Citing an impairment charge related to sustained high natural gas prices, CMS Energy Corp. reported last week a net loss of $265 million, or $1.21 per share, for the third quarter of 2005, compared to reported net income of $56 million, or $0.34 per share, for the same quarter of 2004.
The third quarter loss resulted from a noncash, after-tax impairment charge of $385 million, or $1.75 per share, related to CMS Energy's ownership interest in the Midland Cogeneration Venture (MCV) because of sustained high natural gas prices.
"We're obviously disappointed about the impairment charge on our interest in the MCV," said CMS Energy CEO David Joos. "Unfortunately, this impairment overshadows strong operational performance in the third quarter, including keeping pace with record electric demand in Michigan in July and August."
During the company's 3Q earnings conference call, Joos said, "I can assure you that we are exploring every alternative to modifying the MCV business model to improve its long-term prospects."
Following the earnings release, Standard & Poor's Ratings Services (S&P) said that it placed its 'BB' corporate credit ratings on CMS Energy and its utility subsidiary Consumers Energy Co. on CreditWatch with negative implications. The 'BB' credit rating is two levels below investment grade. S&P said the noncash after-tax impairment charge represents about a 14% decline in the company's current common equity base.
S&P added that the impairment charge resulted in a failed net earnings coverage test under Consumers Energy's first mortgage bonds that will limit Consumers Energy's ability to issue first mortgage bonds up to $298 million over the next 12 months. Resolution of the CreditWatch is expected to occur before year-end 2005.
Excluding the MCV impairment charge and other items, CMS Energy's adjusted 3Q2005 net income is $119 million, or $0.54 per share, up from $18 million, or $0.11 per share, for the same period of 2004. Adjusted third quarter 2005 net income, without mark-to-market impacts, would be $43 million, or $0.20 per share, compared to $27 million, or $0.17 per share, for the same period of 2004.
With the MCV impairment charge, the company now projects that its full-year reported results will be a loss of about $0.39 per share. CMS Energy projects 2005 adjusted earnings, which excludes the MCV impairment charge and other items, at $1.37 per share. CMS Energy said its adjusted 2005 earnings guidance, without mark-to-market impacts, is $0.95 per share.
The MCV Partnership impaired its fixed assets in September 2005 by recording a $1.2 billion noncash charge. After taxes and minority interest, CMS Energy's portion of that charge was $385 million.
In operation since 1990, the natural gas-fired MCV facility can produce up to 1,500 MW of electricity and up to 1.35 million pounds per hour of industrial steam. The MCV Partnership said it expects to incur losses because its power supply contract doesn't allow for the full recovery of its natural gas fuel costs at current and forecast prices. A CMS Energy utility subsidiary, Consumers Energy, is the main customer for the MCV's electricity output. CMS Energy's Joos assured that the MCV partnership's actions aren't expected to affect service or reliability for Consumers Energy's 1.8 million electric customers.
Commenting on CMS Energy's power operations, Joos said results were mixed. "Due to the extremely warm weather this summer, third -quarter electric deliveries were up 7% compared to last year," he said. "However, on a weather-adjusted basis, third quarter [power] sales were actually down 4% due to continued weakness in the Michigan economy."
Joos noted that the company set monthly peak power load records in June, July, August and October. "On Aug. 3, we set a new all-time record peak of 8,473 MW."
Looking ahead to this winter's heating season, Joos said, CMS Energy is in "good shape" to meet gas demand despite the supply disruptions in the Gulf of Mexico due to Hurricanes Katrina and Rita. He noted that 97% of the company's gas supply, which equates to 231 Bcf, is under contract, with 83% of that volume under fixed prices. "Storage inventory of 120 Bcf has been met," he added.
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