Following the lead of other multi-faceted energy marketers forced to sell income-producing assets to build cash, CMS Energy Corp. is negotiating the possible sale of its entire domestic pipeline and field services businesses, worth a combined net value of $1.4 billion. Assets on the table include the Panhandle Eastern and Trunkline interstate natural gas pipelines, the Lake Charles, LA, liquefied natural gas (LNG) receiving terminal, CMS Field Services’ gas gathering and processing assets, and its one-third ownership interest in Guardian Pipeline.

The announcement on Wednesday, which coincided with CMS’s second quarter earnings report, would have been more stunning if similar headlines had not already been made by so many of its peers, including The Williams Cos., Dynegy Inc., Aquila Inc., AES and Mirant, which have all either already begun selling solid assets or have announced plans to do so.

“We are giving it serious consideration,” CMS CEO Ken Whipple said of the domestic sales, which apparently were discussed and approved by the company’s board of directors last week. “We are now in the process of assessing the market’s interest,” which he said was already “significant…we’ve been contacted by a number of companies.” Now, he said, CMS is “exploring” the legal and regulatory issues involved if any transactions go forward.

Throughout a question-and-answer period by energy analysts on a conference call, Whipple appeared to be leaning strongly toward the sales, admitting at one point that “if we do go forward…depending on what is bought, we could be closed as early as late 2002 or early 2003.” Exact earnings figures before interest and taxes (EBIT) were not given, but Whipple said that “broadly, the pipeline assets earn about $250-300 million (EBIT).”

Selling so many of CMS’s income producers, said the former Ford Motor Co. executive, “would accelerate our primary businesses, and give us financial flexibility.” He acknowledged that there would be a “major change to the North American operations,” but he reminded analysts that the company would be keeping the largest Michigan utility, Consumers Energy, as well as its solid international operations.

CMS also is not giving up on its depleted Marketing, Services and Trading (MST) unit, which reported a net loss in the second quarter of $18 million, compared with net income of $33 million in the second quarter of 2001. MST’s involvement in round-trip trading sent the unit into a financial death spiral just three months ago, and led to some resignations, including that of long-time CMS Chairman and CEO William McCormick, who Whipple replaced (see Daily GPI, May 28).

“It is clear that the utility (Consumers) has always been a big piece of our business,” said Whipple. “With this move, if we go through with it, Consumers Energy would be a bigger part of the business. Domestically, our generation business also is a significant, if not large piece of our business, and you add the remainder, the international (businesses)…and the marketing, services and trading business, we believe has a future. We’ve withdrawn from speculative trading, but we continue to be optimistic about generation.”

At this point, however, Whipple said getting the company on its feet financially and gaining access to the capital markets once again was paramount. CMS already has sold off its exploration and production assets, and plans to sell eight other properties before the end of the year, including Consumers Energy’s electric transmission system, worth an estimated $290 million, as well as some generation and distribution assets for an additional $588 million.

“Our MST business has been severely constrained this year,” he said, “but we continue to believe wholesale marketing will be a success.” He said CMS is entering into an agreement with Current Capital, a limited partnership, for a credit support agreement “to allow MST to move forward with credit support.” One of the partners is Harvard Management, but Whipple said he could not discuss details until the deal is finalized. As far as the rest of 2002, CMS only expects MST to break even, with perhaps a slight gain in origination contracts.

Asked by an analyst what had “fundamentally gone wrong” with the pipeline businesses to the point that CMS wanted to “get rid of them,” Whipple corrected him, noting that “nothing had gone fundamentally wrong, but we looked at the corporation, and because of the constraints on our debt level and the financial constraints, we cannot take advantage of the financials in the pipes, and someone else might be able to do so. It makes sense to pursue this as a strategic alternative.”

The only proposed asset for sale that is carrying any debt is Panhandle, which is between $935 million and $950 million, said CFO Al Wright, who discussed the second quarter earnings with analysts in his final conference call. Wright resigned from CMS in July to pursue opportunities outside of the energy business. His replacement will be Thomas J. Webb, a former Ford colleague of Whipple’s, as well as former CFO for Kellogg Co. (see Daily GPI, July 22).

Following the CMS announcement about selling its domestic assets, Standard & Poor’s Ratings Services said it saw no immediate effect on the company’s credit quality. “The potential sale of these assets, the bulk of which include the Panhandle and Trunkline natural gas pipelines, would provide an enormous thrust to the company’s massive ongoing asset sale program undertaken to restore its balance sheet and gain some measure of financial flexibility. However, the sale would remove assets with low business risk that produce the most stable cash flow throughout the consolidated enterprise.”

For the second quarter, the Dearborn, MI-based company reported a consolidated net loss of $75 million, or 56 cents a share, compared with second quarter 2001 net income of $53 million, or 40 cents a share. Operating net income for the second quarter was $59 million, or 44 cents, compared with $35 million, or 27 cents for the same period a year ago.

Operating net income excludes the effects of non-recurring events, such as gains on asset sales ($21 million or 16 cents a share); losses on discontinued operations of CMS Oil and Gas and CMS Viron ($141 million or $1.05 per share); restructuring costs (6 cents a share) and expenses related to early debt retirement (5 cents a share). Second quarter operating revenue totaled $2.4 billion, versus $2.2 billion in the second quarter of 2001.

Operating net income in the quarter “reflects strong results from Consumers Energy’s electric and gas utility businesses,” said the company. The utility reduced power supply costs due to an extended refueling outage in 2001 at the Palisades nuclear plant, and reported favorable weather effects on natural gas and electric deliveries. There also were improved earnings at CMS Energy’s independent power plants and the benefits from mark-to-market accounting of long-term natural gas fuel supply contracts at the Midland Cogeneration Venture.

CMS also affirmed its guidance through 2002, saying it expects to earn between $1.50 and $1.55 per share.

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