CMS Plans IPO for Consumers in Restructuring Effort
Hoping to inject life into its dwindling stock price, CMS Energy
Corp. announced drastic measures last week, including an aggressive
stock buy-back plan and intentions to create a tracking stock for
the jewel in CMS' crown --- Consumers Energy.
Underlying these efforts is CMS management's belief that the
company stock price is undervalued. CMS stock fell more than $8
last week and finished just off its 52-week low at $20.56. It
reached its 52-week high last April, trading at $47.06.
CMS intends to make an initial public offering (IPO) of $600
million of a tracking stock, representing 20% of the financial
interest in its electric and gas utility, "as soon as practicable,"
it said. About 75% of Consumers Energy's earnings will be paid as
dividends to CMS Energy and to the new tracking stock's public
The $600 million in proceeds will be added to the $600-750
million currently being raised through the disposition of
non-strategic assets. CMS is working toward the sale of at least
$500 million of non-core assets this quarter. Kelly Farr, a CMS
spokesman, said that through the sales of its 49% interest in the
Northern Header project in Wyoming, its 49% interest in a Brazilian
electric utility and all of its Michigan E&P properties to
Quicksilver Resources, CMS has already accrued $370 million in
asset sales this quarter. Farr added that CMS is "very confident"
that it will be able to reach its minimum goal by the end of the
first quarter. These funds will be used mostly for reduction of
debt and fixed charges with the hopes of improving the financial
Some of the proceeds also will be used for repurchase of CMS
Energy common stock. CMS' board of directors has authorized a
buyback of up to 10 million shares of common stock from time to
time in open market or private transactions, the company said.
"This restructuring program, along with the ongoing asset
optimization program and dividend actions, will quickly improve CMS
Energy's balance sheet and will eliminate the need to issue any CMS
Energy common stock in the future except for a major acquisition,"
said William T. McCormick, Jr., CEO of CMS. "It will also increase
annual cash flow by about $125 million and should deliver 10-12%
earnings/share growth in 2001 over 2000 and 12-15% annually
"The restructuring, which will now provide a market valuation of
CMS Energy's utility and diversified energy business, should result
in a better market recognition of the value of these businesses.
This, coupled with higher earnings/share growth rates, should lead
to an improved CMS Energy price-to-earnings ratio."
In addition to these other restructuring moves, CMS said that
the CMS Energy dividend, currently at an annual rate of
$1.46/share, will be reduced at the time of the IPO to 40
cents/share to enhance earnings growth and bring the dividend
payout into line with comparable higher-growth energy companies.
Ed Tirello, an analyst with Deutsche Banc Alex Brown, said the
move surprised him. "CMS is a strong company, which is why I didn't
see this one coming. Then again, this management team has surprised
many people many times...They're biting the bullet now. They
realized they were going to have to separate the utility from the
holding company at some point, and they chose now to do it."
By itself, Consumers Energy had a successful year in 1999.
Operating earnings increased 4% to $626 million, from $601 million
the year before. Total electric sales increased 2.5% to 41 billion
KWh. Natural gas deliveries grew by 8%, to 389 Bcf. Consumers
Energy's customer base grew during the year, with more than 25,700
new natural gas customers connected, and 25,000 new electric
Yet overall, net income fell for the parent company from $285
million in 1998 to $277 million in 1999. Much of the downfall can
be attributed to a one-time loss in the fourth quarter caused by
the sale of its 50% ownership in Nitrotec Corp., a New York company
developing a technology for separating helium and nitrogen from
natural gas. CMS wrote the asset off after determining Nitrotec
would not generate the return it had expected. The move cost the
company 45 cents/share in 4Q99.