CMS-PB

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 1999, for CMS Energy Corporation (CMS Energy), its principal subsidiary Consumers Energy Company (Consumers), and Panhandle Eastern Pipe Line Company (Panhandle). CMS Energy is a diversified energy company operating in the U.S. and internationally. A significant event in 1999 was the acquisition of Panhandle from Duke Energy on March 29, 1999, for approximately $1.9 billion in cash and the assumption of $300 million in debt. This acquisition expanded CMS Energy's natural gas transmission and storage capabilities significantly.

Key Financial Metrics

Note: 1999 EPS was reduced by $0.26 due to the premium on the redemption of Class G Common Stock and a $49 million after-tax loss on investments in Nitrotec Corporation.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased by $962 million (18.7%) primarily due to the inclusion of Panhandle's results and growth in utility and diversified energy segments.
• Net Income Decline: Consolidated net income decreased by $8 million. This decline was driven by a $49 million after-tax loss on the write-off of investments in Nitrotec Corporation and higher interest expense related to the Panhandle acquisition, which offset earnings growth from the acquisition and utility operations.
• Balance Sheet Expansion: Total assets increased by $4.15 billion, largely due to the Panhandle acquisition. Long-term debt increased by $2.26 billion to fund the acquisition and general corporate purposes.
• Cash Flow: Cash from operations surged by $401 million, reflecting higher cash earnings and a reduction in working capital.

Guidance, Outlook, and Risks

Management Commentary and Outlook

In February 2000, CMS Energy announced a financial restructuring plan to strengthen its balance sheet. Key elements include:

• Tracking Stock IPO: Plans to issue approximately $600 million of a tracking stock representing 20% of the economic interest in its electric and gas utility operations.
• Asset Sales: Intention to sell $600 million to $750 million of non-strategic assets (excluding Loy Yang) by April 2000. Proceeds are expected to be approximately $370 million from sales already completed or agreed upon.
• Share Repurchase: Authorization to repurchase up to 10 million shares of CMS Energy Common Stock.
• Dividend Reduction: The Board indicated an intention to reduce the CMS Energy Common Stock dividend from an annual rate of $1.46 to $0.40 per share following the tracking stock offering.

Risks and Contingencies

• Regulatory Restructuring: Ongoing electric and gas industry restructuring in Michigan (customer choice programs) creates uncertainty regarding stranded cost recovery and rate structures. The Michigan Public Service Commission (MPSC) has suspended the Power Supply Cost Recovery (PSCR) clause through 2001.
• Environmental Liabilities: Potential costs related to Clean Air Act compliance (estimated $150 million to $500 million for nitrogen oxide reductions) and remediation of manufactured gas plant sites (estimated $66 million to $118 million).
• Nuclear Issues: Ongoing litigation and uncertainty regarding the Department of Energy's failure to accept spent nuclear fuel for disposal. Consumers is storing fuel in "dry casks" at the Palisades plant.
• Market Risk: Exposure to commodity price fluctuations (gas, oil, electricity) and interest rate changes, managed through hedging strategies.

Investor Verification Checklist

• Asset Sale Proceeds: Verify the actual proceeds and timing of the planned asset sales (Loy Yang, Brazilian distribution system, Northern Header) to ensure they meet the $600-$750 million target.
• Tracking Stock Execution: Monitor market conditions and the successful execution of the $600 million tracking stock IPO in Q2 or Q3 2000.
• Regulatory Outcomes: Track the resolution of the ABATE rate complaint and the finalization of Michigan's electric and gas restructuring legislation, specifically regarding stranded cost recovery mechanisms.
• Environmental Compliance Costs: Review future capital expenditure reports for costs associated with Clean Air Act nitrogen oxide and particulate emission reductions.
• Debt Service: Assess the impact of the increased debt load ($7 billion long-term debt) on interest coverage ratios and liquidity, particularly given the planned dividend reduction.