CMS Energy posted strong third quarter earnings on Thursday, but the good news came with warnings that the dividend may be cut even more to conserve cash, and that write-offs will affect the fourth quarter’s numbers.

Overall, investors considered the news to be positive, sending the company’s shares up slightly with a gain of 14 cents. The stock closed at $8.24.

In an hour-long conference call with investors and analysts, CMS CEO Ken Whipple said the reaudit of its 2000 and 2001 financial statements is nearly complete, and should be finalized by December. Preliminary results indicate that CMS will have to restate its 2000 and 2001 financial results, according to the new auditor, Ernst & Young.

However, the restatements will lead to a net positive earnings gain, and they will not be related to any round-trip trading. Another report is expected by January affecting the 2002 income statement.

Most of the conference call concerned the state of CMS’s financial health, which has been ailing in recent months amid federal investigations and a loss of investor confidence.

Analysts overall considered the CMS quarterly results to be decent, especially with the gains in the utility subsidiary. Analyst Jeff Gildersleeve with Argus Research wrote that CMS had made progress “on several fronts,” but added that there are “challenges ahead with regard to the timing of asset sales and also a lot of focus on when they may need to go to the capital markets again in 2003.”

Analyst John Olson of Sanders Morris Harris in Houston also questioned the company’s Argentina assets, which have suffered in the midst of that country’s turmoil. He also wondered whether CMS might take any legal action against former employees because of the problems related to its energy trading unit, CMS-Marketing, Sales and Trade.

CMS said that as of Thursday, it has $550 million of cash on hand, up from $337 million as of Sept. 30. CMS added that it will not have to use the capital markets for the rest of 2002 because of reductions in capital expenditures and operating costs, asset sales and bank financings received.

However, CFO Thomas Webb warned that to conserve future cash, CMS may further reduce the dividend. In July, CMS cut the dividend by 50%, to an annual payout of 72 cents a share from $1.46. Webb said CMS “perhaps” might consider a dividend cut as an “alternative source of liquidity,” adding that other avenues would be more asset sales or more capital reductions.

Without the write-downs expected in the final quarter, CMS still expects ongoing 2002 earnings to range between $1.50-$1.55, matching an earlier forecast. Including an expected fourth-quarter charge of $225 million on underfunded pension assets, CMS expects a net loss of $3 a share for the year. The updated loss forecast includes the effect of a sale of its Panhandle pipeline business and the impact of new accounting rules.

CMS expects to receive bids on the sale of its Panhandle and Field Services businesses by the end of November.

“Although the company believes its liquidity improvement plan will restore it to sound financial footing, it noted that because of current conditions, as more fully described in its quarterly report 10-Q to be filed [Thursday], there can be no assurance that its liquidity plan will be achieved,” it said in a written statement.

To date, CMS has sold $2.7 billion of its non-core assets as part of a two-year plan to raise $2.9 billion. The Dearborn, MI-based company has reduced its debt by $860 million so far this year, paying down $239 million in bank debt since July 2002.

“Our results reflect the strength of our core operations and the positive steps we are taking to get back to basics and control our own destiny,” said Whipple. He said CMS’s ongoing asset sales program has reduced the company’s business risk, which in turn will lead to “more predictable earnings.” He said that the sales’ proceeds and CMS’s “aggressive cost cutting” had “ensured that our liquidity improvement program remains on track.”

Operating income for utility subsidiary Consumers Energy was $70 million in the quarter, up from $13 million a year earlier. The strong results followed high availability of its baseload generating fleet in 2002, compared with 3Q01, when its Palisades Plant was shut down for maintenance. A 12% improvement in commercial and residential electricity sales as a result of sustained above normal temperatures also contributed. At the natural gas utility, a 10.3% drop in deliveries and an inventory write-down following the testing of Consumers Energy’s Michigan storage fields were partially offset by operational efficiencies.

Third quarter ongoing net income of the natural gas transmission business was $17 million, compared to $21 million in the same period last year, reflecting the continuing impact of assets in Argentina and its currency devaluation issues. This was partially offset by improved ongoing net income from CMS Panhandle Co. because of lower operating expenses and the elimination of goodwill amortization. Independent power production income was $39 million, down 17% from $47 million last year, which CMS said came from plant outages and the ongoing Argentina problems as well. The company is attempting to sell off its Argentina assets, but said during the conference call that it most likely will take some time. Until then, the assets are being “managed.”

CMS-Marketing, Services and Trading, its energy merchant arm, had an ongoing loss in the quarter of $2 million, compared to net income of $11 million in the same period last year, primarily reflecting reduced trading results for electricity and natural gas.

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