Consumers Energy Company — 2011 Form 10-K
Business context and reporting period
Consumers Energy is a Michigan-regulated electric and gas utility serving approximately 6.7 million residents. This filing reports the fiscal year ended December 31, 2011; quarterly figures below identify the fourth quarter. The filing is combined with parent CMS Energy’s report, so figures are distinguished by registrant.
Financial performance and position
| Consumers Energy ($ millions, except where noted) | 2011 | 2010 | Change |
|---|---|---|---|
| Operating revenue | 6,253 | 6,156 | +1.6% |
| Operating income | 985 | 926 | +6.4% |
| Net income | 467 | 434 | +7.6% |
| Net income available to common stockholder | 465 | 432 | +7.6% |
| Cash from operating activities | 1,323 | 910 | +413 |
| Capital expenditures (excluding capital-lease assets) | 876 | 815 | +61 |
Operating income was about 15.8% of revenue and net income about 7.5% (calculated from reported figures; the filing does not label these as margins). The company attributed stronger operating cash flow mainly to lower pension contributions, fewer customer refunds, and lower income-tax payments to CMS Energy. Electric deliveries were essentially flat at 37.8 billion kWh; gas deliveries to end-use customers rose 5.2% to 287.3 bcf, partly reflecting colder weather.
At year-end, cash and cash equivalents were $85 million, plus $26 million of restricted cash. Current assets were $2.407 billion and current liabilities $1.642 billion. Long-term debt principal outstanding was $4.329 billion, including $339 million classified as current; the balance-sheet long-term debt amount, after current amounts and discount, was $3.987 billion. Consumers had $649 million available across its revolving facilities and up to $250 million of eligible receivables under its borrowing program. It reported compliance with debt covenants and no defaults.
Fourth-quarter 2011 revenue was $1.565 billion, operating income $173 million and net income $67 million, versus $1.620 billion, $191 million and $79 million, respectively, in fourth-quarter 2010.
Material changes versus the prior comparable period
- Net income increased $33 million. Electric utility earnings rose $30 million, with rate increases and deliveries partly offset by higher operating and service-restoration costs; gas utility earnings increased $3 million.
- Cash from operations rose $413 million, while capital spending increased $61 million. Cash used in investing activities was $951 million, compared with $859 million in 2010.
- Long-term debt principal declined from $4.529 billion to $4.329 billion, although the current portion of debt and lease obligations on the balance sheet rose to $363 million from $61 million.
- The recorded liability for remediation of 23 former manufactured-gas-plant sites increased by $104 million to $128 million. A related regulatory asset was $156 million.
Outlook, management commentary, risks and unusual items
- Management expected weather-adjusted electric deliveries to increase about 2% in 2012 and average about 1% annual growth over five years; gas deliveries were expected to rise about 1% in 2012 and remain broadly stable over five years.
- Consumers planned $6.63 billion of capital investments during 2012–2016, including distribution and reliability upgrades, environmental compliance, renewable generation and Smart Grid deployment. Management expected rate-base growth of 5%–7% and aimed to keep base-rate increases at or below inflation, excluding power- and gas-cost recovery charges.
- Consumers canceled its proposed 830-MW coal plant in December 2011 and planned to mothball seven smaller coal units beginning in January 2015, while evaluating continued operation with controls, conversion to gas, or retirement.
- In its electric rate case, Consumers sought a $195 million annual increase; the MPSC restricted self-implementation to $118 million, effective December 2011 and subject to refund with interest. A gas rate case remained pending: the company sought $49 million and supported a $23 million self-implemented increase in February 2012.
- Environmental compliance was a significant cost and recovery risk. Consumers estimated $1.5 billion of environmental expenditures for 2012–2018 and expected recovery through rates, but could not assure it. Key uncertainties included emissions rules, coal ash and wastewater regulation, and permitting or litigation.
- Other material exposures included the unresolved DOE settlement allocation (Consumers received a $120 million settlement and recorded a corresponding regulatory liability pending MPSC review), severe-weather restoration costs, pension and OPEB obligations, fuel and power purchase commitments, and the Michigan economy. Long-term purchase obligations totaled $16.652 billion, including related-party obligations.
Important facts for investors to verify
- Whether the MPSC’s final electric and gas rate decisions support the self-implemented increases, and whether any refunds or additional rate recovery are required.
- Whether Consumers can recover planned environmental and MGP remediation costs from customers; track the MGP liability, related regulatory asset and actual remediation spending.
- How the MPSC allocates the $120 million DOE settlement and the resulting customer refunds, regulatory-asset recovery or earnings impact.
- Funding and execution of the $6.63 billion capital plan, renewable projects and Smart Grid rollout, including cost recovery and coal-unit decisions.
- Debt maturities, available liquidity, pension/OPEB funding needs and the effect of substantial long-term power and fuel purchase commitments on cash flow.
- The filing reports clean independent-auditor opinions and effective internal control over financial reporting for both Consumers and CMS Energy.