Hoping to inject life into its dwindling stock price, CMS EnergyCorp. announced drastic measures last week, including an aggressivestock buy-back plan and intentions to create a tracking stock forthe jewel in CMS’ crown — Consumers Energy.

Underlying these efforts is CMS management’s belief that thecompany stock price is undervalued. CMS stock fell more than $8last week and finished just off its 52-week low at $20.56. Itreached its 52-week high last April, trading at $47.06.

CMS intends to make an initial public offering (IPO) of $600million of a tracking stock, representing 20% of the financialinterest in its electric and gas utility, “as soon as practicable,”it said. About 75% of Consumers Energy’s earnings will be paid asdividends to CMS Energy and to the new tracking stock’s publicshareholders.

The $600 million in proceeds will be added to the $600-750million currently being raised through the disposition ofnon-strategic assets. CMS is working toward the sale of at least$500 million of non-core assets this quarter. Kelly Farr, a CMSspokesman, said that through the sales of its 49% interest in theNorthern Header project in Wyoming, its 49% interest in a Brazilianelectric utility and all of its Michigan E&P properties toQuicksilver Resources, CMS has already accrued $370 million inasset sales this quarter. Farr added that CMS is “very confident”that it will be able to reach its minimum goal by the end of thefirst quarter. These funds will be used mostly for reduction ofdebt and fixed charges with the hopes of improving the financialflexibility.

Some of the proceeds also will be used for repurchase of CMSEnergy common stock. CMS’ board of directors has authorized abuyback of up to 10 million shares of common stock from time totime in open market or private transactions, the company said.

“This restructuring program, along with the ongoing assetoptimization program and dividend actions, will quickly improve CMSEnergy’s balance sheet and will eliminate the need to issue any CMSEnergy common stock in the future except for a major acquisition,”said William T. McCormick, Jr., CEO of CMS. “It will also increaseannual cash flow by about $125 million and should deliver 10-12%earnings/share growth in 2001 over 2000 and 12-15% annuallythereafter.

“The restructuring, which will now provide a market valuation ofCMS Energy’s utility and diversified energy business, should resultin a better market recognition of the value of these businesses.This, coupled with higher earnings/share growth rates, should leadto an improved CMS Energy price-to-earnings ratio.”

In addition to these other restructuring moves, CMS said thatthe CMS Energy dividend, currently at an annual rate of$1.46/share, will be reduced at the time of the IPO to 40cents/share to enhance earnings growth and bring the dividendpayout into line with comparable higher-growth energy companies.

Ed Tirello, an analyst with Deutsche Banc Alex Brown, said themove surprised him. “CMS is a strong company, which is why I didn’tsee this one coming. Then again, this management team has surprisedmany people many times…They’re biting the bullet now. Theyrealized they were going to have to separate the utility from theholding 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 millionthe year before. Total electric sales increased 2.5% to 41 billionKWh. Natural gas deliveries grew by 8%, to 389 Bcf. ConsumersEnergy’s customer base grew during the year, with more than 25,700new natural gas customers connected, and 25,000 new electriccustomers added.

Yet overall, net income fell for the parent company from $285million in 1998 to $277 million in 1999. Much of the downfall canbe attributed to a one-time loss in the fourth quarter caused bythe sale of its 50% ownership in Nitrotec Corp., a New York companydeveloping a technology for separating helium and nitrogen fromnatural gas. CMS wrote the asset off after determining Nitrotecwould not generate the return it had expected. The move cost thecompany 45 cents/share in 4Q99.

John Norris

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