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CMS Plans IPO for Consumers in Restructuring Effort

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 shareholders.

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 flexibility.

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 thereafter.

"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 customers added.

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.

John Norris

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