CMS Energy Corporation — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; this is an annual filing, not a standalone fourth-quarter report. The combined filing also reports Consumers Energy, CMS Energy’s principal subsidiary. Unless noted, figures below are for CMS Energy consolidated and in U.S. dollars.
Business context
CMS Energy is a Michigan-focused energy holding company. Its regulated utility subsidiary, Consumers Energy, provides electric and natural gas service; CMS Enterprises operates domestic independent power assets. Consumers serves about 6.8 million Michigan residents. Its regulated operations account for substantially all of CMS Energy’s assets, income, and operating revenue.
Financial performance and key metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Operating revenue | $6.432 billion | $6.205 billion |
| Operating income | $978 million | $698 million |
| Income from continuing operations | $366 million | $220 million |
| Net income available to common stockholders | $324 million | $218 million |
| Diluted EPS | $1.28 | $0.91 |
| Cash provided by operating activities | $959 million | $848 million |
| Capital expenditures, excluding assets placed under capital lease | $821 million | $818 million |
| Cash and cash equivalents, including restricted cash | $270 million | Not clearly stated on a comparable basis in the cited discussion |
| Aggregate principal debt | $7.206 billion | $6.609 billion |
Operating margin was approximately 15.2% (operating income divided by revenue); net income available to common stockholders was approximately 5.0% of revenue. These are calculated ratios, not company-reported measures. CMS Energy reported total assets of $15.616 billion and long-term debt, excluding current maturities, of $6.448 billion at year-end. Its $550 million revolving facility had $547 million available; no borrowings and $3 million of letters of credit were outstanding. CMS Energy complied with its disclosed debt covenants.
Consumers Energy reported 2010 revenue of $6.156 billion, net income of $434 million, operating cash flow of $910 million, capital expenditures of $815 million, and long-term debt excluding current maturities of $4.488 billion. Its cash and restricted cash totaled $94 million. Consumers’ operating cash flow declined from $922 million in 2009, mainly due to increased benefit-plan contributions and customer refunds.
Material changes versus 2009
- CMS Energy common earnings rose $106 million and diluted EPS increased from $0.91 to $1.28. Operating income increased $280 million.
- Management attributed the improvement principally to electric and gas rate orders, increased electric deliveries and favorable electric weather, and the absence of the 2009 Big Rock refund impact. Enterprises also recorded a $31 million insurance settlement related to a previously sold investment.
- Electric utility net income increased to $303 million from $194 million; gas utility net income increased to $127 million from $96 million. Enterprises moved from a $7 million loss to $36 million of income, partly due to the insurance settlement and a tax benefit.
- Gas utility revenue fell to $2.354 billion from $2.556 billion, while electric utility revenue increased to $3.802 billion from $3.407 billion. CMS Energy’s operating revenue overall increased 3.7%.
- CMS Energy operating cash flow increased by $111 million, despite postretirement-benefit contributions rising to $463 million from $262 million. CMS Energy’s reported net income includes a $23 million discontinued-operations loss, versus $20 million of discontinued-operations income in 2009.
Outlook, significant items and risks
- Investment and demand: The company expects more than $6 billion of capital investment over five years; its detailed 2011–2015 forecast totals $6.447 billion for CMS Energy, including $6.430 billion for Consumers. Consumers forecasts electric delivery growth of about 1.5% annually through 2016 and gas delivery declines averaging about 1% annually. Its 2011 forecast calls for electric deliveries to rise 2% and gas deliveries to decline 1%, both weather-adjusted.
- Generation and modernization: Consumers deferred development of a proposed 830-MW coal plant, citing weaker demand, expected lower gas prices, and surplus regional capacity; it wrote off $22 million of development costs. Consumers expects to spend $650 million on renewable energy through 2015 and $355 million on smart-grid deployment through 2015. A joint Ludington plant upgrade announced in 2011 is expected to cost Consumers $400 million of an $800 million project.
- Environmental obligations: Consumers estimated $1.9 billion in environmental-compliance expenditures for 2011–2018, including emissions controls, coal-ash disposal, and cooling-water measures. Recovery through customer rates is expected but not assured. Environmental rules, permitting, and possible requirements for older generating units could add costs or prompt retirements.
- Bay Harbor: CMS Energy recorded a $40 million 2010 charge to increase its environmental remediation liability. At year-end, the recorded liability was $98 million, compared with $121 million undiscounted; management expected to pay $34 million in 2011. The long-term remedy and leachate-disposal approach remained under negotiation, and costs could increase.
- Regulation and refunds: The MPSC authorized an annual $146 million electric rate increase in November 2010 and a $66 million annual gas rate increase in May 2010. A subsequent gas-rate request was revised to $29 million and its self-implementation was delayed by the MPSC. Consumers completed an $85 million Big Rock customer refund in January 2011 and appealed the underlying order.
- Other contingencies: CMS Energy disclosed unresolved gas-price-reporting litigation and a DOJ investigation whose outcomes and potential losses were not estimable in the filing. Consumers also disclosed environmental and air-permit proceedings, a potentially responsible-party notice for the Kalamazoo River Superfund site with no estimable liability, and a $163 million spent-nuclear-fuel disposal obligation to the DOE.
- Funding and other risks: CMS Energy depends on subsidiary dividends to service parent-company debt. The filing highlights leverage, capital-market access and credit ratings, pension and OPEB funding, Michigan economic conditions, weather, commodity prices, rate recovery, and environmental regulation as material uncertainties. Management stated it expected available liquidity and operating cash flows to fund obligations and planned investment.
Most important facts for investors to verify
- Whether 2010 earnings growth is sustainable after separating rate increases, weather effects, the insurance settlement, the prior-year Big Rock refund comparison, and other unusual items.
- The final costs and timing of Bay Harbor remediation, and the resolution of related regulatory negotiations and claims.
- Consumers’ ability to recover its planned environmental and infrastructure investment through rates, including the outcome of pending rate and cost-recovery proceedings.
- Funding needs and debt maturities relative to cash generation, available credit facilities, dividend flows from Consumers, and the large purchase obligations disclosed in the filing.
- Whether demand, renewable-energy requirements, and generation plans evolve as forecast, including the deferred coal project and planned capital-intensive projects.
- Potential financial effects of the unresolved gas-price-reporting litigation, environmental matters, and spent-fuel obligation; several exposures are not reliably estimable in the filing.
PricewaterhouseCoopers issued unqualified audit opinions on both companies’ financial statements and reported effective internal control over financial reporting as of December 31, 2010.