CMS Energy announced a major reorganization plan that includes a $2.4 billion sale of its non-strategic international power generation and distribution assets. The sales are expected to strengthen its balance sheet, provide more predictable earnings and lower its business risk by focusing its future business growth primarily on its Michigan utility, interstate pipeline assets and energy trading operations in North America. However, the transactions will have a significant negative short-term impact on net income, forcing a $613 million asset write-down and a third quarter net loss of $569 million. Investors pushed down the company’s stock price by 3% in early trading Friday.

The asset sales include CMS’s two South American electric distribution businesses, and its entire interest in its Equatorial Guinea oil and gas fields and methanol plant. The planned asset sales are expected to raise about $2.4 billion in cash, which, together with the utility securitization proceeds expected yet this year, will result in a total of about $2.9 billion of cash proceeds, of which about $2.1 billion is expected to be received by January 2002.

CMS currently is negotiating the sale of its interest in the Loy Yang Power facility in Australia and its interests in Equatorial Guinea for a total of about $1.2 billion. In addition, the company earlier in the week announced a deal to sell its Michigan electric transmission system for $290 million to Trans Elect (see Power Market Today, Oct. 26).

CMS estimates that these measure will enable it to reduce its total debt by year-end 2002 to about 58% of capital, 55% in 2003. “With the actions announced today to address the company’s under performing investments and our new, more focused strategy and improved balance sheet, we believe the company is well positioned for future success,” said CMS CEO William T. McCormick Jr. The company also said it is committed to maintaining its common dividend at the current annual level of $1.46 per share.

The net gains associated with the asset sales are expected to be $0.85/share next year. Excluding these gains, however, CMS expects to significantly miss prior Wall Street earnings expectations. It forecasts 2002 earnings per share from operations to be in the range of $2.00 to $2.05. Wall Street consensus currently has CMS earning $2.79/share next year. CMS said the lower forecast reflects the substantially lower current oil and gas commodity prices, a reduction in earnings due to the sale of assets to strengthen its balance sheet, and forecasted lower utility sales to commercial and industrial users due to the weak economy.

Beyond 2002, the company expects to be able to grow earnings per share (excluding any gains on asset sales) by 7-9% with growth principally in electric and gas marketing, exploration and production, pipelines, midstream and liquefied natural gas receiving and processing.

The company announced third quarter earnings of 35 cents per share before a non-cash write-down, compared to 43 cents per share before asset sales in the third quarter of 2000. Consolidated net income before the write-down was flat at $46 million. However, the impact of its change in strategy is expected to result in a $569 million net loss for the quarter and a $407 million net loss for the first nine months of the year.

CMS took a non-cash third quarter write down of $613 million after tax. Included were a $183 million charge related to discontinuation of the company’s South American energy distribution unit, a $218 million charge related to energy development projects and international investments in recognition of the net recoverable value of these investments, a $130 million charge related to the Dearborn Industrial Generation plant power supply contract with the Ford/Rouge complex due to higher than expected fuel and operating costs, and an $82 million charge related to revised estimates of Consumers Energy’s payments to the Midland Cogeneration Venture for purchased power.

For CMS Energy’s business units, the write-down is made up of $32 million for the oil and gas exploration and production unit, $28 million for the gas pipeline and processing business, $268 million for independent power production, $93 million for Consumers Energy and $9 million for other areas.

Third quarter operating revenue totaled $3 billion, up 29%, due largely to increased lower margin energy marketing and trading transactions. Third quarter operating income of CMS Energy’s non-utility, diversified energy businesses was $145 million before the write-down, up 33%.

Its oil and gas exploration and production operating income also was up, increasing to $24 million up from $10 million in the third quarter last year due to higher realized oil and natural gas prices and increased natural gas production. Operating income of the marketing, services and trading business was $20 million for the third quarter, up from a loss of $2 million in the third quarter last year, due primarily to increased net value of long-term power contracts and wholesale gas and power trading activity. Operating income of the natural gas transmission business for the third quarter was $51 million before the write-down, up from $48 million the previous year, due primarily to higher earnings from the GasAtacama project and lower operating expenses. Independent power production operating income for the third quarter before the write-down was $51 million, unchanged from the third quarter of last year. Operating income of the electric and natural gas utility businesses of CMS Energy’s principal subsidiary, Consumers Energy, was $81 million in the third quarter before the write-down, a decline from $127 million during the same period last year.

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.