Why did CMS Energy's net income decline in 1999 even though revenue grew significantly?

Net income fell to $277 million from $285 million. The main drag was the $49 million after-tax write-off of Nitrotec investments, and higher interest expense from debt used to acquire Panhandle also weighed on earnings. Before the Nitrotec charge, net income rose to $318 million, a 17% increase, driven by utility, pipeline, independent power, and oil and gas results. Basic EPS also fell to $2.18 from $2.65 partly because of a $.26 per-share reallocation from the Class G stock exchange.

What is the purpose of the planned tracking stock offering and dividend reduction?

Management says the restructuring plan is designed to strengthen the balance sheet, reduce fixed charges, and enhance EPS growth. The roughly $600 million IPO of tracking stock, representing 20% of the economic interest in the electric and gas utility, is mainly intended to reduce debt. The company plans to pay about 75% of utility earnings as dividends from the tracking stock. The CMS Energy common dividend would fall from $1.46 to $0.40 per share after the IPO. If market conditions are unfavorable, management says it will use additional asset sales or other means instead.

How much of the Panhandle acquisition is reflected in CMS Energy's results, and how is it performing?

CMS Energy acquired Panhandle from Duke Energy on March 29, 1999 for $1.9 billion in cash plus $300 million of existing debt. Panhandle contributed $471 million of 1999 operating revenue and $74 million of net income. The results are split into pre-acquisition and post-acquisition periods that are not directly comparable because of purchase accounting, which created about $800 million of goodwill amortized over 40 years. Panhandle's 1999 net income was down from $91 million in 1998, and pressure from competition and discounting in the Midwest market could limit future revenue.

What are the biggest risks to Consumers Energy's earnings?

The main risks include the pace and terms of Michigan electric restructuring, including full customer choice by January 2002 and the potential impact on frozen power supply cost recovery. Other risks are the ABATE complaint, which seeks rate reductions and retroactive refunds, the MCV Partnership power purchase underrecovery (an accumulated after-tax shortfall of $30 million), and possible additional losses if the MCV Facility runs above the 91.5% availability assumption. Consumers also faces Clean Air Act nitrogen oxide compliance costs of $150 to $500 million and nuclear spent fuel storage issues, since the DOE has not accepted spent fuel.

Is the company's debt load sustainable, and what supports its liquidity?

Long-term debt rose to $7.0 billion, and total capitalization including trust preferred securities is much larger, which makes leverage a key concern for investors. The company points to dividends from subsidiaries (Consumers paid $262 million in 1999) and operating cash flow of $917 million as its main sources of cash. It also has $725 million of senior credit facilities, of which $241 million was available at year-end, and it plans to reduce debt using asset sale and IPO proceeds. Interest coverage remains positive, but the restructuring plan is central to reducing the debt burden.

CMS ENERGY CORP 10-K FY1999 Annual Report

01—Abstract

Summary

Summary of the 10-K filed March 30, 2000. Cited figures are marked; the original filing is the authoritative source.

CMS Energy's 1999 10-K shows a company in transition.

Consolidated operating revenue rose to $6.1 billion^a (from $5.1 billion), driven mainly by the March 1999 acquisition of Panhandle Eastern Pipe Line for about $1.9 billion in cash plus $300 million of assumed debt. Consolidated net income fell slightly to $277 million from $285 million, which included a non-cash $84 million pretax ($49 million after-tax) write-off of Nitrotec investments. Basic EPS for CMS Energy common stock was $2.18, down from $2.65, partly due to a $.26 reallocation from the Class G exchange.

Excluding Nitrotec, net income before reconciling items rose about 17%, and the company points to higher utility and pipeline earnings. Total assets grew to $15.5 billion^b from $11.3 billion, and long-term debt rose to about $7.0 billion from $4.7 billion, with trust preferred securities adding roughly $1.1 billion more. Management announced a February 2000 financial restructuring plan to strengthen the balance sheet and reduce fixed charges.

The plan includes an IPO of about $600 million^c of tracking stock representing 20% of the economic interest in the electric and gas utility, targeted for Q2 or Q3 2000 subject to market conditions. It also includes repurchasing up to 10 million shares, a planned cut in the annual dividend from $1.46 to $0.40 after the IPO, and asset sales of $600 to $750 million (excluding Loy Yang) by April 2000, with Loy Yang sale also under consideration. Investors should weigh the execution risk of these actions, the dividend reduction, and the heavy debt load against the company's diversified growth strategy.

The core utility, Consumers Energy, remains a meaningful earnings base, with 1999 electric pretax operating income of $494 million^d and gas pretax operating income of $132 million. Key uncertainties include the MPSC electric restructuring and customer choice timetable (full choice by January 2002), an ABATE complaint seeking rate reductions, the frozen power supply cost recovery clause, the MCV Partnership power purchase cost recovery, Clean Air Act nitrogen oxide compliance spending of $150 to $500 million, and the DOE's delay in accepting spent nuclear fuel. Panhandle's 1999 net income of $74 million, after purchase accounting effects, shows the value of the acquisition is still being demonstrated.

02—Key points

Key Highlights

Operating revenue of $6.1 billion in 1999, up 19% from $5.1 billion, mainly from the Panhandle acquisition completed March 29, 1999
Consolidated net income of $277 million, down from $285 million; 1999 included an $84 million ($49 million after-tax) Nitrotec investment write-off; basic EPS $2.18 vs. $2.65
Total assets rose to $15.5 billion from $11.3 billion, and long-term debt to $7.0 billion from $4.7 billion, reflecting financing for the $1.9 billion Panhandle acquisition
Planned restructuring: about $600 million tracking stock IPO (20% economic interest in the utility), up to 10 million share buyback, and dividend cut from $1.46 to $0.40 per share after the IPO
Asset sales of $600 to $750 million (excluding Loy Yang) targeted by April 2000, with about $370 million of agreed sales, including Northern Header and northern Michigan oil and gas properties
Consumers' electric pretax operating income rose to $494 million and gas pretax operating income to $132 million, with 1.67 million electric and 1.58 million gas customers
Major regulatory and environmental uncertainties: Michigan electric restructuring (full customer choice by 2002), ABATE rate complaint, MCV power purchase underrecoveries, and Clean Air Act NOx compliance costs of $150 to $500 million

03—Questions

Frequently Asked Questions

Why did CMS Energy's net income decline in 1999 even though revenue grew significantly?
Net income fell to $277 million from $285 million. The main drag was the $49 million after-tax write-off of Nitrotec investments, and higher interest expense from debt used to acquire Panhandle also weighed on earnings. Before the Nitrotec charge, net income rose to $318 million, a 17% increase, driven by utility, pipeline, independent power, and oil and gas results. Basic EPS also fell to $2.18 from $2.65 partly because of a $.26 per-share reallocation from the Class G stock exchange.
What is the purpose of the planned tracking stock offering and dividend reduction?
Management says the restructuring plan is designed to strengthen the balance sheet, reduce fixed charges, and enhance EPS growth. The roughly $600 million IPO of tracking stock, representing 20% of the economic interest in the electric and gas utility, is mainly intended to reduce debt. The company plans to pay about 75% of utility earnings as dividends from the tracking stock. The CMS Energy common dividend would fall from $1.46 to $0.40 per share after the IPO. If market conditions are unfavorable, management says it will use additional asset sales or other means instead.
How much of the Panhandle acquisition is reflected in CMS Energy's results, and how is it performing?
CMS Energy acquired Panhandle from Duke Energy on March 29, 1999 for $1.9 billion in cash plus $300 million of existing debt. Panhandle contributed $471 million of 1999 operating revenue and $74 million of net income. The results are split into pre-acquisition and post-acquisition periods that are not directly comparable because of purchase accounting, which created about $800 million of goodwill amortized over 40 years. Panhandle's 1999 net income was down from $91 million in 1998, and pressure from competition and discounting in the Midwest market could limit future revenue.
What are the biggest risks to Consumers Energy's earnings?
The main risks include the pace and terms of Michigan electric restructuring, including full customer choice by January 2002 and the potential impact on frozen power supply cost recovery. Other risks are the ABATE complaint, which seeks rate reductions and retroactive refunds, the MCV Partnership power purchase underrecovery (an accumulated after-tax shortfall of $30 million), and possible additional losses if the MCV Facility runs above the 91.5% availability assumption. Consumers also faces Clean Air Act nitrogen oxide compliance costs of $150 to $500 million and nuclear spent fuel storage issues, since the DOE has not accepted spent fuel.
Is the company's debt load sustainable, and what supports its liquidity?
Long-term debt rose to $7.0 billion, and total capitalization including trust preferred securities is much larger, which makes leverage a key concern for investors. The company points to dividends from subsidiaries (Consumers paid $262 million in 1999) and operating cash flow of $917 million as its main sources of cash. It also has $725 million of senior credit facilities, of which $241 million was available at year-end, and it plans to reduce debt using asset sale and IPO proceeds. Interest coverage remains positive, but the restructuring plan is central to reducing the debt burden.

04—Continue

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