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CMS Energy to Pay $200M in 'Round-Trip' Shareholder Suits

CMS Energy said Friday it agreed to pay $200 million to settle shareholder class action lawsuits related to "round-trip" trades made by a Texas subsidiary in 2000-2002.

"As far as round trip trading this is pretty much it, but in the interest of full disclosure... CMS Energy is also named in a handful of lawsuits linked to the gas price index reporting issue, and those are filed out West," CMS spokesman Jeff Holyfield told NGI. "We still have that going on, but as far as round-trip trading this is really clearing the decks."

In an unrelated matter, the company also said Friday that it would pay $12 million to Duke/Fluor Daniel following an arbitration panel's ruling on a dispute related to construction of the Dearborn Industrial Generation Facility.

Jackson, MI-based CMS Energy said the preliminary agreement in the shareholder suits is expected to lead to a detailed stipulation of settlement that will be presented to the assigned federal judge and the affected class in the first quarter. James Brunner, CMS Energy general counsel, said the memorandum of understanding signed by parties moves the CMS Energy step closer to eliminating a major legal and business uncertainty.

"We now have the legal framework for a settlement and our focus in the coming weeks will be on moving forward to finalize the details of an agreement and presenting that to the court," Brunner said. "This memorandum of understanding and the settlement it represents, if approved by the court, along with the arbitration result in the Dearborn Industrial Generation matter, will go a long way toward resolving the outstanding major litigation issues facing the company and its affiliates."

The shareholder lawsuits contend that CMS Energy made false and misleading statements about its business and financial conditions by including the results of round-trip energy trades carried out by a Texas-based subsidiary in its revenues and expenses. CMS Energy said it has defended itself vigorously against these claims since their inception. The company restated its financial reports for 2000 and 2001 to eliminate all revenues and expenses from the round-trip trades, sold the majority of the Texas office trading business, phased out most of its remaining operations and closed the subsidiary's Texas office by the end of 2003. It reached a settlement on these matters with the U.S. Securities and Exchange Commission in March 2004 without any fine (see Daily GPI, March 18, 2004).

Under the terms of the settlement announced Friday, the litigation will be settled for $200 million, including administration costs and any attorney fees awarded by the court. CMS Energy will make a payment of $123.5 million plus an amount equivalent to interest on the outstanding unpaid settlement balance beginning on the date of preliminary approval by the court and running until the balance of the settlement funds is paid into a settlement account. The company's insurers will pay $76.5 million toward the settlement. CMS Energy has established a $123.5 million reserve and taken a resulting pre-tax charge to 2006 earnings in the fourth quarter. CMS Energy said it is not admitting liability under the class action complaints.

In July 2005 CMS Energy announced an agreement to settle a shareholder derivative lawsuit (see Daily GPI, July 11, 2005) related to round-trip or "wash" trades that first came to light in 2002 (see Daily GPI, May 13, 2002).

In an unrelated matter, CMS Energy said it has received the ruling of the arbitration panel handling the dispute between CMS Energy subsidiary Dearborn Industrial Generation LLC (DIG) and Duke/Fluor Daniel (DFD) over the construction of the Dearborn Industrial Generation facility (see Daily GPI, Jan. 14, 1999; Nov. 6, 1998).

DIG previously had drawn $30 million from three letters of credit placed by DFD in connection with the project. The arbitration panel awarded DIG approximately $25 million, including interest, on its various claims against DFD presented in the arbitration. The panel also awarded DFD approximately $5 million on its claims and credited DFD approximately $30 million, plus $2 million in interest, for the three letters of credit that DIG drew against DFD.

This resulted in a net amount due DFD, including interest, of about $12 million, which is payable upon entry of judgment in Wayne County, MI, Circuit Court and within the applicable time periods contained in the Michigan Court Rules. CMS Energy previously had created a reserve of about $30 million corresponding to the letter of credit draws, and recorded fourth quarter pre-tax earnings of approximately $18 million because of the arbitration result.

CMS Energy primary business operations are an electric and natural gas utility, natural gas pipeline systems and independent power generation.

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