Business context and reporting period
Consumers Energy Company filed this combined 10-K with its parent, CMS Energy Corporation. Consumers is a regulated Michigan electric and gas utility serving about 6.8 million people. The filing reports the fiscal year ended December 31, 2010; the 2010 fourth-quarter figures are unaudited supplemental data.
Financial performance and liquidity
- Revenue: Consumers reported $6.156 billion, up 3.2% from $5.963 billion in 2009. Electric utility revenue was $3.802 billion (up from $3.407 billion); gas utility revenue was $2.354 billion (down from $2.556 billion).
- Profit: Net income was $434 million, versus $293 million; net income available to the common stockholder was $432 million, versus $291 million. Operating income was $926 million, compared with $689 million, and operating margin was approximately 15.0%, versus 11.6%.
- Cash flow and investment: Cash from operations was $910 million, down from $922 million. Capital expenditures were $815 million, leaving $95 million of operating cash flow after capital expenditures, before financing and other investing activity.
- Debt and liquidity: Long-term debt, excluding current maturities, was $4.488 billion; total debt principal was $4.529 billion. Year-end cash was $71 million, plus $23 million restricted. Consumers had $350 million available across its $500 million and $150 million revolving credit facilities; a separate $30 million letter-of-credit facility was fully utilized. Its $250 million receivables program was available, with no receivables transferred at year-end.
- Other measures: Assets totaled $14.839 billion. Pension and OPEB contributions totaled $447 million in 2010. Electric deliveries to end-use customers increased 5.3% to 37.7 billion kWh; gas deliveries to end-use customers decreased 3.9% to 273.1 bcf.
Material changes versus the prior year
- Higher electric and gas rate revenues, increased electric deliveries, and favorable electric weather contributed to improved earnings. The 2010 electric rate order authorized an annual $146 million increase; the May 2010 gas rate order authorized $66 million annually.
- Electric results also benefited from the absence of the prior-year Big Rock decommissioning refund effect. Consumers completed an $85 million refund, plus interest, in January 2011 and appealed the underlying order.
- Operating costs included a $22 million charge to write off development costs for the deferred proposed coal plant. Higher retirement-benefit expenses also weighed on electric utility results.
- Operating cash flow was slightly lower, principally reflecting higher pension contributions and customer refunds, partly offset by increased billings following regulatory actions.
Outlook, risks, and unusual items
- Consumers forecast weather-adjusted electric deliveries to grow 2% in 2011 and about 1.5% annually through 2016; it expects gas deliveries to decline about 1% in 2011 and annually through 2016. Management said Michigan economic conditions appeared to have stabilized, while noting continuing economic and population pressures.
- Consumers expects more than $6 billion of capital investment over five years; its detailed 2011–2015 forecast totals $6.43 billion. Plans include system upgrades, renewables, and a $355 million smart-grid program through 2015. A 100-MW wind farm was expected to enter service in late 2012. The proposed 830-MW coal plant was deferred, with construction likelihood significantly diminished.
- Environmental compliance is a major capital and regulatory exposure: Consumers estimated $1.9 billion of expenditures from 2011 through 2018. Recovery through customer rates is expected by management but not assured. Proposed rules on emissions, coal ash, cooling-water systems, and pipeline safety could add costs or affect plant operations.
- Long-term power and commodity purchase obligations are substantial: the filing lists $15.794 billion of purchase obligations and $1.735 billion of related-party purchase obligations. Capacity and energy payments under long-term PPAs for 2011–2030 were estimated at $15.3 billion.
- Other material uncertainties include rate-case outcomes and possible refunds, the ability to recover regulatory assets and investment costs, weather and commodity-price volatility, Michigan economic conditions, pension funding, environmental proceedings, and litigation. CMS Energy’s Bay Harbor remediation liability and other parent-company exposures are distinct from Consumers’ standalone obligations.
- Fourth-quarter unaudited Consumers results were revenue of $1.620 billion and net income of $79 million, compared with $1.543 billion and $21 million, respectively, in fourth-quarter 2009.
Important facts for investors to verify
- Review the final regulatory outcomes, refund exposure, and rate recovery assumptions, including the pending gas rate case and PSCR/GCR reconciliations.
- Assess whether operating cash flow and available financing can support the planned capital program, debt maturities, dividends, and benefit-plan contributions.
- Test the cost, timing, and customer-rate recovery assumptions behind the $1.9 billion environmental estimate and other compliance spending.
- Examine the economics and availability terms of the long-term PPAs and other purchase commitments, particularly the MCV and Palisades contracts.
- Confirm the status and potential financial exposure of environmental and legal matters, including the DOE spent-fuel dispute and the Kalamazoo River Superfund notification.