
to Section 2.04; provided, however, that, if at the Closing the OPIC Financing
has closed and funded, the Base Purchase Price shall be reduced in an amount
equal to that portion of the principal amount of the OPIC Financing actually
distributed to or otherwise received by Seller or Seller's Affiliates (the Base
Purchase price, as adjusted, shall be referred to herein as the "ADJUSTED
PURCHASE PRICE"). In addition, if the Closing occurs later than January 3, 2002
pursuant to the provisions of Section 3.01, the Adjusted Purchase Price shall be
increased by an amount equal to the capital contributions, if any, made by
Seller to Associates on or after the Measurement Date and interest on the
Adjusted Purchase Price from and including January 3, 2002 up to but excluding
the Closing Date calculated at a per annum interest rate of five percent (5%).
2.03 Estimate of Working Capital Adjustment. Seller shall deliver to Buyer
no later than five (5) Business Days prior to the Closing Date a statement in
the format set forth on Schedule 2.03(a) setting forth the amount obtained by
subtracting $15,700,000 from Seller's reasonable estimate of the Working Capital
of Associates as of the Measurement Date (such difference, the "PRELIMINARY
WORKING CAPITAL ADJUSTMENT"); provided, however, that for purposes of this
Section 2.03 the reasonable estimate of Working Capital shall be adjusted such
that (a) an amount equal to the amount of capital expenditures budgeted for
completion of the AMPCO Plant and related facilities, including the new housing,
as set forth in the approved 2002 capital budget for the Companies (currently
estimated to be approximately $8,800,000) and not otherwise included in Working
Capital, shall be treated and separately stated as a Current Liability, (b) the
value of AMPCO's inventory of methanol shall be the value determined by
multiplying the estimated volume of methanol as of the Measurement Date by the
Net Methanol Price for the last lifting of methanol prior to the date of
preparation of the Preliminary Working Capital Adjustment, (c) any prepaid
amounts relating to items that should be capitalized as fixed assets of the
Companies shall be deducted from the value for Current Assets, and (d) the value
for inventories included in the calculation of Current Assets shall include only
those items of materials and supplies having a unit value of $100 or more.
Attached as Schedule 2.03(b) for illustrative purposes only is a completed
statement setting forth the Working Capital of Associates as of September 30,
2001 (without the adjustments provided for in the proviso to the preceding
sentence). Such statement shall be accompanied by a worksheet setting forth in
reasonable detail Seller's calculations used to estimate the Preliminary Working
Capital Adjustment. Seller shall provide Buyer with reasonable access to the
data used to prepare the Preliminary Working Capital Adjustment and the
worksheet.
2.04 Working Capital Adjustments. If the Preliminary Working Capital
Adjustment is positive, Buyer shall pay Seller, at the Closing, in addition to
the Base Purchase Price, an amount
7
equal to forty-five percent (45%) of such Preliminary Working Capital
Adjustment. If the Preliminary Working Capital Adjustment is negative, the Base
Purchase Price payment by Buyer to Seller pursuant to Section 2.02 shall be
reduced by an amount equal to forty-five percent (45%) of such Preliminary
Working Capital Adjustment.
2.05 Settlement Statement.
(a) At 7:01 a.m. Equatorial Guinea time on January 1, 2002, Seller
shall measure the amount of methanol in AMPCO's inventory in accordance
with prudent practices used in the international petrochemical industry,
and Buyer shall have the right to have someone present for such
measurement.
(b) Within 120 days following the Closing Date, Seller and Buyer
shall jointly prepare a statement (the "SETTLEMENT STATEMENT"), which
shall provide the actual Working Capital as of the Measurement Date based
on actual revenues earned and obligations incurred up to and including the
Measurement Date, subject to the adjustments provided for in the proviso
to the first sentence of Section 2.03 and in Section 2.05(c); provided,
however, that for purposes of this Section 2.05 the value of AMPCO's
inventory of methanol included in the determination of Working Capital
shall be the value determined by multiplying the volume of methanol
established pursuant to Section 2.05(a) by the Net Methanol Price for the
first lifting of methanol after the Measurement Date. The Settlement
Statement shall also specify any adjustments to the Adjusted Purchase
Price made pursuant to the last sentence of Section 2.02 if the Closing
Date occurs after January 3, 2002. As part of the joint preparation of the
Settlement Statement, Seller and Buyer shall, as soon as practicable and
within sixty (60) days after the Closing Date, jointly perform an audit to
verify the existence of those materials and supplies of the Companies
having a unit value of $1,000 or higher in accordance with prudent
industry practices, including the records of the Companies with respect to
any purchases, sales, or other utilizations of such materials and supplies
from the Measurement Date to the date of the audit.
(c) Except for accounts created as a result of advances to nationals
of the Republic of Equatorial Guinea providing services directly or
indirectly to the Companies and accounts receivable from AMPCO Marketing,
L.L.C. and AMPCO Services, L.L.C., any accounts receivable as of the
Measurement Date that have not been collected (net of any payables due to
any company as to which there is such an account receivable) as of the
date of the Settlement Statement (the "UNCOLLECTED ACCOUNTS RECEIVABLE")
shall be deemed to have zero value and will not be included in the
Settlement Statement.
(d) If Buyer and Seller shall be unable to agree on the Settlement
Statement within 120 days after the Closing Date, the public accounting
firm of Ernst & Young., or such other nationally recognized public
accounting firm as is mutually acceptable to Buyer and Seller, shall be
engaged to make its determination of any amounts in dispute (and only such
amounts). Each Party shall bear and pay one-half of the fees and other
costs charged by such accounting firm.
(e) If any accounting firm is engaged as provided in Section
2.05(d), Seller and Buyer agree to provide such accounting firm with a
detailed statement itemizing any amounts in dispute and all books, Records
and other information relevant to the determination of the amounts in
dispute. Such accounting firm shall be instructed to use a
8
materiality standard as such firm may determine to be reasonable under the
circumstances, in light of the cost to be incurred and the amounts at
issue. Each Party shall each be permitted to provide expert testimony to
such accounting firm supporting such Party's position, and such accounting
firm shall take such testimony into account. Such accounting firm shall be
instructed to make such calculations as soon as practicable. The final
determination of any of the aforesaid disputed items pursuant to this
Section 2.05(e) shall be binding on the Parties.
(f) If the amount obtained by subtracting $15,700,000 from the
actual Working Capital as of the Measurement Date as agreed by the Parties
or determined by the aforementioned accounting firm (the "ACTUAL WORKING
CAPITAL ADJUSTMENT") differs from the Preliminary Working Capital
Adjustment, then Buyer shall pay Seller, or Seller shall pay Buyer, as the
case may be, by wire transfer in immediately available funds, within five
(5) Business Days after final determination of the Actual Working Capital
Adjustment, forty-five percent (45%) of the sum of (i) the difference
(whether positive or negative) between the Preliminary Working Capital
Adjustment and the Actual Working Capital Adjustment and (ii) interest on
such amount at a rate of eight percent (8%) per annum, compounded monthly,
from the Closing Date to the date of payment.
ARTICLE III
CLOSING
3.01 Time and Place of Closing. Subject to fulfillment or waiver of the
conditions precedent specified in Sections 8.01 and 8.02, the consummation of
the transactions contemplated by this Agreement (the "CLOSING") shall take place
at the offices of Vinson & Elkins L.L.P., 1001 Fannin, Houston, Texas commencing
at 8:00 a.m. local time(a) on January 3, 2002 (provided, however, that such date
shall be extended (i) for any period of time that Seller is attempting to cure a
breach in accordance with the provisions of Section 6.07 or (ii) for any period
of time that the respective Affiliate of Seller has extended the date for
closing the transactions contemplated by the AMPCO Agreement or the Upstream
Agreement, in each case through and including, but no later than, April 2, 2002)
or(b) on such other date as Buyer and Seller may mutually agree in writing. The
date upon which the Closing occurs shall be referred to herein as the "CLOSING
DATE."
3.02 Deliveries by Seller.
(a) Delivery of Documents. At the Closing, Seller shall deliver to
Buyer:
(i) With respect to the Shares, stock certificates
representing such Shares, accompanied by (A) a duly executed share
transfer form, (B) a copy of a duly executed resolution of the
Management Committee of Associates approving transfer of the Shares,
and (C) a copy of Associates share register reflecting the transfer
of the Shares to Buyer;
(ii) Two (2) originals of an assignment and assumption
agreement duly executed by Seller and Associates in substantially
the form attached hereto as Schedule 3.02(a)(ii) with respect to the
interest of the Seller in and to the Shares and Associates (the
"INSTRUMENT OF CONVEYANCE"); and
9
(iii) All other documents, instruments and writings required
to be delivered by Seller at the Closing pursuant to the terms of
this Agreement.
(b) Delivery of Records. On the Closing Date (or as soon thereafter
as practicable), Seller shall deliver or cause to be delivered to Buyer
all Records of the Companies in Seller's possession, subject to the
following provisions:
(i) Seller may retain the originals of all Records that
contain information relating to the Companies but principally relate
to Seller or its Affiliates (with Buyer to receive copies thereof),
and Seller may retain copies of all Records that contain information
relating to Seller or its Affiliates but principally relate to the
Companies;
(ii) Seller may retain all Records prepared in connection with
the sale of the Shares, including offers received from prospective
purchasers of the Shares and any information relating to such
offers, and need not deliver to Buyer or grant Buyer access to any
such Records; and
(iii) Seller may retain (with Buyer to receive copies thereof)
all consolidating and consolidated financial information and all
other accounting Records prepared or used in connection with (A) the
preparation of financial statements of the Companies and (B) the
preparation and filing of any Tax Returns.
3.03 Deliveries by Buyer. At the Closing, Buyer shall deliver to Seller:
(a) The Adjusted Purchase Price, no later than 1:00 p.m., Houston
time, on the Closing Date, by wire transfer of immediately available funds
to an account designated by Seller;
(b) Two (2) originals of the Instrument of Conveyance duly executed
by Buyer; and
(c) All other documents, instruments and writings required to be
delivered by Buyer at the Closing pursuant to the terms of this Agreement.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER AND CMS
Each of Seller and CMS represents and warrants to Buyer as of the date
hereof as follows:
4.01 Existence and Qualification. Each of Seller, CMS, and the Companies
is a corporation or company duly organized and validly existing under the laws
of the jurisdiction of its organization. Each of Seller, CMS, and the Companies
(to the Knowledge of Seller as it relates to compliance by AMPCO with any legal
requirements of the Government of Equatorial Guinea) is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the lack of such
qualification would not have a Material Adverse Effect. Each of the Companies
(to the Knowledge of Seller as it relates to compliance by AMPCO with any legal
requirements of the Government of Equatorial Guinea) has all requisite power and
authority to own, operate and lease its properties and to carry on the Business
as presently conducted by it.
4.02 Authority, Approval and Enforceability. Each of Seller and CMS has
all requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations under this Agreement. The execution and
delivery of this Agreement by each of Seller and CMS and the performance of the
transactions contemplated hereby by Seller and CMS have been duly and validly
approved by the board of directors of Seller and CMS, by the shareholder of
Seller, and by all other corporate action, if any, necessary on behalf of Seller
and CMS. The resolutions of the management committee of Associates approving the
transfer of the Shares has been duly and validly adopted by such management
committee. This Agreement has been duly executed and delivered on behalf of
Seller and CMS and constitutes the legal, valid and binding obligation of Seller
and CMS, enforceable against Seller and CMS in accordance with its terms,
subject to applicable bankruptcy, insolvency or other similar laws relating to
or affecting the enforcement of creditors' rights generally and to general
principles of equity ("CREDITORS' RIGHTS"). At the Closing all documents
required hereunder to be executed and delivered by Seller and CMS will have been
duly authorized, executed and delivered by Seller and CMS and will constitute
legal, valid and binding obligations of Seller and CMS, enforceable in
accordance with their terms, subject to Creditors' Rights.
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4.03 Capitalization of the Companies.
(a) The authorized share capital of Associates is $50,000 divided
into 50,000 ordinary shares of $1.00 nominal or par value. Of the
authorized shares, 10,000 shares have been issued at a subscription price
of $42,000 per share, the subscription amount to be paid as and when
required pursuant to the Associates Members' Agreement. Seller owns
beneficially and of record the Shares. The Shares represent fifty percent
(50%) of issued and outstanding shares of Associates. Except as otherwise
provided in the Associates Members' Agreement, (i) the Shares are free and
clear of all mortgages, pledges, security interests, liens or encumbrances
of any kind and are not subject to any agreements or understandings among
any Persons with respect to the voting or transfer thereof, and (ii) there
are no outstanding subscriptions, options, convertible securities,
warrants, calls or other securities granting rights to purchase or
otherwise acquire the Shares or any unissued shares or new securities of
Associates or any commitments or agreements of any character obligating
Seller or Associates to issue or transfer any such shares or other
securities.
(b) The authorized share capital of AMPCO is $50,000 divided into
50,000 ordinary shares of $1.00 nominal or par value. Of the authorized
shares, 10,000 shares have been issued at a subscription price of $42,000
per share, the subscription amount to be paid as and when required
pursuant to the AMPCO Members' Agreement. Associates owns beneficially and
of record 9,000 of the shares of AMPCO (the "AMPCO SHARES"), which
represent ninety percent (90%) of the issued and outstanding shares of
AMPCO. Except as otherwise provided in the AMPCO Members' Agreement, (i)
the AMPCO Shares are free and clear of all mortgages, pledges, security
interests, liens or encumbrances of any kind and are not subject to any
agreements or understandings among any Persons with respect to the voting
or transfer thereof and (ii) there are no outstanding subscriptions,
options, convertible securities, warrants, calls or other securities
granting rights to purchase or otherwise acquire such shares in AMPCO or
any unissued shares or other new securities of AMPCO or any commitments or
agreements of any character obligating AMPCO to issue or transfer any such
shares or other securities.
4.04 No Conflicts. Except as provided in Schedule 4.13, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated herein will:
(a) conflict with or result in a breach, default or violation of the
articles of incorporation or other governing documents of Seller, CMS, or
either of the Companies;
(b) conflict with or result in a breach, default or violation of,
any material agreement, document, instrument, judgment, decree, order,
governmental permit, certificate or license to which Seller, CMS, or
either of the Companies (to the Knowledge of Seller as it relates to
compliance by AMPCO with any legal requirements of the Government of
Equatorial Guinea) is a party or is subject that would have a Material
Adverse Effect; or
(c) result in the creation of any lien, charge or other encumbrance
upon any of the properties or assets of either of the Companies that would
have a Material Adverse Effect.
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4.05 Financial Statements.
(a) The balance sheet of AMPCO and the related statements of
members' equity and of cash flows for the twelve (12) month period ending
December 31, 2000 certified by Arthur Andersen LLP, copies of which have
been delivered to the Buyer by the Seller, fairly present in all material
respects the financial position of AMPCO as of such date and the results
of its operations and cash flows for such year and have been prepared in
accordance with GAAP.
(b) Attached as Schedule 4.05 are the unaudited balance sheet of
each of the Companies as of September 30, 2001 and the related statements
of income for the period then ended. Such balance sheets and statements of
income fairly present in all material respects the financial position of
the Companies as of such date and the results of their respective
operations for such period and have been prepared in accordance with GAAP,
except that footnotes and related schedules otherwise required by GAAP
have not been included with such unaudited financial statements.
(c) The financial statements referred to in clauses (a) and (b)
above are hereinafter referred to as the "FINANCIAL STATEMENTS."
4.06 Material Contracts.
(a) Except as listed on Schedule 4.06(a)(i) (collectively, the
"MATERIAL CONTRACTS"), none of the Companies is a party to or bound by any
lease, agreement or other contract of the type described below currently
in effect (except for those entered into after the Execution Date and
prior to the Closing in accordance with Section 6.02):
(i) any agreements whereby either of the Companies guarantees
any material obligation of Seller, any of its Affiliates, or any
other Person;
(ii) any employment agreement between either of the Companies
and any expatriates (other than employment contracts with Philippine
Overseas Contract Workers who do not fill management positions and
similar non-local employees);
(iii) any agreement for capital expenditures or the
acquisition or construction of fixed assets that requires future
payments in excess of $500,000 (or the equivalent in local
currency);
(iv) any collective bargaining agreement with any labor union;
(v) any agreement granting to any Person a right of first
refusal, option, subscription right or other preferential right to
purchase or acquire any of the Shares;
(vi) agreements, indentures or other instruments relating to
the borrowing, or the guarantee of any borrowing, by either of the
Companies;
(vii) any agreement for the purchase or sale of natural gas,
methanol, or associated products with a term of more than ninety
(90) days;
13
(viii) any agreement for the sale of any asset (other than
sales of methanol or associated products in the ordinary course of
business) of any of the Companies for more than $2,000,000 (or the
equivalent in local currency);
(ix) any agreement that constitutes a lease under which either
of the Companies is the lessor or lessee of real or personal
property which lease (A) cannot be terminated without penalty upon
not more than thirty (30) days notice and (B) involves an annual
base rental in excess of $500,000 (or the equivalent in local
currency) or whereby such a lease constitutes a capital lease for
Tax or GAAP purposes;
(x) any agreement with Seller or its Affiliates relating to
the provision of goods or services or the payment of funds or the
advancing or borrowing of money (the "INTERCOMPANY Agreements");
(xi) any agency, consultancy or similar agreement requiring
payment in excess of $250,000 per annum (or the equivalent in local
currency);
(xii) any agreement concerning a partnership or joint venture;
(xiii) any commodity futures agreement;
(xiv) any other agreement that (A) involves future payment by
or to any of the Companies in excess of $500,000 (or the equivalent
in local currency) and (B) is not an agreement entered into in the
ordinary course of owning and operating a methanol production
facility and marketing production therefrom;
(xv) any agreement granting or reserving a net profits
interest, overriding royalty interest, production payment, incentive
compensation based on production, or similar burden on methanol
production that reduces the proceeds of production that would
otherwise be attributable to the Companies;
(xvi) any agreement pursuant to which AMPCO has transferred an
interest in the AMPCO Plant or subjected the AMPCO Plant to any
liens or judgments.
Attached as Schedule 4.06(a)(ii) is a list of certain agreements that, as
of the Execution Date, have not been executed and are under negotiation
(the "PENDING MATERIAL CONTRACTS"). True and complete copies of each
Pending Material Contract have been made available to Buyer, and the draft
date of each such draft so made available is listed on Schedule
4.06(a)(ii).
(b) True and complete copies of each Material Contract have been
made available to Buyer; provided, however, that certain of the documents
are in the Spanish language, and Seller makes no representations as to the
accuracy or completeness of any English translations made available to
Buyer.
(c) To the Knowledge of Seller, except as set forth in Schedule
4.06(c), (i) each of the Material Contracts is in full force and effect,
except to the extent that the failure to be in full force and effect would
not have a Material Adverse Effect, and (ii) neither of the Companies is
in default with respect to any Material Contract, other than exceptions to
the foregoing that would not have a Material Adverse Effect.
14
(d) Except as set forth on Schedule 4.06(d), (i) to the Knowledge of
Seller, (i) AMPCO has acquired the rights required pursuant to applicable
Law to construction, own, and operate the methanol production plant and
related facilities owned and operated by AMPCO (the "AMPCO PLANT") in
substantially the manner in which it has been constructed, owned, and
operated prior to the Execution Date, (ii) the government of the Republic
of Equatorial Guinea, as of the Execution Date, has not threatened
termination of any of the rights of AMPCO with respect to the AMPCO Plant,
and (iii) AMPCO has not transferred any interest in the AMPCO Plant to any
other party or subjected to the AMPCO Plant to any liens or judgments
(except for Permitted Encumbrances).
4.07 Absence of Certain Changes. Since the date of the September 30, 2001
Financial Statements, neither of the Companies has
(a) transferred any of its assets, including any right under any
lease or Material Contract or any proprietary right or other intangible
asset, in each case having a value in excess of $1,000,000 except for fair
consideration and in the ordinary course of business;
(b) waived, released, canceled, settled or compromised any debt,
claim or right having a value in excess of $1,000,000 in each case except
in the ordinary course of business;
(c) suffered (i) any damage, destruction or casualty of property if
the anticipated cost to repair such property, after application of all
insurance proceeds with respect thereto, exceeds $5,000,000 in the
aggregate or (ii) any taking by condemnation or eminent domain of any of
its property or assets having a historical cost or fair market value that
exceeds $2,000,000;
(d) conducted any of its affairs in a manner that is outside the
ordinary course of business and inconsistent with its past practices
except (i) for any event described in any of Sections 4.07(a) through (c)
hereof( disregarding the applicable dollar thresholds in any of such
sections), (ii) as otherwise contemplated in this Agreement, or (iii) as
results from announcements by Seller of its intention to sell the Shares;
(e) changed any accounting methods or principles used in recording
transactions on the books of any Company or in preparing the financial
statements of either Company other than as required by GAAP; or
(f) entered into any contract committing itself with respect to any
of the foregoing.
4.08 Employees. Except as set forth on Schedule 4.08, (i) the Companies
have no employees, and (ii) the Companies do not administer or sponsor any
employee pension benefit plan or employee welfare benefit plan. For the purposes
of this Section 4.08, an employee pension benefit plan includes any plan, fund
or program providing either retirement income to employees, former employees or
their beneficiaries or a deferral of income to employees, former employees or
their beneficiaries beyond termination of employment. Also, for purposes of this
Section 4.08, an employee welfare benefit plan includes any plan, fund or
program providing employees, former employees or their beneficiaries with
health, sickness, accident, disability, death, unemployment or other similar
benefits.
15
4.09 Insurance. Schedule 4.09 contains a list of all material policies of
property damage, liability and other forms of insurance (other than officer's
and director's liability policies) that cover occurrences as of, or claims made
on, the date hereof and maintained by either of the Companies or by Seller or
any Affiliate thereof to the extent applicable to either of the Companies.
4.10 Litigation. Except for (a) claims listed in Schedule 4.10, (b) claims
under worker's compensation and similar Laws, (c) routine claims for employee
benefits and (d) claims for money damages alone of less than $250,000 (or the
equivalent in local currency) in respect of any claim, there are no lawsuits,
claims, arbitrative, governmental investigations or other legal proceedings
pending or, to the Knowledge of Seller, threatened against either of the
Companies or otherwise relating to the conduct of the Business that would have a
Material Adverse Effect.
4.11 Liability for Brokers' Fees. Buyer will not directly or indirectly
incur any liability or expense as a result of any undertakings or agreements of
Seller or Seller's Affiliates for brokerage fees, finder's fees, agent's
commissions or other similar forms of compensation in connection with this
Agreement or any agreement or transaction contemplated hereby.
4.12 Compliance with Laws. Except as listed in Schedule 4.12, neither of
the Companies has received any written notice of any violation of any applicable
Law other than such violations as would not have a Material Adverse Effect.
Except as would not have a Material Adverse Effect or as set forth on Schedule
4.12, (a) to the Knowledge of Seller, the Companies are in compliance with all
applicable Laws and (b) neither of the Companies has entered into or agreed to
any court decree or order or is subject to any judgment, decree or order
relating to compliance with any applicable Laws.
4.13 Consents and Preferential Rights. Except as disclosed in Schedule
4.13, (i) no consents are required to be obtained by Seller or any of the
Companies in connection with the transfer of the Shares to Buyer, and (ii) there
are no preferential purchase rights applicable to the transfer of the Shares to
Buyer.
4.14 Taxes. Except as set forth on Schedule 4.14 or as would not otherwise
have a Material Adverse Effect,
(a) To the Knowledge of Seller, all returns, reports, and
declarations of estimated Tax with respect to any Tax that are required to
be filed on or prior to the Closing with respect to the Companies ("TAX
RETURNS") have or will be duly and properly filed, all items of income,
gain, loss, deduction, credit, or other items ("TAX ITEMS") required to be
included in each such Tax Return have been so included, and all such Tax
Items and any other information provided in each such Tax Return are true,
correct, complete, and in accordance with applicable Laws, and all such
Tax Returns reflect all liabilities for Taxes for the periods covered by
such Tax Returns, all Taxes shown as due on each such Tax Return have been
or will be timely paid in full, no penalty, interest, or other charge is
or will become due with respect to the late filing of any such Tax Return
or late payment of any such Tax or any estimate relating to such Tax, and
all Tax withholdings and deposit requirements imposed on or with regard to
the Companies have been satisfied in full in all respects.
(b) There is no investigation or other proceeding pending with
respect to the Companies for any Tax in any jurisdiction where the
Companies do not file Tax Returns.
16
(c) There are no pending audits, assessments or claims for any Tax
deficiency of the Companies. There are no pending claims for refund of any
Tax for the Companies.
(d) There are no outstanding agreements, rulings, or requests for
rulings applicable to any Tax that are, or if issued would be, binding
upon the Companies for any post-Closing period.
(e) The Companies do not have in force any waiver of any statute of
limitations in respect of any Tax or any extension of time with respect to
a Tax assessment or deficiency.
(f) There are no liens for any Tax upon any of the assets of the
Companies except for liens for Taxes not yet due.
(g) Except as reflected in the Companies' Tax Returns, there are no
elections with respect to any Tax affecting the Companies.
(h) Any Tax required to be withheld by the Companies and paid in
connection with amounts paid or owing to any lender, creditor, employee,
contractor, service provider, or any other Person has in fact been
withheld and paid in full, and all Tax withholding, reporting, and payment
obligations have been complied with in accordance with applicable Law.
(i) Neither of the Companies is party to, bound by, or has any
obligation under any Tax sharing agreement, Tax indemnification agreement,
or similar agreement.
(j) Each of the Companies is, and has been classified for more than
twelve (12) months prior to the date hereof, as a partnership pursuant to
Treasury Regulation Section 301.7701-3. Copies of Internal Revenue Service
Forms 8832 filed by Seller with respect to the Companies are attached
hereto as Schedule 4.14(j).
4.15 Intellectual Property. Each of the Companies owns or has valid
licenses for all Intellectual Property used by it in the conduct of its Business
and such rights shall not be adversely affected by the transactions contemplated
under this Agreement.
4.16 Data Room and Information. To Seller's Knowledge and except for (i)
the Permitted Encumbrances (excluding item (i) in the definition of Permitted
Encumbrances) and (ii) matters disclosed in any Schedule to this Agreement:
(a) all material written data and written information of Seller the
Companies relating to the Companies or the Business of the Companies in
Seller's or the Companies' possession was contained in the Data Room or
subsequently disclosed or made available to Buyer or Buyer's Affiliates
(excluding any information described in Section 3.02(b)(ii); and
(b) all written data and written information given to Buyer or
Buyer's Affiliates in the Data Room or subsequently disclosed or made
available by or on behalf of Seller concerning the Companies or the
Business is believed by Seller (i) not to be misleading in any material
respect, and (ii) to be accurate in all material respects when given and
by reference to the facts existing at the time such information or data
was created; provided that no representation or warranty is made or given
as to the accuracy or completeness of any
17
models, projections, opinions, interpretations, estimates or forecasts
(whether contained in any third party document or otherwise) or any
information or data contained in any of the foregoing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER AND MARATHON
Each of Buyer and Marathon represents and warrants to Seller as of the
date hereof as follows:
5.01 Corporate Existence and Qualification. Each of Buyer and Marathon is
a corporation duly incorporated and validly existing under the laws of the
jurisdiction of its organization, and each of Buyer and Marathon has all
requisite corporate power and authority to own, operate and lease its properties
and to carry on its business as presently conducted.
5.02 Authority, Approval and Enforceability. Each of Buyer and Marathon
has all requisite power and authority to execute and deliver this Agreement and
to perform its obligations under this Agreement. The execution and delivery of
this Agreement by Buyer and Marathon and the performance of the transactions
contemplated hereby by Buyer Marathon have been duly and validly approved by the
board of directors of Buyer and Marathon and by all other corporate action, if
any, necessary on behalf of Buyer and Marathon. This Agreement has been duly
executed and delivered on behalf of Buyer and Marathon and constitutes the
legal, valid and binding obligation of Buyer and Marathon enforceable in
accordance with its terms, subject to Creditors' Rights. At the Closing, all
documents required hereunder to be executed and delivered by either or both of
Buyer and Marathon will have been duly authorized, executed and delivered by
Buyer and Marathon, as applicable, and will constitute legal, valid and binding
obligations of Buyer and Marathon, as applicable, enforceable in accordance with
their terms, subject to Creditors' Rights.
5.03 No Default or Consents. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated herein will:
(a) conflict with or result in a breach, default or violation of the
articles of incorporation or other governing documents of Buyer or
Marathon;
(b) conflict with or result in a breach, default or violation of any
material agreement, document, instrument, judgment, decree, order,
governmental permit, certificate or license to which Buyer or Marathon is
a party or is subject; or
(c) require Buyer or Marathon to obtain or make any waiver, consent,
action, approval clearance or authorization of, or registration,
declaration or filing with, any Governmental Authority.
5.04 Investment. Marathon is an accredited investor as defined in
Regulation D of the United States Securities Act of 1933 and is causing Buyer to
acquire the Shares, to be held by Buyer for its own account, for investment and
not with a view to, or for offer or resale in connection with, a distribution
thereof within the meaning of the Securities Act of 1933 or a distribution
thereof in violation of any applicable securities laws. Each of Buyer and
Marathon, together with its respective directors, executive officers and
advisors, is familiar with investments of the nature of the Shares and
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the Business, understands that this investment involves substantial risks, has
adequately investigated the Companies and the Business and has substantial
knowledge and experience in financial and business matters and the international
oil and gas industry such that it is capable of evaluating, and has evaluated,
the merits and risks inherent in purchasing the Shares and is able to bear the
economic risks of such investment.
5.05 Financial Capacity. Marathon will cause Buyer to have cash on hand or
financing commitments that are sufficient to satisfy all of Buyer's obligations
under this Agreement to be performed at the Closing. Neither Buyer nor Marathon
is aware of any event or occurrence, which would result in any of the conditions
to its right to funds under such financing commitments not to be satisfied.
Marathon will provide to Seller such documentation as Seller may reasonably
request to confirm Buyer's financial capacity.
5.06 Liability for Brokers' Fees. Seller will not directly or indirectly
incur any liability or expense as a result of any undertakings or agreements of
Buyer or Buyer's Affiliates for brokerage fees, finder's fees, agent's
commissions or other similar forms of compensation in connection with this
Agreement or any agreement or transaction contemplated hereby.
5.07 No Knowledge of Seller's Breach. As of the Execution Date, neither
Buyer nor Marathon has Knowledge of any breach by Seller or CMS of Seller's and
CMS's representations and warranties hereunder.
ARTICLE VI
COVENANTS OF SELLER AND BUYER
6.01 Access.
(a) During the period commencing with the Execution Date and ending
at 5:00 p.m., local time, on November 30, 2001 (the "DUE DILIGENCE
PERIOD"), Buyer shall have the right to conduct the investigation
described in Section 6.01(b).
(b) Upon reasonable notice from Buyer to Seller, Seller shall
permit, and shall exercise its rights under the Associates Members'
Agreement and the AMPCO Members' Agreement to cause the Companies to
permit, Buyer and its authorized employees, agents, accountants, legal
counsel and other representatives to have reasonable access, at Buyer's
sole expense, risk and cost, to the facilities, properties, personnel and
Records of the Companies (including all title, land, geological,
geophysical, seismic, engineering, production, product sales,
personnel-related documents and financial records and data of the
Companies) for the purpose of conducting an investigation of their
financial condition, corporate status, business, properties and assets;
provided however, that such investigation shall be conducted in a manner
that does not interfere with normal operations of the Companies.
(c) Prior to Closing, (i) Buyer will not contact any Governmental
Authority of the Republic of Equatorial Guinea, or official thereof, or
any employee of Seller, either other Companies, or any of their
Affiliates, without first obtaining the approval of an authorized
representative of Seller (not to be unreasonably withheld), and (ii)
Seller will furnish, or shall
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exercise its rights under the Associates Members' Agreement and the AMPCO
Members' Agreement to cause the Companies to furnish, Buyer with such
additional financial and operating data and other information pertaining
to the Companies and their assets and operations as Buyer may reasonably
request; provided however that nothing in this Agreement shall obligate
Seller to take any action that would disrupt the normal course of its or
any of its Affiliate's, or any of the Companies', business or violate the
terms of any applicable Law or agreement to which it or any of its
Affiliates or any Company is a party or to which it or any of its
Affiliates, any Company or any of their assets are subject; and provided
further, that the confidentiality of any data or information to which
Buyer is given access shall be maintained by Buyer and its representatives
in accordance with Section 11.01.
(d) After the expiration of the Due Diligence Period and until
Closing or termination of this Agreement, Buyer shall continue to have the
right to conduct the investigation described in Section 6.01 to the extent
necessary for the purposes of preparing for an orderly transition of
ownership of the Companies.
6.02 Operation of Business.
(a) Except (i) as set forth in Schedule 6.02 or as otherwise
contemplated in this Agreement, (ii) as otherwise consented to by Buyer in
writing (which consent will not be unreasonably delayed, withheld or
conditioned), (iii) as provided for in the Material Contracts, and (iv)
for the execution by AMPCO of any Pending Material Contract (provided such
Pending Material Contract is substantially in the form of the draft listed
on Schedule 4.06(a)(ii)), from the Execution Date through the Closing
Date, Seller will, to the extent of Seller's voting and other rights under
the Associates Member's Agreement and the participation by representatives
of Seller on the management committees of the Companies, use Reasonable
Efforts to cause each of the Companies to:
(A) conduct its Business in all material respects, in the
ordinary course of business, including without limitation completion
of construction of the AMPCO Plant, consistent with past practices;
(B) use its Reasonable Efforts to comply in all material
respects with all applicable Laws and use its Reasonable Efforts to
maintain compliance in all material respects with all of its
material agreements;
(C) continue its existing practices relating to the
maintenance and operation of its assets;
(D) not directly or indirectly purchase, redeem or otherwise
acquire or dispose of any share of its capital stock or any
subscriptions, warrants, options, calls or other commitments or
rights to acquire any shares of its capital stock or take any steps
otherwise affecting or changing its capitalization;
(E) not merge into or with or consolidate with any other
Person or acquire all or substantially all of the business or assets
of any Person;
(F) not make any change in its governing documents;
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(G) not purchase any securities of any Person except for
short-term investments made in the ordinary course of business;
(H) not sell, lease or otherwise dispose of or grant rights in
respect of any of its assets or properties that have a fair market
value in excess of $1,000,000 (or the equivalent in local currency)
(1) for less than fair market value and (2) other than in the
ordinary course of business;
(I) not create, incur, assume or guarantee any long-term debt
or capitalized lease obligation or, except in the ordinary course of
business and consistent with past practices, incur or assume any
short-term debt;
(J) not mortgage, pledge or subject to any lien, claim,
encumbrances or security interest any of its assets, tangible or
intangible, except for Permitted Encumbrances or other similar liens
or encumbrances created in the ordinary course of business
consistent with past practices;
(K) not take any action or enter into any commitment with
respect to or in contemplation of any liquidation, dissolution,
recapitalization, reorganization or other winding up of its
Business;
(L) not grant any preferential right of purchase or similar
consent right to the transfer or assignment of the Business or any
of its assets;
(M) not take, or knowingly permit to be taken, any action in
the conduct of the Business that would be contrary to or in breach
of any of the terms or provisions of this Agreement; and
(N) not commit to do any of the foregoing.
(b) In addition to the foregoing, from the Execution Date until the
Closing or the termination of this Agreement, Seller agrees to keep Buyer
reasonably apprised, from time to time, of any significant developments in
the Business of the Companies and to consult with Buyer with regard to
such developments. To the extent any disruption occurs to the Business of
the Companies prior to Closing as a result of the announcement by Seller
of its intention to sell the Shares, Seller agrees to use Reasonable
Efforts to minimize such disruption.
(c) Seller shall refrain and, to the extent of Seller's voting and
other rights under the Associates Member's Agreement and the participation
by representatives of Seller on the management committees of the
Companies, shall cause the Companies to refrain from taking any action
that would change the classification for U.S. income tax purposes of the
Companies as described in Section 4.14(j).
(d) Seller shall refrain and, to the extent of Seller's voting and
other rights under the Associates Member's Agreement and the participation
by representatives of Seller on the management committees of the
Companies, shall cause the Companies not to dividend, loan, or otherwise
distribute money to or for the benefit of Seller at any time on or after
the Measurement Date.
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6.03 Satisfaction of Buyer's Conditions. Seller will use its, and will, to
the extent of Seller's voting and other rights under the Associates Member's
Agreement and the participation by representatives of Seller on the management
committees of the Companies, cause the Companies to use their, Reasonable
Efforts to obtain the satisfaction of the conditions to the Closing set forth in
Section 8.02 hereof and to obtain the consent or approval of the relevant
parties to the assumption or substitution by Buyer of the guaranties specified
in Schedule 6.10.
6.04 Press Releases. From the Execution Date through the Closing Date,
subject to applicable securities law or stock exchange requirements, each Party
shall promptly advise and consult with, and obtain the consent (which consent
will not be unreasonably delayed, withheld or conditioned) of, the other Party
before issuing, or permitting any of its directors, officers, employees, agents
or its Affiliates to issue, any press release with respect to this Agreement or
the transactions contemplated hereby.
6.05 Insurance. Seller shall, to the extent of Seller's voting and other
rights under the Associates Member's Agreement and the participation by
representatives of Seller on the management committees of the Companies, use its
Reasonable Efforts to cause the Companies to not voluntarily terminate and to
maintain in force and effect through the Closing Date the insurance coverages
set forth on Schedule 4.09 or to cause to be placed in force and effect
comparable insurance coverage. Buyer acknowledges that no insurance coverage or
policy maintained by Seller or its Affiliates will extend beyond the Closing for
the benefit of the Companies or Buyer.
6.06 Satisfaction of Seller's Conditions. Buyer will use its Reasonable
Efforts to obtain the satisfaction of the conditions to the Closing set forth in
Section 8.01 hereof.
6.07 Breach Notice. If, prior to the Closing Date, Buyer obtains Knowledge
of a breach of any of Seller's representations and warranties or of any of
Seller's covenants contained in this Agreement, Buyer shall notify Seller in
writing of such information (the "BREACH NOTICE") within five (5) Business Days
of such discovery or the day prior to the Closing Date, whichever is earlier.
The Breach Notice shall contain reasonable details regarding the alleged breach
and Buyer's good faith estimate of the potential Losses associated with such
breach. In the event the breach is of a magnitude such that Losses attributable
to such breach (together with other such breaches discovered by Buyer with
respect to which Buyer has delivered the requisite Breach Notices) are
reasonably likely to exceed $13,000,000 and (x) Seller fails to deliver to Buyer
a written undertaking within five Business Days of receipt of such Breach Notice
that Seller intends to cure such breach prior to the Closing Date or (y) Seller
delivers such written undertaking but fails to cure such breach prior to the
Closing Date, (i) Buyer may terminate this Agreement upon written notice to
Seller (provided that Buyer has timely given Seller the requisite Breach
Notices) and (ii) Seller may terminate this Agreement upon written notice to
Buyer.
6.08 Uncollected Accounts Receivable. Following the Closing Date, Buyer
will use its, and will, to the extent of Buyer's voting and other rights under
the Associates Members' Agreement and the participation by representatives of
Buyer on the management committees of the Companies, cause the Companies to use
their, Reasonable Efforts to collect any Uncollected Accounts Receivable. If
either of the Companies receives all or any portion of any Uncollected Accounts
Receivable, Buyer shall pay to Seller, by wire transfer in immediately available
funds to an account designated by Seller, forty-five percent (45%) of such
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amounts received (net of any offsets for accounts payable used in the
calculation of Uncollected Accounts Receivable) that are allocable to
Associates.
6.09 Consents and Preferential Rights. Seller will use Reasonable Efforts
to obtain any consent listed in Schedule 4.13 prior to the Closing Date, and
Buyer agrees to use Reasonable Efforts to cooperate in such process, as
requested by Seller.
6.10 Release of Guaranties. Buyer acknowledges that Seller and its
Affiliates have guaranteed the obligations (whether of performance or of
payment) of the Companies set forth in Schedule 6.10. If Seller and its
Affiliates have not been released as of the Closing Date of all obligations
relating to those guaranties and any liabilities related thereto and Seller
elects in writing to waive the condition to closing set forth in Section
8.01(e), Buyer shall indemnify Seller and its Affiliates against and assume all
such obligations and shall deliver to Seller a document reasonably acceptable to
Seller effectuating and evidencing such indemnification and assumption.
6.11 Preservation of Books and Records; Access.
(a) For a period of seven (7) years after the Closing Date, Buyer
shall (a) preserve and retain the Records and all other corporate,
accounting, legal, auditing and other books and records of the Companies
(including any documents relating to any governmental or non-governmental
actions, suits, proceedings or investigations) relating to the conduct of
the business and operations of the Companies prior to the Closing Date and
(b) cause the Companies to permit Seller and its authorized
representatives to have reasonable access thereto on the same basis as
applies to Buyer pursuant to Section 6.01 and to meet with employees of
Buyer and the Companies on a mutually convenient basis in order to obtain
additional information and explanations with respect to such books and
records. Notwithstanding the foregoing, during such seven-year period,
Buyer may dispose of any such Records that are offered to, but not
accepted by, Seller.
(b) After Closing, upon reasonable prior notice to Buyer, Buyer
shall permit and shall exercise its rights under the Associates Members'
Agreement and the AMPCO Members' Agreement to cause AMPCO to permit, CMS
and its nominee to have reasonable access, at CMS's sole expense, risk and
cost, to the AMPCO Plant site and such Records of AMPCO as are reasonably
necessary to verify the amount of emissions reductions in carbon dioxide,
methane, nitrous oxide, hydrofluorocarbons, perfluorcarbons, and sulfer
hexafluoride as a result of the use by the AMPCO Plant (without taking
into account any expansion of the AMPCO Plant that may occur following the
Closing Date) of methane feedstock that, but for the AMPCO Plant, would
otherwise be flared; provided however, that such activities shall be
conducted in a manner that does not interfere with normal operations of
AMPCO.
6.12 Further Assurances. At and after the Closing, Seller and Buyer will
use Reasonable Efforts to take all appropriate action and execute any documents
or instruments of any kind that may be reasonably necessary to effectuate the
intent of this Agreement.
6.13 Casualty Loss. If, after the date hereof and prior to the Closing
Date, all or any part of the assets of the Companies shall be destroyed by
explosion, fire or other casualty, and if the Closing occurs, Seller shall pay
to Buyer at the Closing all sums paid to Seller or any of its Affiliates by
third parties by reason of the destruction of such assets, and in addition,
Seller shall, and shall
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ensure that its Affiliates shall, assign, transfer and set over unto Buyer all
of the right, title and interest of Seller or the relevant Affiliate in and to
any unpaid awards or other payments from third parties arising out of such
destruction. Seller shall not voluntarily compromise, settle or adjust any
amounts payable by reason of such destruction without the prior written consent
of Buyer. Seller shall use its Reasonable Efforts to obtain payment from the
relevant third party.
ARTICLE VII
TAX MATTERS
7.01 Preparation and Filing of Tax Returns.
(a) After the Closing Date, each of Seller and Buyer shall provide
each other, and Buyer, to the extent of its voting and other rights under
the Associates Members' Agreement and the participation by its
representatives on the management committees of the Companies, shall cause
each of the Companies to provide to Seller, such cooperation and
information relating to the Companies as may reasonably be requested in
connection with filing any Tax Return or refund claim, determining any Tax
liability or a right to a refund, conducting or defending any audit or
other proceeding in respect of Taxes related to the business of the
Companies, or effectuating the terms of this Agreement. Buyer shall, to
the extent of Buyer's voting and other rights under the Associates
Members' Agreement and the participation by representatives of Buyer on
the management committees of the Companies, cause each of the Companies to
file timely with the appropriate Governmental Authority all Tax Returns
required to be filed with respect to the Companies following the Closing
Date regardless of whether the subject of such Tax Returns relate
partially or wholly to the time period prior to the Closing Date. Such Tax
Returns shall be prepared in a manner consistent with practices and the
Laws followed in prior years with respect to similar Tax Returns, except
for changes required by changes in Law.
(b) For United States tax purposes, Buyer and Seller shall report
their respective allocable shares of the items of income, gain, loss,
deduction, and credit of the Companies based on an interim closing of the
books as of January 3, 2002.
(c) Seller shall, to the extent of its voting and other rights under
the Associates Members' Agreement and the participation by its
representatives on the management committees of the Companies, cause the
Companies not to make, revoke, or amend any Tax election that would affect
the period after the Closing (other than any election that must be made
periodically and that is made consistently with past practice) without the
prior consent of Buyer.
(d) The Buyer Indemnified Parties shall not take any action, and, to
the extent of Buyer's voting and other rights under the Associates
Members' Agreement and the participation by representatives of Buyer on
the management committees of the Companies, shall not allow either of the
Companies to take any action, on or after the Closing Date, that would
increase the liability of the Seller or its direct or indirect
shareholders for Taxes during the period of time prior to or ending on the
Closing Date; provided, however, that nothing in this Section 7.01(d)
shall prevent the Buyer Indemnified Parties from making any election under
Section 754 of the Code. Seller shall consent to, and cooperate with the
Buyer Indemnified Parties in making, any such Section 754 elections for
periods beginning on or after January 1, 2002.
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(e) Seller shall be responsible for any Transfer Taxes, including
the filing of any Tax Return with respect thereto.
(f) The Adjusted Purchase Price shall be allocated in the manner
required by Section 1060 of the Code. To facilitate such allocation, Buyer
shall deliver to Seller, not later than December 1, 2001, a schedule
setting forth Buyer's proposed allocation of the Base Purchase Price.
Buyer and Seller shall use Reasonable Efforts to agree upon a final
allocation of the Adjusted Purchase Price not later than 120 days after
Closing. Buyer and Seller shall timely file IRS form 8594 with respect to
the transactions contemplated by this Agreement.
7.02 Retention of Information. Each of the Parties will preserve and
retain all schedules, work papers and other documents relating to any Tax
Returns of or with respect to the Companies or to any claims, audits or other
proceedings affecting the Companies until the expiration of the statute of
limitations (including extensions) applicable to the taxable period to which
such documents relate or until the final determination of any controversy with
respect to such taxable period, and until the final determination of any
payments that may be required with respect to such taxable period under this
Agreement.
7.03 Indemnification by Seller. Seller hereby agrees to protect, defend,
indemnify and hold harmless the Buyer Indemnified Parties and the Companies from
and against, and agrees to pay (a) any Taxes (net of any realized Tax benefits
associated therewith) of the Companies (but only in an amount proportional to
Seller's direct or indirect interest in the relevant Company for the period to
which such Taxes relate) attributable to the time period prior to January 1,
2002 (including for the avoidance of doubt any Taxes of the Companies for the
period prior to January 1, 2002 that are set forth on Schedule 4.14), but only
to the extent such Taxes exceed the amount reserved for such Taxes on the
Settlement Statement, (b) any Taxes arising out of the transactions contemplated
by this Agreement, (c) any increase in Taxes of a Buyer Indemnified Party
resulting from a breach by Seller of its representations in Section 4.14(j) or
its covenant in Section 6.02(c), and (d) any Taxes of any corporation (other
than the Companies) that is or was an Affiliate of Seller at any time prior to
January 1, 2002. Notwithstanding anything to the contrary in this Agreement, no
claim for Taxes shall be permitted under this Section 7.03 unless such claim is
first made before the expiration of the statute of limitations (including
applicable extensions) for the taxable period to which the claim relates or, if
no such statute of limitation exists, prior to the date on which such claim is
otherwise barred by Law.
7.04 Buyer Tax Indemnification. Buyer agrees to protect, defend, indemnify
and hold harmless the Seller Indemnified Parties from and against, and agrees to
pay (a) any Taxes of the Companies (but only in an amount proportional to
Seller's direct or indirect interest in the relevant Company for the period to
which such Taxes relate) attributable to the time period from and after January
1, 2002, excluding for purposes of clarification any Taxes arising out of the
transactions contemplated by this Agreement, and (b) any liability arising from
a breach by Buyer of its covenants in Article VII.
7.05 Tax Indemnification Procedures.
(a) If a claim shall be made by any Tax authority that, if
successful, would result in the indemnification of a Party under this
Agreement (referred to herein as the "TAX INDEMNIFIED PARTY"), the Tax
Indemnified Party shall promptly notify the party obligated
25
under this Agreement to so indemnify (referred to herein as the "TAX
INDEMNIFYING PARTY") in writing of such fact.
(b) The Tax Indemnified Party shall take such action in connection
with contesting such claim as the Tax Indemnifying Party shall reasonably
request in writing from time to time, including the selection of counsel
and experts and the execution of powers of attorney; provided that (i)
within thirty (30) days after the notice described in Section 7.05(a) has
been delivered (or such earlier date that any payment of Taxes is due by
the Tax Indemnified Party but in no event sooner than five (5) days after
the Tax Indemnifying Party's receipt of such notice), the Tax Indemnifying
Party requests that such claim be contested, (ii) the Tax Indemnifying
Party shall have agreed to pay to the Tax Indemnified Party all costs and
expenses that the Tax Indemnified Party incurs in connection with
contesting such claim, including reasonable attorneys' and accountants'
fees and disbursements, and (iii) if the Tax Indemnified Party is
requested by the Tax Indemnifying Party to pay the Tax claimed and sue for
a refund, the Tax Indemnifying Party shall have advanced to the Tax
Indemnified Party, on an interest-free basis, the amount of such claim.
The Tax Indemnified Party shall not make any payment of such claim for at
least thirty (30) days (or such shorter period as may be required by
applicable law) after the giving of the notice required by Section
7.05(a), shall give to the Tax Indemnifying Party any information
reasonably requested relating to such claim, and otherwise shall cooperate
with the Tax Indemnifying Party in good faith in order to contest
effectively any such claim.
(c) Subject to the provisions of Section 7.05(b), the Tax
Indemnified Party shall only enter into a settlement of such contest with
the applicable taxing authority or prosecute such contest to a
determination in a court or other tribunal of initial or appellate
jurisdiction as instructed by the Tax Indemnifying Party.
(d) If, after actual receipt by the Tax Indemnified Party of an
amount advanced by the Tax Indemnifying Party pursuant to Section
7.05(b)(iii), the extent of the liability of the Tax Indemnified Party
with respect to the claim shall be established by the final judgment or
decree of a court or other tribunal or a final and binding settlement with
an administrative agency having jurisdiction thereof, the Tax Indemnified
Party shall promptly repay to the Tax Indemnifying Party the amount
advanced to the extent of any refund received by the Tax Indemnified Party
with respect to the claim together with any interest received thereon from
the applicable taxing authority and any recovery of legal fees from such
taxing authority, net of any Taxes as are required to be paid by the Tax
Indemnified Party with respect to such refund, interest or legal fees.
Notwithstanding the foregoing, the Tax Indemnified Party shall not be
required to make any payment hereunder before such time as the Tax
Indemnifying Party shall have made all payments or indemnities then due
with respect to the Tax Indemnified Party pursuant to this Agreement.
7.06 Mutual Cooperation. Seller and Buyer shall reasonably cooperate with
each other and with each other's agents, including accounting firms and legal
counsel, in connection with Tax matters relating to the Companies, including (i)
preparation and filing of Tax Returns, (ii) determining the liability and amount
of any Taxes due or the right to and amount of any refund of Taxes, (iii)
examinations of Tax Returns, and (iv) any administrative or judicial proceedings
in respect of Taxes assessed or proposed to be assessed. Such cooperation shall
include each Party's making all information and
26
documents in its possession relating to the Companies available to the other
Party and retaining all Tax Returns, schedules and work papers, and all material
records and other documents relating thereto, until the expiration of the
applicable statute of limitations (including, to the extent notified by any
Party, any extension thereof) of the Tax period to which such Tax Returns and
other documents and information relate. Each of the Parties shall also make
available to the other Party, as reasonably requested and available, personnel
(including officers, directors, employees, and agents) responsible for
preparing, maintaining, and interpreting information and documents relevant to
Taxes, and personnel reasonably required as witnesses or for purposes of
providing information or documents in connection with any administrative or
judicial proceeding relating to Taxes. Each of the Parties shall exert all
appropriate efforts to preserve the confidentiality of all non-public
information and documents obtained or used in connection with such cooperation
or assistance. Any Party requesting any such cooperation or assistance shall
promptly reimburse any other Party providing any such cooperation or assistance
for the reasonable expenses incurred by such other Party with respect thereto.
Notwithstanding anything to the contrary in this Agreement, neither Seller nor
Buyer shall be required to provide to the other party all or any portion of a
U.S. consolidated federal income Tax Return filed by the respective consolidated
group in which Seller or Buyer is included.
7.07 Survival. The covenants, representations and warranties of the
Parties contained in this Article VII shall survive the Closing and shall
continue in full force and effect until all applicable statutes of limitations,
including waivers and extensions, have expired with respect to the matters
addressed therein, and if no statute of limitations exists, until such matters
are finally settled. Notwithstanding the foregoing, any such covenant as to
which a bona fide claim relating thereto is asserted in writing (which states
with specificity the basis therefor) during such survival period shall, with
respect only to such claim, continue in force and effect beyond such survival
period pending resolution of the claim.
7.08 Conflict. In the event of a conflict between the provisions of this
Article VII and any other provisions of this Agreement, this Article VII shall
control.
ARTICLE VIII
CLOSING CONDITIONS
8.01 Conditions to Obligations of Seller. The obligations of Seller to
proceed with the Closing are subject to the satisfaction at or prior to the
Closing of all of the following conditions, any one or more of which may be
waived in writing in whole or in part by Seller (which waiver shall be deemed to
constitute a waiver of any liability Buyer may have under this Agreement with
respect to the event or condition causing such condition not to be satisfied at
the Closing):
(a) Compliance. Each of Buyer and Marathon shall have complied in
all material respects with its covenants and agreements contained herein,
and Buyer's and Marathon's representations and warranties contained
herein, or in any certificate or similar instrument required to be
delivered by or on behalf of Buyer or Marathon pursuant hereto, shall be
true in all material respects on and as of the Closing Date, with the same
effect as though made at such time;
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(b) Officers' Certificate. Seller shall have received certificates
dated as of the Closing Date (i) by a Director, President, or Vice
President of Buyer, in his or her representative capacity, to the effect
that the conditions specified in Section 8.01(a) have been fulfilled,(ii)
by a Secretary or Assistant Secretary of Buyer, in his or her
representative capacity, certifying the accuracy and completeness of the
copies of, as well as the current effectiveness of, the resolutions to be
attached thereto of the Board of Directors (or any committee thereof) of
Buyer authorizing the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated herein, as
well as to the incumbency of the officers executing this Agreement on
behalf of Buyer and any documents to be executed and delivered by Buyer at
the Closing, and (iii) by a Secretary or Assistant Secretary of Marathon,
in his or her representative capacity, certifying the accuracy and
completeness of the copies of, as well as the current effectiveness of,
the resolutions to be attached thereto of the board of directors (or any
committee thereof) of Marathon authorizing the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein, as well as to the incumbency of the officers
executing this Agreement on behalf of Marathon and any documents to be
executed and delivered by Marathon at the Closing;
(c) No Orders. No order, writ, injunction or decree shall have been
entered and be in effect by any court of competent jurisdiction or any
governmental or regulatory instrumentality or authority, and no statute,
rule, regulation or other requirement shall have been promulgated or
enacted and be in effect, that restrains, enjoins or invalidates the
transactions contemplated hereby;
(d) No Suits. No suit or other proceeding shall be pending or
threatened by any third party before any court or governmental agency
seeking to restrain or prohibit or declare illegal, or seeking substantial
damages in connection with, the transactions contemplated by this
Agreement;
(e) Guaranties. Buyer shall have assumed or provided substitutes
for, and Seller shall have been released from all liabilities with respect
to, the guaranties specified in Schedule 6.10 in a manner satisfactory to
Seller; and
(f) Approvals. All Approvals (without any adverse conditions or
obligations) and waivers of preferential purchase and similar rights of
third parties in connection with the transactions contemplated by this
Agreement listed on Schedule 8.01(f) and all other Approvals required by
Law shall have been satisfied or obtained.
(g) Simultaneous Closing. The simultaneous closing of the
transactions contemplated by (i) the AMPCO Agreement, and (ii) the
Upstream Agreement.
8.02 Conditions to Obligations of Buyer. The obligations of Buyer to
proceed with the Closing are subject to the satisfaction at or prior to the
Closing of all of the following conditions, any one or more of which may be
waived in writing in whole or in part by Buyer (which waiver shall be deemed to
constitute a waiver of any liability Seller may have under this Agreement (other
than liability for matters specified in a duly delivered Breach Notice) with
respect to the event or condition causing such condition not to be satisfied at
the Closing):
28
(a) Compliance. Each of Seller and CMS shall have complied in all
material respects with its covenants and agreements contained herein, and
Seller's and CMS' representations and warranties contained herein or in
any certificate or similar instrument required to be delivered by or on
behalf of Seller or CMS pursuant hereto, shall be true and correct in all
material respects on and as of the Closing Date, with the same effect as
though made at such time except to the extent Seller or CMS has been
unable to cure a breach identified by Buyer in a Breach Notice; provided
that if a representation or warranty is expressly made only as of a
specific date, it need only be true and correct in all material respects
as of such date; provided, however, that Buyer's right not to proceed with
the Closing as a result of a breach of Seller's or CMS' representations
and warranties shall only arise in the event that Buyer has a right to
terminate this Agreement pursuant to Section 6.07.
(b) Officers' Certificate. Buyer shall have received certificate
dated as of the Closing Date (i) by a Director, President, or Vice
President of Seller, in his or her representative capacity, to the effect
that the conditions specified in Section 8.02(a) have been fulfilled, (ii)
by a Secretary or Assistant Secretary of Buyer, in his or her
representative capacity, certifying the accuracy and completeness of the
copies of, as well as the current effectiveness of, the consent and
resolutions to be attached thereto of the shareholder and of the board of
directors (or any committee thereof) of Seller authorizing the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein, as well as to the incumbency of the
officers executing this Agreement on behalf of Seller and any documents to
be executed and delivered by Seller at the Closing, and (iii) by a
Secretary or Assistant Secretary of CMS, in his or her representative
capacity, certifying the accuracy and completeness of the copies of, as
well as the current effectiveness of, the resolutions to be attached
thereto of the board of directors (or any committee thereof) of CMS
authorizing the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated herein, as well as to
the incumbency of the officers executing this Agreement on behalf of CMS
and any documents to be executed and delivered by CMS at the Closing;
(c) Resignations. Seller shall have delivered to Buyer (i)
resignations substantially in the form attached hereto as Schedule
8.02(c), effective as of the Closing Date, of all of the members of the
management committees and officers of the Companies nominated or appointed
by Seller and (ii) appointments, in a form reasonably satisfactory to
Buyer, appointing Buyer's designees to the vacant positions created by
such resignations (it being acknowledged that chairmanship of the
management committees of the Companies shall pass to a designees of
Samedan Methanol following consummation of the transactions contemplated
by this Agreement);
(d) No Orders. No order, writ, injunction or decree shall have been
entered and be in effect by any court of competent jurisdiction or any
governmental or regulatory instrumentality or authority, and no statute,
rule, regulation or other requirement shall have been promulgated or
enacted and be in effect, that restrains, enjoins or invalidates the
transactions contemplated hereby;
(e) No Suits. No suit or other proceeding shall be pending or
threatened by any third party before any court or governmental agency
seeking to restrain or prohibit or declare illegal, or seeking substantial
damages in connection with, the transactions contemplated by this
Agreement;
29
(f) Approvals. All Approvals (without any adverse conditions or
obligations) and waivers of preferential purchase and similar rights of
third parties in connection with the transactions contemplated by this
Agreement listed on Schedule 8.02(f) and all other Approvals required by
Law shall have been satisfied or obtained.
(g) Simultaneous Closing. The simultaneous closing of the
transactions contemplated by (i) the AMPCO Agreement and (ii) the Upstream
Agreement.
(h) Casualty Loss. AMPCO shall not have experienced any casualty
events between the Execution Date and the Closing Date resulting in Losses
to Buyer exceed in the aggregate an amount equal to $30,000,000.
ARTICLE IX
TERMINATION
9.01 Termination. This Agreement may be terminated in the following
instances:
(a) by Seller, if through no fault of Seller, the Closing does not
occur on or before January 3, 2002 (or on or before such later date if the
Closing Date has been extended pursuant to Section 3.01 as a result of
Seller's attempts to cure a breach pursuant to Section 6.07);
(b) by Buyer, if through no fault of Buyer, the Closing does not
occur on or before January 3, 2002 (or on or before such later date if the
Closing Date has been extended pursuant to Section 3.01 as a result of
Seller's attempts to cure a breach pursuant to Section 6.07);
(c) by Seller or Buyer, as applicable, in accordance with Section
6.07; or
(d) at any time by the mutual written agreement of Buyer and Seller.
30
9.02 Effect of Termination. The following provisions shall apply in the
event of a termination of this Agreement:
(a) If this Agreement is terminated by either Party for any reason
except pursuant to an express right to do so set forth herein, the other
Party shall be entitled to exercise all rights and remedies available at
law or in equity as a result of such wrongful termination; provided in no
event shall such other Party ever be entitled to any consequential or
speculative damages including lost profits and, provided further, that if
this Agreement is terminated by either Party due to the failure of the
conditions to the obligations of such Party to close in Article VIII to be
satisfied and the other Party has exercised Reasonable Efforts to satisfy
such conditions, any recovery for claims arising in connection therewith
shall be limited to actual out-of-pocket expenses actually incurred by the
terminating Party in connection with this Agreement prior thereto. Upon
termination of this Agreement by Seller pursuant to an express right to do
so set forth herein, Seller shall be free to enjoy immediately all rights
of ownership of the Shares and to sell, transfer, encumber and otherwise
dispose of the Shares to any Party without any restriction under this
Agreement.
(b) Seller and Buyer hereby agree that the provisions of Section
9.02 and Articles X and XI shall survive any termination of this Agreement
pursuant to the provisions of this Article IX.
ARTICLE X
INDEMNIFICATION; SCOPE OF REPRESENTATIONS; LIMITATIONS
10.01 Indemnification.
(a) Subject to the limitations of this Article X, Seller agrees to
indemnify, defend and hold harmless the Buyer Indemnified Parties from and
against any and all Indemnified Losses resulting from or arising out of
any of the following:
(i) any breach of any of the representations and warranties of
Seller contained in this Agreement or in any instrument executed
pursuant hereto; and
(ii) any breach of any covenant of Seller contained in this
Agreement.
(b) Notwithstanding anything to the contrary in Section 10.01(a), in
no event shall any amounts be recovered from Seller or any of its
Affiliates:
(i) relating to any breach of a representation or warranty by
Seller or a covenant of Seller of which Buyer had Knowledge prior to
the Closing Date and, with respect to such breach, Buyer failed to
timely provide a Breach Notice to Seller in accordance with Section
6.07;
(ii) for any matter under Section 10.01(a) for which a written
notice of claim specifying in reasonable detail the specific nature
of and specific basis of the Losses and the estimated amount of such
Indemnified Losses ("CLAIM NOTICE") is not delivered to Seller prior
to the close of business on the day twenty-four (24) months
following the Closing Date, and the indemnities granted by Seller in
Section 10.01(a) shall terminate on such date; provided, however,
that such indemnities shall survive with respect only to the
specific matter that is the subject of any Claim Notice
31
delivered in good faith in compliance with the requirements of this
Section 10.01(b) prior to such twenty-four (24) month anniversary
until the earlier to occur of (x) the date on which a final
nonappealable resolution of the matter described in such Claim
Notice has been reached or (y) the date on which the matter
described in such Claim Notice has otherwise reached final
resolution;
(iii) under Section 10.01(a) for any Tax Claim, Buyer's
exclusive remedy for any Tax Claim being set forth in Article VII,
which shall not be subject to any Deductible or maximum claim
amount;
(iv) for any Indemnified Losses resulting from matters
described in Section 10.01(a)(i) until the aggregate amount of
Indemnified Losses incurred by the Buyer Indemnified Parties in
respect of all matters giving rise to such Indemnified Losses
exceeds $1,000,000 (the "DEDUCTIBLE") in which event Seller will be
obligated, subject to the other provisions of this Section 10.01(b),
to indemnify the Buyer Indemnified Parties to the extent and only to
the extent such Indemnified Losses exceed the Deductible; and
(v) for any Indemnified Losses resulting from matters
described in Section 10.01(a)(i) that in the aggregate exceed an
amount equal to twenty percent (20%) of the Adjusted Purchase Price
(including the Deductible); provided, however, that this Section
10.01(b)(v) shall not apply to Indemnified Losses arising from a
breach of Seller's representations or warranties set forth in
Section 4.03 or 4.06(d) or to action grounded in fraud. For the
avoidance of doubt, the limitation described in this Section
10.01(b) permits a maximum possible recovery by Buyer under Section
10.01(a)(i) (other than Indemnified Losses arising from a breach of
Seller's representations or warranties set forth in Section 4.03 or
Section 4.06(d) or actions grounded in fraud) of an aggregate amount
equal to twenty percent (20%) of the Adjusted Purchase Price minus
the Deductible.
In addition to the foregoing limitations of this Section 10.01(b), except
for actions grounded in fraud, the maximum amount in the aggregate that
the Buyer Indemnified Parties shall be able to recover from Seller or any
of its Affiliates for any and all Indemnified Losses resulting from
matters described in Section 10.01(a)(i) (including with respect to
Sections 4.03 and 4.06(d)) shall in no event exceed an amount equal to
100% of the Adjusted Purchase Price.
(c) Subject to the limitations of this Article X, Buyer agrees to
indemnify, defend and hold harmless the Seller Indemnified Parties from
and against any and all Indemnified Losses resulting from or arising out
of any of the following:
(i) any breach of any of the representations and warranties of
Buyer contained in this Agreement or in any instrument executed
pursuant hereto;
(ii) any breach of any covenant of Buyer contained in this
Agreement; and
(iii) any Third Party Claim in respect of the conduct of the
Business or any part thereof, and any liability or obligation of the
Companies that arises after the
32
Closing Date, including, but not limited to, the obligation to pay
all costs and expenses incurred with respect to the Business after
the Closing Date, but only to the extent that such Third Party Claim
did not result from the breach of a representation or warranty of
Seller made pursuant hereto.
Notwithstanding anything to the contrary contained in this Section
10.01(c), in no event shall any amounts be recovered from Buyer under
Section 10.01(c) for any Tax Claim, Seller's exclusive remedy with respect
to Tax Claims being set forth in Article VII.
(d) Notwithstanding anything to the contrary contained in this
Agreement, in no event shall Indemnified Losses include any exemplary,
punitive, special, indirect, consequential, remote or speculative damages.
10.02 Indemnification Procedures. All claims for indemnification under
this Section 10.02 shall be asserted and resolved pursuant to this Section
10.02. Any Person claiming indemnification hereunder is hereinafter referred to
as the "INDEMNIFIED PARTY" and any Person against whom such claims are asserted
hereunder is hereinafter referred to as the "INDEMNIFYING PARTY." In the event
that any Indemnified Losses are asserted against or sought to be collected from
an Indemnified Party by a third party, said Indemnified Party shall with
reasonable promptness provide to the Indemnifying Party a Claim Notice. The
Indemnifying Party shall have thirty (30) days from the personal delivery or
receipt of the Claim Notice (the "NOTICE PERIOD") to notify the Indemnified
Party (a) whether or not it disputes the liability of the Indemnifying Party to
the Indemnified Party hereunder with respect to such Losses and (b) whether or
not it desires, at the sole cost and expense of the Indemnifying Party, to
defend the Indemnified Party against such Losses; provided, however, that any
Indemnified Party is hereby authorized prior to and during the Notice Period to
file any motion, answer or other pleading that it shall deem necessary or
appropriate to protect its interests or those of the Indemnifying Party (and of
which it shall have given notice and opportunity to comment to the Indemnifying
Party) and not prejudicial to the Indemnifying Party. In the event that the
Indemnifying Party notifies the Indemnified Party within the Notice Period that
it desires to defend the Indemnified Party against such Losses, the Indemnifying
Party shall have the right to defend all appropriate proceedings, and with
counsel of its own choosing, which proceedings shall be promptly settled or
prosecuted by them to a final conclusion. If the Indemnified Party desires to
participate in, but not control, any such defense or settlement it may do so at
its sole cost and expense. If requested by the Indemnifying Party, the
Indemnified Party agrees to cooperate with the Indemnifying Party and its
counsel in contesting any Losses that the Indemnifying Party elects to contest
or, if appropriate and related to the claim in question, in making any
counterclaim against the person asserting the third party Losses, or any
cross-complaint against any Person. No claim may be settled or otherwise
compromised without the prior written consent of the Indemnifying Party.
10.03 Exclusive Remedy. THE PARTIES ACKNOWLEDGE AND AGREE THAT THE
REMEDIES SET FORTH IN ARTICLE VII AND ARTICLE X, INCLUDING THE DEDUCTIBLES,
LIABILITY LIMITS, SURVIVAL PERIODS, DISCLAIMERS AND LIMITATIONS ON SUCH
REMEDIES, ARE INTENDED TO BE, AND SHALL BE, THE EXCLUSIVE REMEDIES WITH RESPECT
TO ANY ASPECT OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY
HEREBY RELEASES, WAIVES AND DISCHARGES, AND COVENANTS NOT TO SUE WITH RESPECT
TO, ANY CAUSE OF ACTION OR CLAIM NOT EXPRESSLY PROVIDED FOR IN THIS AGREEMENT
INCLUDING CLAIMS UNDER STATE OR FEDERAL SECURITIES
33
LAWS, AVAILABLE AT COMMON LAW OR BY STATUTE (EXCLUDING FRAUD CLAIMS).
10.04 Independent Investigation. Buyer acknowledges and affirms that (a)
it has had full access to the Data Room and the information contained in, or
made available or provided with respect to materials contained in, the Data
Room, including copies of the Material Contracts, (b) provided Seller complies
with Seller's obligations pursuant to Section 6.01, it has had access to the
personnel, officers, professional advisors, operations and Records of the
Companies and (c) in making the decision to enter into this Agreement and to
consummate the transactions contemplated hereby, it has relied on the
representations, warranties, covenants and agreements of Seller set forth in
this Agreement and in the certificate provided for in Section 8.02(b), and other
than such reliance, it has relied solely on the basis of its own independent
investigation, analysis and evaluation of the Companies and their assets,
business, financial condition, operations and prospects.
10.05 Scope of Representations. Except to the extent expressly set forth
in this Agreement, Seller makes no representations or warranties whatsoever and
disclaims all liability and responsibility for any other representation,
warranty, statement or information made or communicated (orally or in writing)
to Buyer. Without limiting the generality of the foregoing, except as expressly
set forth in this Agreement, Seller makes no representation or warranty as to
title to any of the assets or properties of the Companies and, with respect to
any personal property and equipment included within such assets or properties,
SELLER EXPRESSLY DISCLAIMS AND NEGATES ANY IMPLIED OR EXPRESS WARRANTY OF
MERCHANTABILITY, OF FITNESS FOR A PARTICULAR PURPOSE, AND OF CONFORMITY TO
MODELS OR SAMPLES OF MATERIALS.
ARTICLE XI
MISCELLANEOUS
11.01 Confidentiality.
(a) Until the Closing Date, all data or information received by
Buyer or its Affiliates pursuant to this Agreement or in connection with
the transactions contemplated thereby shall be subject to that certain
confidentiality agreement countersigned July 20, 2001 between Marathon and
CMS Gas Transmission Company (the "CONFIDENTIALITY AGREEMENT"), the terms
and conditions of which are hereby incorporated by reference as if Buyer
and Seller were party to such agreement.
(b) From and after the Closing, any data or information received at
any time by Seller from Buyer and any data or information regarding the
Companies, including data or information regarding their assets and
operations, shall be maintained by Seller and its representatives in
confidence for a period of twenty-four (24) months from the Closing Date,
except (i)to the extent necessary to resolve any matters relating to
Governmental Authorities (including Tax controversies) or disputes with
Buyer pursuant to this Agreement or (ii) if such information (x) is
already in possession of the public or becomes available to the public,
other than through the act or omission of Seller in violation of this
Agreement; (y) is required to be disclosed under any applicable Law,
order, decree, regulation or rule of (A) a Governmental Authority or court
or (B) any regulatory entity, securities commission or stock exchange; or
(z) is acquired independently and without a confidential restriction from
a third party who represents that it has the right to disseminate it at
the time it is acquired by Seller.
34
11.02 Brokers. Regardless of whether the Closing shall occur, (a) Seller
shall indemnify and hold harmless Buyer and the Companies and their Affiliates
from and against any and all liability for any brokers' or finders' fees (and
any court costs and attorneys' fees) arising with respect to brokers or finders
retained or engaged by Seller or any of its Affiliates in respect of the
transactions contemplated by this Agreement and (b) Buyer shall indemnify and
hold harmless Seller and its Affiliates from and against any and all liability
for any brokers' or finders' fees (and court costs and attorneys' fees) arising
with respect to brokers or finders retained or engaged by Buyer or any of its
Affiliates in respect of the transactions contemplated by this Agreement.
11.03 Expenses. Except as specifically provided herein, each Party hereto
shall pay all legal and other costs and expenses incurred by such Party or any
of its Affiliates in connection with this Agreement and the transactions
contemplated hereby.
11.04 Notices. Any notice, request, instruction, correspondence or other
communication to be given or made hereunder by either Party to the other (herein
collectively called "NOTICE") shall be in writing and (a) delivered by hand, (b)
mailed by certified mail, postage prepaid and return receipt requested, (c) sent
by telecopier or (d) sent by Express Mail, Federal Express or other express
delivery service, as follows:
If to Seller, addressed to:
CMS Methanol Company
c/o Maples and Calder
P.O. Box 309 G.T.
Ugland House
South Church Street
Grand Cayman, Cayman Islands
British West Indies
Attention: Gareth Griffiths
Telephone: (345) 949 8066
Telecopier: (345) 949 8080
With a copy to:
CMS Gas Transmission Company
Fairlane Plaza South
330 Town Center Drive
Dearborn, MI 48126
Attention: President
Telephone: (313) 436-9200
Telecopier: (313) 982-8815
35
If to CMS, addressed to:
CMS Enterprises Company
Fairlane Plaza South
330 Town Center Drive
Dearborn, MI 48126
Attention: General Counsel
Telephone: (313) 436-9200
Telecopier: (313) 436 9225
If to Buyer, addressed to:
Marathon E.G. Marathon Limited
c/o Caledonian Bank & Trust Limited
P.O. Box 1043
George Town, Grand Cayman, British West Indies
Attention: Fiona Berrie
Telephone: (345) 949 0050
Telecopier: (345) 949 8062
With a copy to Marathon
If to Marathon, addressed to:
Marathon Oil Company
5555 San Felipe Street
Houston, Texas 77056-2799
Attention: Richard L Horstman
Telephone: (713) 296 2500
Telecopier: (713) 513-4172
Notice given by hand, Federal Express or other express delivery service or by
mail shall be effective upon actual receipt. Notice given by telecopier shall be
effective upon actual receipt if received during the recipient's normal business
hours, or at the beginning of the recipient's next business day after receipt if
not received during the recipient's normal business hours. All Notices by
facsimile shall be confirmed promptly after transmission in writing by certified
mail or personal delivery. No Notice shall be given to or by the Companies. Any
Party may change any address to which Notice is to be given to it by giving
Notice as provided above of such change of address.
11.05 Governing Law. THE PROVISIONS OF THIS AGREEMENT, THE SCHEDULES
HERETO AND THE DOCUMENTS DELIVERED PURSUANT HERETO SHALL BE GOVERNED BY,
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS
(EXCLUDING ANY CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER SUCH MATTERS
TO THE LAWS OF ANOTHER JURISDICTION), EXCEPT TO THE EXTENT THAT SUCH MATTERS ARE
MANDATORILY SUBJECT TO THE LAWS OF ANOTHER JURISDICTION PURSUANT TO THE LAWS OF
SUCH OTHER JURISDICTION. THE PARTIES IRREVOCABLY
36
CONSENT AND SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS
IN THE STATE OF TEXAS.
11.06 Waiver of Jury Trial. THE PARTIES VOLUNTARILY AND INTENTIONALLY
WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR
ANY OTHER TRANSACTION DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY OF THE PARTIES HERETO.
THE PARTIES HERETO HEREBY AGREE THAT THEY WILL NOT SEEK TO CONSOLIDATE ANY SUCH
LITIGATION WITH ANY OTHER LITIGATION IN WHICH A JURY TRIAL HAS NOT OR CANNOT BE
WAIVED. THE PROVISIONS OF THIS SECTION 11.06 HAVE BEEN FULLY NEGOTIATED BY THE
PARTIES HERETO AND SHALL BE SUBJECT TO NO EXCEPTIONS.
11.07 Entire Agreement; Amendments and Waivers. This Agreement, together
with all Schedules hereto, constitutes the entire agreement between the Parties
pertaining to the subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written, of the
Parties. No supplement, modification or waiver 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 hereof (regardless of whether similar), nor shall
any such waiver constitute a continuing waiver unless otherwise expressly
provided.
11.08 Binding Effect and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties and their respective permitted
successors and assigns. Neither this Agreement nor any of the rights, benefits
or obligations hereunder shall be assigned, by operation of law or otherwise, by
any Party hereto prior to the Closing without the prior written consent of the
other Party, except that Seller may assign all of its rights, benefits and
obligations hereunder to an Affiliate without being released from its
obligations hereunder. Except as expressly provided herein, nothing in this
Agreement is intended to confer upon any Person other than the Parties and their
respective permitted successors and assigns, any rights, benefits or obligations
hereunder.
11.09 Severability. If any one or more of the provisions contained in this
Agreement or in any other document delivered pursuant hereto shall for any
reason, be held to be invalid, illegal or unenforceable in any material respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement or any other such document.
11.10 Headings and Schedules. The headings of the several Articles and
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
11.11 Survival of Representations. The representations and warranties in
this Agreement shall survive the Closing except for the representations and
warranties of Seller, which shall terminate twenty-four (24) months after the
Closing.
11.12 Time of the Essence. The Parties agree and acknowledge that time is
of the essence of this Agreement.
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11.13 Counterparts; Facsimile. This Agreement may be executed in two (2)
or more counterparts, each of which shall be deemed an original, but all of
which shall constitute but one agreement. The Parties hereto agree that any
document or signature delivered by facsimile transmission shall be deemed an
original executed document for all purposes hereof.
11.14 No Third Party Beneficiaries. This Agreement is not intended to and
shall not confer upon any Person, other than the Parties hereto (and Persons
specifically granted indemnification rights hereunder), any rights or remedies
with respect to the subject matter or any provision hereof.
38
IN WITNESS WHEREOF, the Parties have duly executed this Agreement the day
and year first written above.
SELLER: CMS METHANOL COMPANY
BY: /s/ Thomas L. Miller
-----------------------------------
Thomas L. Miller
Authorize Representative
CMS, in consideration of the premises, the agreements and the covenants
contained herein, and the benefits it is deriving from the execution and
delivery of this Agreement and the transactions contemplated hereby, the receipt
and sufficiency of which is hereby acknowledged, hereby unconditionally and
irrevocably guarantees payment to Buyer and performance by Seller of the
obligations of Seller under this Agreement (the "SELLER'S OBLIGATIONS"), subject
to any defenses of Seller under this Agreement (except those enumerated
hereafter), but CMS waives (i) any defense that may arise by reason of
incapacity, lack of authority, invalidity, bankruptcy or insolvency of Seller,
(ii) any defense based on election of remedies, (iii) any requirement that Buyer
pursue or exhaust any remedy against Seller, and (iv) any defense based on any
right to consent to any amendment, waiver, modification, or supplement of this
Agreement or any provision hereof or of the Seller Obligations. CMS acknowledges
and agrees that the guaranty set forth above is a guaranty of payment and
performance and not merely a guaranty of collection, that CMS is liable as a
primary obligor, and, except as provided in the first sentence of this
paragraph, that the obligations of CMS under this guaranty set forth above shall
not be released, discharged, or in any way affected by any circumstance or
condition whatsoever that might otherwise constitute a legal or equitable
defense or discharge of a guarantor, indemnitor, or surety or that might
otherwise limit recourse against CMS under any applicable Law. Should Buyer be
obligated by a reorganization, insolvency, bankruptcy, or other Law to repay
Seller or CMS, or any trustee, receiver, or other representative of any of them,
any amounts previously paid by Seller or CMS pursuant to this Agreement, then
the guaranty of CMS set forth above shall be reinstated in the amount of such
repayments. CMS consents to and agrees to be bound by the provisions of Articles
VII, X and XI (as if it were Seller) with respect to any claims under this
guaranty.
CMS ENTERPRISES COMPANY
BY: /s/ Alan M. Wright
-----------------------------------
Alan M. Wright
Executive Vice President and
Chief Financial Officer
39
BUYER: MARATHON E.G. METHANOL LIMITED
BY: /s/ J.F. Meara
-----------------------------------
J. F. Meara
Director
Marathon, in consideration of the premises, the agreements and the
covenants contained herein, and the benefits it is deriving from the execution
and delivery of this Agreement and the transactions contemplated hereby, the
receipt and sufficiency of which is hereby acknowledged, hereby unconditionally
and irrevocably guarantees payment to Seller and performance by Buyer of the
obligations of Buyer under this Agreement (the "BUYER'S OBLIGATIONS"), subject
to any defenses of Buyer under this Agreement (except those enumerated
hereafter), but Marathon waives (i) any defense that may arise by reason of
incapacity, lack of authority, invalidity, bankruptcy or insolvency of Buyer,
(ii) any defense based on election of remedies, (iii) any requirement that
Seller pursue or exhaust any remedy against Buyer, and (iv) any defense based on
any right to consent to any amendment, waiver, modification, or supplement of
this Agreement or any provision hereof or of the Buyer Obligations. Marathon
acknowledges and agrees that the guaranty set forth above is a guaranty of
payment and performance and not merely a guaranty of collection, that Marathon
is liable as a primary obligor, and, except as provided in the first sentence of
this paragraph, that the obligations of Marathon under this guaranty set forth
above shall not be released, discharged, or in any way affected by any
circumstance or condition whatsoever that might otherwise constitute a legal or
equitable defense or discharge of a guarantor, indemnitor, or surety or that
might otherwise limit recourse against Marathon under any applicable Law. Should
Seller be obligated by a reorganization, insolvency, bankruptcy, or other Law to
repay Buyer or Marathon, or any trustee, receiver, or other representative of
any of them, any amounts previously paid by Buyer or Marathon pursuant to this
Agreement, then the guaranty of Marathon set forth above shall be reinstated in
the amount of such repayments. Marathon consents to and agrees to be bound by
the provisions of Articles VII, X and XI (as if it were Buyer) with respect to
any claims under this guaranty.
MARATHON OIL COMPANY
BY: /s/ S. J. Lowden
-----------------------------------
S. J. Lowden
Senior Vice President
40
EXHIBIT (12)
Exhibit (12)
CMS ENERGY CORPORATION
Ratio of Earnings to Fixed Charges and Preferred Securities Dividends
and Distributions
(Millions of Dollars)
NINE MONTHS YEARS ENDED DECEMBER 31 -
ENDED -----------------------------------------------------
SEPTEMBER 30, 2001 2000 1999 1998 1997 1996
------------------ ----- ----- ----- ----- -----
(d) (b) (c)
Earnings as defined (a)
Consolidated net income $(407) $ 36 $ 277 $ 242 $ 244 $ 224
Income taxes (108) 60 64 100 108 137
Exclude equity basis subsidiaries (2) (171) (84) (92) (80) (85)
Fixed charges as defined, adjusted
to exclude capitalized interest of
$35, $49, $41, $29, $13, and $5 million
for the nine months ended September 30, 2001,
and the years ended December 31, 2000, 1999,
1998, 1997, and 1996, respectively 554 744 588 395 360 313
----- ----- ----- ----- ----- -----
Earnings as defined $ 37 $ 669 $ 845 $ 645 $ 632 $ 589
===== ===== ===== ===== ===== =====
Fixed charges as defined (a)
Interest on long-term debt $ 426 $ 591 $ 502 $ 319 $ 273 $ 230
Estimated interest portion of lease rental 5 7 8 8 10
Other interest charges 45 48 57 48 49 43
Preferred securities dividends and
distributions 112 147 96 77 67 54
----- ----- ----- ----- ----- -----
Fixed charges as defined $ 588 $ 793 $ 662 $ 452 $ 397 $ 337
===== ===== ===== ===== ===== =====
Ratio of earnings to fixed charges and
preferred securities dividends and distributions - - 1.28 1.43 1.59 1.75
===== ===== ===== ===== ===== =====
NOTES: (a) Earnings and fixed charges as defined in instructions for Item 503 of
Regulation S-K.
(b) For the year ended December 31, 2000, fixed charges exceeded earnings by
$124 million. Earnings as defined include a $329 million pretax impairment loss
on the Loy Yang investment. The ratio of earnings to fixed charges and preferred
securities dividends and distributions would have been 1.26 excluding this
amount.
(c) Excludes a cumulative effect of change in accounting after-tax gain of $43
million.
(d) For the nine months ended September 30, 2001, fixed charges exceeded
earnings by $551 million. Earnings as defined include $628 million of pretax
contract losses and asset revaluations and $185 million of write-offs associated
with discontinued operations. The ratio of earnings to fixed charges and
preferred securities dividends and distributions would have been 1.45 excluding
these amount.
EXHIBIT (15)(a)
EXHIBIT (15)(a)
November 12, 2001
CMS Energy Corporation:
We are aware that CMS Energy Corporation has incorporated by reference in
its Registration Statements No. 33-55805, No. 33-60007, No. 333-27849, No.
333-32229, No. 333-37241, No. 333-45556, No. 333-47464, No. 333-51932, No.
333-52560, and No. 333-58686 its Form 10-Q for the quarter ended September 30,
2001, which includes our report dated October 31, 2001 covering the unaudited
interim financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, that report is not considered a part of the registration
statement prepared or certified by our firm or a report prepared or certified by
our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
- -----------------------
EXHIBIT (15)(b)
EXHIBIT (15)(b)
November 12, 2001
Consumers Energy Company:
We are aware that Consumers Energy Company has incorporated by reference in
its Registration Statements No. 333-62500 and No. 333-76347 its Form 10-Q for
the quarter ended September 30, 2001, which includes our report dated October
31, 2001 covering the unaudited interim financial information contained therein.
Pursuant to Regulation C of the Securities Act of 1933, that report is not
considered a part of the registration statement prepared or certified by our
firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
- -----------------------
