Business context and reporting period
Consumers Energy Company (Consumers), a wholly owned subsidiary of CMS Energy, filed this combined Form 10-K for the fiscal year ended December 31, 2015. Consumers is a regulated Michigan electric and gas utility serving about 6.7 million residents. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise. The filing also reports CMS Energy consolidated results, which are identified separately.
Key financial metrics
| Metric | Consumers 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $6,165 | $6,800 | Down 9.3% |
| Operating income | $1,122 | $1,135 | Down $13 |
| Net income | $594 | $567 | Up 4.8% |
| Net income available to common stockholder | $592 | $565 | Up $27 |
| Operating cash flow | $1,794 | $1,338 | Up $456 |
| Capital expenditures, excluding capital-lease assets | $1,537 | $1,573 | Down $36 |
| Long-term debt, excluding current portion | $5,206 | $5,154 | Up $52 |
| Total assets | $18,658 | $17,847 | Up $811 |
Consumers’ operating margin was approximately 18.2% and net margin approximately 9.6%, based on reported revenue and income. Operating cash flow exceeded reported capital expenditures by about $257 million before the Jackson plant acquisition and other investing activity. At year-end, Consumers had $50 million of cash and cash equivalents plus $19 million of restricted cash; it reported $891 million available under revolving credit facilities and $249 million of commercial paper outstanding. Current liabilities were $1,731 million versus current assets of $1,929 million.
Electric utility revenue was $4,249 million, down from $4,436 million; gas utility revenue was $1,916 million, down from $2,363 million. Electric deliveries were 37.3 billion kWh versus 37.6 billion; gas deliveries to end-use customers were 299 bcf versus 331 bcf. The filing attributes much of the lower gas revenue and deliveries to the comparison with colder winter weather in 2014, as well as lower gas prices.
Material changes versus the prior comparable period
- Consumers’ net income increased despite lower revenue, reflecting lower gas costs and rate increases, among other factors. Operating income decreased slightly as depreciation and other costs rose.
- Operating cash flow improved, principally from lower-priced gas purchases, improved customer collections, higher earnings, and lower income-tax payments to CMS Energy; higher postretirement-benefit contributions partly offset the increase.
- Consumers acquired a 540-MW natural-gas generating plant in Jackson, Michigan, for $155 million in December 2015. Investing cash outflow rose to $1,781 million from $1,653 million, mainly reflecting that acquisition.
- Long-term debt increased modestly. Consumers issued $250 million of first mortgage bonds and retired $50 million of bonds in 2015.
- Year-end results include a $37 million Michigan use-tax settlement benefit: tax and interest refunds and interest income, with related reductions to plant cost, taxes, and interest expense as described in the filing.
Guidance, outlook, risks and unusual items
- Consumers forecasts weather-adjusted electric deliveries to rise 1.5%–2.0% in 2016 and average annual growth of 0.5%–1.0% over five years. Gas deliveries are expected to increase 0.5% in 2016 and remain broadly stable over five years.
- Management expects approximately $8.4 billion of Consumers capital investment from 2016 through 2020 and about $17 billion from 2016 through 2025. It projects rate-base growth of 5%–7% annually while targeting base-rate increases, excluding power- and gas-cost recovery charges, at or below inflation.
- Consumers expects its resources to meet full-service capacity requirements through 2020, including after the planned retirement of seven smaller coal units by April 2016. It expects to spend $0.7 billion on environmental compliance from 2016 through 2020; cost recovery through rates is expected but not assured.
- Environmental obligations include a $114 million recorded liability for former manufactured-gas-plant sites, with $129 million undiscounted, and an estimated $243 million of coal-ash compliance capital and removal costs from 2016–2020. New coal-ash rules led to a $68 million increase in the recorded asset-retirement obligation in 2015.
- Material exposures include regulatory decisions and rate recovery, possible changes to Michigan’s 10% retail-open-access limit, environmental rules and litigation, weather and commodity prices, outages, cybersecurity, pension and benefit costs, and access to capital. CMS Energy also faces an unresolved $152 million Equatorial Guinea tax claim plus penalties and interest, and natural-gas price-reporting litigation for which a loss estimate is not available.
- The electric rate case order authorized a $165 million annual increase, reduced to $126 million in April 2016 following planned coal-unit retirements. A gas rate case seeking $85 million annually remained pending; Consumers had self-implemented a $60 million increase in January 2016, subject to refund.
- CMS Energy reported 2015 net income available to common stockholders of $523 million and diluted EPS of $1.89, versus $477 million and $1.74 in 2014. CMS Energy is the parent; its debt and results should not be treated as obligations or financial resources of Consumers.
Most important facts an investor should verify
- Review the detailed rate-case orders, refund exposure on self-implemented rates, and developments in Michigan energy legislation, especially retail open access.
- Validate the funding plan for $8.4 billion of planned five-year investment against cash generation, debt maturities, borrowing availability, and customer-rate recovery.
- Assess environmental compliance estimates and recoverability, including coal ash, emissions, water rules, and MGP remediation liabilities.
- Check the duration, pricing, and performance obligations of major power-purchase agreements, particularly the MCV and Palisades contracts; reported future PPA obligations total $9.947 billion.
- Monitor weather-normalized utility demand, customer collections, pension assumptions and funding, and material legal contingencies disclosed in the full filing.