Business context and reporting period
Consumers Energy Company’s Form 10-K covers the fiscal year ended December 31, 2020; it also reports fourth-quarter results. Consumers, a wholly owned CMS Energy subsidiary, is a regulated Michigan electric and gas utility serving approximately 6.8 million residents. Amounts below are U.S. dollars; financial figures are in millions unless stated otherwise.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Operating revenue | $6,189 | $6,376 |
| Operating income | $1,221 | $1,130 |
| Net income | $816 | $743 |
| Net income available to common stockholder | $814 | $741 |
| Operating cash flow | $1,218 | $1,601 |
| Capital expenditures, excluding finance-lease assets | $2,170 | $2,085 |
| Long-term debt, excluding current portion | $7,742 | $7,048 |
| Cash and cash equivalents, including restricted cash | $35 | $28 |
Operating margin was approximately 19.7% (versus 17.7% in 2019); net margin was approximately 13.2% (versus 11.7%). These ratios are calculated from reported revenue and income. Cash flow after reported capital expenditures was approximately negative $952 million. At year-end, Consumers had $1.092 billion available on revolving credit facilities and no commercial paper outstanding. Its current assets were $1.892 billion and current liabilities $2.139 billion. Long-term debt principal, including current maturities, was $8.197 billion; Consumers also had $307 million outstanding under a short-term intercompany credit agreement.
Material changes versus the prior comparable period
- Revenue fell 2.9%, while net income rose 9.8%. Electric and gas deliveries declined: electric deliveries to end-use customers were 35.4 billion kWh versus 36.8 billion; gas deliveries were 283 bcf versus 313 bcf.
- Higher authorized rates and lower operating expenses supported earnings, partly offset by weaker gas sales, primarily due to unfavorable weather, lower commercial and industrial electric deliveries, higher depreciation and property taxes, and increased donations.
- Operating cash flow declined $383 million, primarily reflecting $683 million of pension contributions compared with none in 2019, partly offset by higher earnings and noncash items.
- Capital expenditures increased to $2.170 billion. Long-term debt excluding current maturities increased $694 million.
- Fourth-quarter revenue was $1.665 billion versus $1.670 billion; operating income was $308 million in both periods; net income was $191 million versus $206 million.
Outlook, commentary, risks and unusual items
- Demand and COVID-19: Management expects weather-normalized electric and gas deliveries to remain stable over the next five years relative to 2020. Pandemic effects included lower commercial and industrial electric deliveries, higher residential deliveries, increased uncollectible accounts and workforce costs. The MPSC authorized deferral of certain incremental pandemic-related uncollectible expenses. Long-term effects remain uncertain.
- Rates and regulation: The 2020 electric rate case authorized a $90 million annual increase, including a $36 million customer refund; excluding that refund, the increase was $126 million. The 2019 gas rate case authorized a $144 million annual increase and a 9.9% authorized return on equity. Rate recovery and regulatory proceedings remain important uncertainties.
- Investment and transition: Consumers plans $13.2 billion of capital expenditures from 2021–2025 and expects $25 billion of investment over ten years, with annual rate-base growth of 6%–8%. Its plans include a net-zero carbon goal for its electric business by 2040, retirement of D.E. Karn units 1 and 2 in 2023, and net-zero methane emissions from its gas delivery system by 2030. Execution, permitting, costs and regulatory recovery are risks.
- Commitments and environmental matters: Long-term PPA obligations total $8.898 billion, including $1.057 billion due in 2021. Estimated 2021–2025 compliance spending includes $156 million for coal ash, $23 million for wastewater requirements, $38 million for cooling-water intake requirements, and $43 million for air rules. Consumers recorded $56 million for former manufactured-gas-plant remediation; cost estimates and rate recovery may change.
- Other items: Adoption of the expected-credit-loss standard increased EnerBank’s allowance and reduced CMS Energy’s 2020 pretax income by $21 million; Consumers’ financial-statement impact was not material. Consumers recorded a $14 million pretax gain on sale of transmission equipment, with half of the gain to be shared with customers. A $28 million voluntary customer refund was authorized. Auditors issued unqualified opinions on the financial statements and internal controls; regulatory accounting was identified as a critical audit matter.
Important facts for investors to verify
- Whether MPSC-approved rate increases and the customer refund are reflected as expected in future revenues and cash flows, and the status of pending rate and cost-recovery proceedings.
- How pandemic-related customer delinquencies, collections and commercial/industrial demand evolve, including the treatment of deferred uncollectible-account costs.
- Funding of the capital program and debt maturities, available credit capacity, pension funding needs, and the sustainability of cash flows relative to investment and dividends.
- Delivery against capital, rate-base, renewable-generation and emissions targets, including approvals, project timing, and actual costs and recovery.
- Potential changes in environmental remediation liabilities, the Ray Compressor Station cost disallowance and appeal, and other material contingencies disclosed in the filing.