CMS ENERGY CORP annual report, FY2011

CMS Energy Corporation — 2011 Form 10-K

Business context and reporting period. This is a combined annual filing for CMS Energy Corporation and its wholly owned utility subsidiary, Consumers Energy Company, for the fiscal year ended December 31, 2011. CMS Energy is a Michigan-focused energy holding company; Consumers provides electric and natural gas utility service to Michigan customers. The filing also reports 2011 fourth-quarter results.

Financial performance and position

CMS Energy consolidated	2011	2010
Operating revenue	$6.503 billion	$6.432 billion
Operating income	$1.003 billion	$978 million
Income from continuing operations	$415 million	$366 million
Net income available to common stockholders	$415 million	$324 million
Diluted EPS	$1.58	$1.28
Cash provided by operations	$1.169 billion	$959 million
Capital expenditures, excluding capital-lease assets	$882 million	$821 million

• Operating margin was approximately 15.4% in 2011, versus 15.2% in 2010; net margin was approximately 6.4% versus 5.0%.
• At year-end, CMS Energy reported $16.452 billion of assets, $6.040 billion of long-term debt excluding current maturities, and $1.057 billion of current long-term debt and lease obligations. Aggregate principal indebtedness was $7.093 billion, including EnerBank certificates of deposit and trust preferred securities.
• Cash and cash equivalents were $161 million, plus $27 million restricted cash, on the consolidated balance sheet. CMS Energy also had $547 million available under its $550 million revolving facility. No borrowings were outstanding; $3 million of letters of credit were in use.
• Consumers reported 2011 revenue of $6.253 billion, net income of $467 million, operating cash flow of $1.323 billion, and capital expenditures of $876 million. Year-end cash was $85 million plus $26 million restricted cash; long-term debt excluding current maturities was $3.987 billion.
• In fourth-quarter 2011, CMS Energy revenue was $1.620 billion, income from continuing operations was $41 million, and diluted EPS was $0.15.

Material changes versus 2010

• CMS Energy common net income rose $91 million and diluted EPS increased from $1.28 to $1.58. Management attributed the improvement principally to electric and gas rate orders, a $32 million tax benefit from Michigan tax-law changes, and the absence of a 2010 increase in the Bay Harbor environmental liability. Higher storm restoration costs and the absence of a 2010 insurance settlement recovery partly offset these benefits.
• Revenue increased about 1.1%, while operating income increased about 2.6%. Cash from operations rose $210 million, mainly reflecting lower pension contributions and fewer customer refunds.
• Electric utility revenue increased to $3.913 billion from $3.802 billion; gas utility revenue decreased to $2.340 billion from $2.354 billion. Enterprises revenue fell to $204 million from $238 million.
• Consumers’ electric deliveries were essentially flat at 38 billion kWh. Gas deliveries, including off-system transportation, rose to 337 bcf from 317 bcf, with colder weather contributing to higher customer usage.
• CMS Energy debt principal declined from $7.206 billion to $7.093 billion. The 2011 cash balance was lower than 2010, while financing cash flow shifted from a $202 million inflow to a $199 million outflow.

Outlook, management commentary, and significant risks

• Consumers expects weather-adjusted electric deliveries to increase about 2% in 2012 and average roughly 1% annual growth over five years. It expects gas deliveries to increase about 1% in 2012 and remain broadly stable over five years. No CMS Energy EPS guidance is stated in the supplied filing text.
• Consumers expects approximately $6.63 billion of capital investment from 2012 through 2016, including utility distribution, reliability, environmental, renewable-energy, and Smart Grid projects. Management expects liquidity to remain sufficient and targets base-rate increases at or below inflation, excluding power and gas cost recovery charges.
• Consumers cancelled a planned 830-MW coal plant in December 2011 and plans to mothball seven smaller coal units beginning January 2015, while evaluating conversion, additional controls, retirement, or other options. A $750 million Smart Grid program is planned, with deployment beginning in the second half of 2012.
• Environmental compliance is a major cost and execution risk. Consumers estimates $1.5 billion of environmental expenditures from 2012 through 2018 and expects recovery through rates, but cannot assure recovery. New air, coal-ash, wastewater, greenhouse-gas, and pipeline-safety requirements could raise costs or affect plant operations.
• Consumers has a $128 million recorded liability for 23 former manufactured-gas-plant sites, against an undiscounted estimate of $142 million; a related $156 million regulatory asset reflects expected rate recovery. CMS Energy has a $77 million recorded Bay Harbor liability, with an undiscounted estimate of $100 million. Scope, permitting, regulatory decisions, and cost recovery remain uncertain.
• Other notable exposures include a disputed $142 million Equatorial Guinea tax claim plus interest; appeals and litigation over alleged historical natural-gas price reporting; and a DOE settlement to Consumers of $120 million, whose allocation was pending before the MPSC. Consumers’ long-term power purchase commitments total $15.3 billion for 2012–2040.
• CMS Energy depends on subsidiary dividends to service parent-company debt. The companies cite risks from rate-case outcomes, financing access and credit ratings, Michigan economic conditions, weather, commodity prices, pension funding, outages, and environmental or legal proceedings. CMS Energy and Consumers reported effective disclosure controls and internal control over financial reporting; auditors issued unqualified opinions.

Important facts for investors to verify

• Whether the MPSC’s final electric and gas rate orders support Consumers’ self-implemented rates and whether any amounts must be refunded.
• Whether Consumers can recover environmental, Smart Grid, renewable, and other planned capital costs through rates, and whether the $6.63 billion investment plan remains on schedule and within budget.
• Updated estimates, timing, and potential additional exposure for Bay Harbor remediation and former MGP-site cleanup; also the status of the Equatorial Guinea claim and gas-index litigation.
• Cash generation, capital spending, debt maturities, revolver availability, and CMS Energy’s ability to receive dividends from Consumers, particularly given parent-level obligations.
• How the coal-unit mothballing and cancelled plant affect future generation adequacy, power-purchase costs, environmental spending, and customer rates.

Note: This filing covers the full 2011 fiscal year, not a standalone quarterly report. Amounts are in U.S. dollars; financial figures are generally in millions unless otherwise stated.