Business context and reporting period
Consumers Energy Company filed this combined Form 10-K with its parent, CMS Energy Corporation, for the fiscal year ended December 31, 2014. Consumers is a regulated Michigan electric and gas utility serving approximately 1.8 million electric and 1.7 million gas customers. Unless identified as CMS Energy, figures below are for Consumers; dollar amounts are in U.S. dollars.
Financial performance and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $6.800 billion | $6.321 billion | +7.6% |
| Operating income | $1.135 billion | $1.118 billion | +1.5% |
| Net income | $567 million | $534 million | +6.2% |
| Net income available to common stockholder | $565 million | $532 million | +6.2% |
| Cash provided by operations | $1.338 billion | $1.351 billion | -1.0% |
| Capital expenditures | $1.573 billion | $1.320 billion | +19.2% |
| Long-term debt, excluding current portion | $5.154 billion | $4.579 billion | +$575 million |
- Operating margin was approximately 16.7%, versus 17.7% in 2013; net margin was approximately 8.3%, versus 8.4%.
- At year-end, Consumers reported $71 million cash and cash equivalents, including $37 million restricted. Its $650 million revolving facility had $615 million available; a separate $30 million facility was fully committed by letters of credit. Commercial paper outstanding was $60 million.
- Consumers’ debt-to-capital ratio under its credit agreements was 0.48, within the limit of 0.65. Total principal amount of debt outstanding was $5.283 billion, including current debt.
- Fourth-quarter 2014 Consumers revenue was $1.672 billion, operating income $264 million, and net income $118 million, compared with $1.674 billion, $258 million, and $119 million, respectively, in fourth-quarter 2013.
Material changes versus the prior comparable period
- Electric and gas utility revenue rose to $4.436 billion and $2.363 billion, respectively, from $4.173 billion and $2.148 billion. Higher gas sales reflected colder winter weather; gas deliveries to end-use customers increased to 331 bcf from 307 bcf.
- Electric utility net income increased $21 million to $384 million; gas utility net income increased $11 million to $179 million. Electric results benefited from rate effects, lower employee benefit costs, and a $39 million tax benefit from an MPSC accounting order. Gas results benefited principally from weather-driven sales.
- Operating costs rose, including purchased and interchange power, cost of gas sold, and depreciation. Depreciation and amortization increased $56 million, reflecting higher plant in service.
- Operating cash flow was slightly lower despite higher net income. Consumers’ 2014 cash flow included $29 million of postretirement contributions, compared with $222 million in 2013; other working-capital and asset/liability movements offset benefits.
- Capital spending increased by $253 million. Long-term debt increased, while Consumers issued $378 million of securitization bonds in July 2014 and $500 million of first mortgage bonds.
Outlook, management commentary, risks and contingencies
- Consumers forecast approximately $7.4 billion of capital expenditures for 2015–2019, including $5.0 billion for electric utility operations and $2.4 billion for gas utility operations. It expects longer-term investment of about $15.5 billion through 2024 and annual rate-base growth of 5%–7%.
- Management projected weather-adjusted electric deliveries to grow 1.0% in 2015 and average about 0.5% annually over the following five years; gas deliveries were expected to remain broadly stable. These projections depend on weather, economic activity, energy efficiency, and other factors.
- In December 2014, Consumers requested a $163 million annual electric rate increase and additional investment-recovery mechanisms. In January 2015, the MPSC approved a $45 million annual gas rate increase, below the $88 million requested.
- Consumers expected $0.9 billion in environmental expenditures during 2015–2019. Preliminary estimates separately identified $252 million for coal-ash compliance, $152 million for wastewater rules, and $100 million for cooling-water intake requirements; estimates may change. Recovery through customer rates is expected but not assured.
- Consumers planned to retire seven smaller coal units by April 2016 and three smaller gas units by June 2015. A purchase agreement for a 540-MW gas-fired plant for $155 million remained subject to approvals and was expected to close in early 2016.
- Long-term purchase agreements create substantial commitments: estimated capacity and energy payments were $11.1 billion from 2015 through 2036. Consumers is a net power purchaser, and fuel availability, prices, plant outages, and winter conditions can affect costs and operations.
- Notable uncertainties include electric-choice expansion or deregulation, regulatory cost recovery, environmental compliance, pension and postretirement assumptions, and legal matters. Consumers recorded $115 million for remaining obligations at 23 former manufactured-gas-plant sites; the related regulatory asset was $147 million. CMS Energy, rather than Consumers, disclosed a disputed $142 million Equatorial Guinea tax claim plus penalties and interest.
- Consumers recorded a $15 million 2014 charge to increase its Bay Harbor environmental liability; the year-end recorded liability was $62 million. The filing also disclosed an EPA settlement involving a $2.75 million civil penalty, environmental projects, emissions controls, and unit retirements.
Important facts for investors to verify
- Progress and final MPSC outcomes for the pending electric rate case and investment-recovery request, and the implementation of the approved gas rate increase.
- Whether the planned capital program and environmental spending remain on schedule, receive regulatory approval, and are recoverable in rates.
- Debt maturities, refinancing needs, available credit, and cash generation relative to elevated capital expenditures and contractual power-purchase obligations.
- Final compliance costs and operating implications of coal-ash, air-emissions, wastewater, and cooling-water rules, including planned plant retirements.
- Changes in weather-sensitive demand, commodity and purchased-power costs, plant reliability, and the assumptions underlying benefit-plan obligations and environmental liabilities.