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CMS Energy Corporation is a diversified energy company with businesses engaged in electric and gas utility operations. The company's primary subsidiary, Consumers Power Company, is Michigan's largest utility and the fourth largest gas and electric utility in the United States. In addition to its regulated utility business, CMS is one of the world's top independent power producers with ownership interests in 31 power plants on three continents. Through its subsidiary, CMS Nomeco, CMS is also a producer of oil and natural gas with over 1,000 active wells in eight countries.
CMS Energy's main subsidiary, Consumers Power Company, holds an important place in the history of the power industry in the United States. Founded in 1910 through a merger of a variety of gas, electric and electric trolley companies, Consumers Power was at the forefront of the development of the large utilities that marked the business world of the turn of the century. By the 1960s, Consumers Power had established itself as an old, dependable, solid utility company. As the largest utility in Michigan, the company had paid regular and substantial dividends for some 50 years.
Although when Consumers was founded, hydro power had been the main energy source in Michigan, by the 1950s coal-powered turbines were delivering 80 percent of the state's power. It was Consumers Power's efforts to develop alternate sources of electric power that would land the company on the verge of bankruptcy and would lead to the founding of CMS Energy. The period after World War II was one of optimism for American industry and science; nuclear power appeared poised to become the pollution-free, cheap energy source of the future. Consumers Power was quick to jump on the nuclear bandwagon, building first an experimental nuclear plant at Big Rock, Michigan, and then the much larger commercial Palisades plant. In spite of technical difficulties in the operation of the Big Rock plant and serious cost overruns in the construction of Palisades, in 1970 Consumers embarked on the construction of a third nuclear reactor at Midland, Michigan. The Midland facility was originally scheduled to open in 1975 at a cost of about $500 million. Nine years and $3.5 billion later, Consumers Power pulled the plug on the still unfinished plant.
The Midland debacle plunged Consumers Power into a state of crisis. Stock prices plummeted from a high of $55 before Midland to only $5.00 a share in 1985. Income, which had already been dwindling, now fell to a net loss of $270 million. Financial analysts were suggesting that bankruptcy might be the most attractive option for the beleaguered utility. To make matters worse, Dow Chemical had made massive investments in the ill-fated plant in an agreement to buy excess steam to be used in its chemical processing. The giant chemical company was now suing Consumers Power, alleging mismanagement and a cover-up on the part of the utility. The Michigan Public Service Commission, the regulatory agency that oversees utility rates, authorized an emergency $99 million rate increase fearing that bankruptcy of Michigan's largest utility would wreak havoc with the already suffering Michigan economy. The commission was reluctant, however, to let rate payers bear the full burden of the Midland fiasco, and Consumers was faced with the need for massive reorganization to deal with its huge debt burden.
In 1985, Consumers Power hired William T. McCormick, Jr. to head the reorganization of the troubled company. McCormick, who held a doctorate in nuclear physics from MIT, had extensive experience dealing with regulators and politicians from years spent as a lobbyist in Washington. This experience would be crucial in the new CEO's handling of the Consumers Power reorganization.
McCormick's first move was to create a holding company for Consumers Power. In May 1987, shareholders of Consumers Power approved a reorganization plan in which shares of Consumers common stock were converted into shares of CMS Energy Corp. common stock, and Consumers Power became a subsidiary of the new energy company. The creation of CMS Energy offered several advantages to the utility. Charges of mismanagement had severely damaged the reputation of the 75-year-old firm, and McCormick felt that starting afresh with a new name and management team could only improve investor confidence. More importantly, the new energy corporation could expand into non-regulated energy related ventures without putting its regulated utility business at risk. McCormick moved quickly to cut costs and free up cash to retire preference stock and to refinance the company's crippling debt load. By 1987, the new management had succeeded in paying off or refinancing some $3 billion in debt, reducing CMS' fixed charges by $67 million.
It was McCormick's solution for the Midland plant fiasco that would prompt both the most plaudits and the most controversy for the newly born energy corporation. It was clear that it would be impossible to salvage the nuclear capacity of the project but even with the new cost cutting plan and rate hikes it would be equally unrealistic to expect to recover from the burden of taking the $3.6 billion loss that abandoning the project would entail. "Some people jumped all over us for suggesting anything other than abandoning the plant," McCormick stated in a 1988 article in Forbes, "but we projected we would need additional capacity by the early 1990s when we could get the cogeneration plant into operation, and everyone realized that it would be senseless to throw these usable assets away." Under McCormick's plan the non-nuclear facilities of the plant would be converted to a gas-fired 1,370 megawatt cogeneration plant, salvaging about $1.5 billion worth of existing facilities. Of course completing the conversion would cost an additional $500 million but McCormick had a solution for raising these funds.
McCormick managed to convince Dow Chemical that they should once more join forces and operate the new Midland project as a joint venture. The cogeneration plant would provide steam for Dow's processing needs and electricity to be sold to CMS' subsidiary, Consumers Power. Dow Chemical, along with a number of smaller companies with a vested interest in the survival of the plant, was to control 51 percent of the newly formed Midland Cogeneration Venture. CMS Energy, in turn, swapped $1.5 billion of abandoned Midland assets for a 49 percent interest in the cogeneration facility plus $1.2 billion in notes. CMS' equity in the venture was deliberately kept below 50 percent so that the the new power plant would be governed by the federal Public Utilities Regulatory Policy Act (PURPA), which gave independent power producers certain advantages in selling power to utilities provided they were not more than 50 percent-owned by a public utility. Under PURPA, public utilities were required to buy power from the independents for the avoided cost of producing this power by the utility itself, which would usually entail a higher price than would be attainable on the wholesale market. Part of the agreement between CMS and its Midland partners specified that Consumers would buy the bulk of Midland's power at this higher PURPA rate, thereby securing a market for the cogeneration project's energy. More importantly, McCormick planned to use the cash generated by the notes to fund CMS' investment in its non-regulated energy business.
By 1987, with reduced costs and the non-cash credits from Midland, CMS' earnings rebounded to $262 million. Investors, charmed by McCormick's innovative ideas and persuasive rhetoric, returned to the CMS fold and stock prices once again rose to almost $40 by 1989. But not everyone was happy with the new plans for Midland. Regulators who had already bailed out the company by agreeing to large rate hikes were angered that the cash from the Midland deal was to be used to grow CMS through diversification rather than to be passed on to subsidiary Consumers Power and its customers. CMS' use of PURPA to allow Consumers to pay higher-than-market rates for the cogeneration plant's energy also came under fire by the Michigan Public Service Commission, which would agree to let Consumers pass on the higher PURPA costs to its customers for only about half of the energy that Consumers had already agreed to buy from the Midland venture. To make matters worse, an industrial coalition calling itself ABATE was also determined to block the higher rates and appealed in federal court to strip Midland of its qualification to operate under PURPA.
After seven years of lawsuits, countersuits, and appeals by CMS, its partners in the Midland Cogeneration Venture, ABATE, the Michigan Public Service Commission, and the Michigan Attorney General, many of the issues surrounding the Midland plant still remained unresolved. The Michigan Public Service Commission's limits on recoverable costs, as well as rulings reducing recoverable write-offs of the abandoned nuclear facilities at Midland, saw CMS posting substantial losses for three years in a row from 1990 through 1992. With shrunken dividends and an uncertain future investors once again shied away from CMS stock and share price dropped to only $15.
In 1993, CMS Energy finally reached an agreement with the Michigan Public Service Commission that would allow Consumers to recover from its rates 915 of the 1,240 megawatts of energy the company had agreed to buy annually from the Midland partnership. This compromise, although still under appeal by ABATE, finally allowed CMS to emerge from the Midland quagmire and to once again become a profitable enterprise. Record electric sales by Consumers, as well as a boom in foreign independent power production, boosted CMS' revenues to $3.6 billion in 1994. The resolution of a host of regulatory issues allowed net income to return to $179 million although this was still short of pre-1990 levels.
In spite of the troubles with the Midland venture, CMS Energy stuck to their plan of diversification, albeit at a slower pace than McCormick would have liked had the cash from Midland been forthcoming. Back in the 1960s, Consumers Power had created a subsidiary, the Nomeco Oil and Gas Company, to manage the development of oil and gas reserves needed to operate Consumers' utility business. With only eight employees, Nomeco was originally intended only to build domestic reserves of oil and gas for the company's use and was not envisioned as a revenue producer. As part of McCormick's new vision for the company, CMS expanded the mandate of this subsidiary to include significant independent production of oil and gas to be sold on the open market for immediate earnings. By the early 1990s the subsidiary had producing wells in the United States, Australia, Colombia, Equatorial Guinea, and New Zealand with proven reserves of 60 million net equivalent barrels and almost 100 employees. As the resolution of Midland related disputes began to free up cash in the mid-1990s, CMS was able to further expand its oil and gas production, acquiring four gas and oil production companies in Michigan, Africa and Colombia, and beginning production in the huge oilfields of Ecuador. By 1995 proven reserves had almost doubled to 113 million barrels, and revenue from Nomeco was close to $90 million.
In the late 1980s, CMS formed two subsidiaries, CMS Gas Marketing and CMS Gas Transmission and Storage, to take advantage of Consumers Power's expertise in gas procurement and handling. These service-based companies were one of the early successes of CMS' program of expansion, making a respectable $4 million in net income on revenues of $42 million by 1991. The opening of the Grands Lacs Market Center in St. Clair, Michigan, in 1994 was a important step for CMS as it would provide a major storage and exchange point for buyers and sellers through the United States and Canada. CMS' gas service companies would continue to contribute substantially to CMS' recovery in the mid-1990s, with revenues reaching $145 million by 1994.
One of McCormick's most ambitious plans for CMS Energy was the development of its independent power production business. McCormick believed that the power industry in the United States was moving inexorably towards less regulation and more competition, and he was determined to put CMS Energy at the forefront of this movement. A subsidiary, CMS Generation, was founded in 1986 with the aim of furthering the independent power production business. CMS' cash flow problems of the late 1980s and early 1990s severely restricted the growth of this business sector, however, as the heavy investment needed to acquire or build new plants was simply not available. To make matters worse, one of the few investments the new subsidiary was able to make was Oxford Energy Co., a tire burning power plant that went bankrupt in 1992, costing CMS $31 million. It was not until 1993 that CMS Generation was able to produce even modest revenues for its parent company, with its acquisition of a New York waste wood burning electricity plant as well as its first foreign plant in Argentina. It would be this foreign investment that would finally pay off for CMS' independent power unit.
Growth in the domestic independent power production sector was much slower than analysts like McCormick had predicted, with 1994 estimates coming in at only about one percent annually through the year 2020. International markets, however, surged in the mid-1990s. Many countries in Latin America, Asia, and Eastern Europe were faced with power shortages yet could not afford to expand and run their own generating systems. Governments began to look at large American and European power companies as potential partners in building their power infrastructures. With limited competition in these markets, returns on investment could be up to double those in the domestic power market.
In 1994, CMS entered this market on a large scale, founding new joint projects in Argentina, the Philippines, India, and Morocco. Revenues doubled from the previous year and, even more importantly, high rates of return meant that net income from these operations quadrupled from 1993. At $20 million, this income represented the largest contribution to CMS' bottom line from the company's non-utility businesses. 1994 was also an important year on the domestic front for CMS Generation as they began the process of acquiring HYDRA-CO, the independent power subsidiary of Niagara Mohawk Power, although earnings from this acquisition would not be incorporated into CMS finances until the following year. The addition of HYDRA-CO's plants would bring CMS Generation's total number of U.S. plants to 25, making CMS one of the nation's top five independent power producers. In spite of the serious problems of the 1980s and early 1990s, by 1995 CMS seemed poised to emerge as an important player on the international energy scene.
Principal Subsidiaries: Consumers Power Co., NOMECO Oil & Gas Co., CMS Generation Co., CMS Gas Marketing, CMS Gas Transmission and Storage.
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