What drove the increase in CMS Energy's 2010 earnings?

Net income available to common stockholders rose to $324 million from $218 million. The main drivers were electric and gas rate orders, which added about $90 million after tax; weather-related and volume gains in electric sales; and a $31 million after-tax insurance settlement tied to a previously sold asset. The 2009 Big Rock decommissioning refund, which reduced 2009 earnings, did not recur. These gains were partly offset by a $40 million Bay Harbor charge and a $22 million write-off of coal-plant development costs.

How is CMS Energy funding its large capital program?

Consumers plans more than $6 billion of capital spending over five years. Funding comes from operating cash flow of $959 million in 2010, external debt (Consumers issued $600 million of first mortgage bonds and CMS Energy issued $800 million of senior notes in 2010), and equity contributions from CMS Energy to Consumers. Liquidity is supported by revolving credit facilities totaling about $1.2 billion and a $250 million receivables sale program. Management says these sources are sufficient for 2011 and beyond, though it notes that capital market disruptions could force spending cuts.

What are the most significant contingent liabilities for investors?

The most important are the Bay Harbor environmental remediation, with a remaining recorded liability of $98 million and an undiscounted obligation of $121 million; the gas index price reporting litigation, where the outcome could be material; and the DOJ investigation into that same matter. Other exposures include the Equatorial Guinea tax claim of $142 million, which the company disputes, and potentially substantial costs from future EPA rules on coal ash, cooling water intake, and greenhouse gases. CMS Energy expects Consumers to recover most environmental compliance costs through rates, but that outcome is not guaranteed.

Is CMS Energy's dividend and holding-company structure a risk?

Yes. As a holding company, CMS Energy depends on dividends from Consumers to meet its debt service. In 2010 Consumers paid $358 million in common dividends to CMS Energy. Consumers had $404 million of unrestricted retained earnings available for dividends at year-end, which limits how much cash it can send up the chain. CMS Energy's senior notes indenture limits its own common dividends to $959 million.

Are there any notable changes in regulatory or legislative conditions?

Several items bear watching. Consumers' 2010 gas rate case seeks a $55 million increase, and the MPSC delayed Consumers' self-implementation of a revised $29 million gas increase. The 2008 Energy Legislation caps alternative electric supplier access at 10% of sales and requires 10% renewable sales by 2015, and proposals in the legislature would raise the cap to 25%. The MPSC's Big Rock refund decision is under appeal. Consumers' pilot electric and gas decoupling mechanisms, which affect revenue stability, must also meet conditions to continue.

CMS ENERGY CORP 10-K FY2010 Annual Report

01—Abstract

Summary

Summary of the 10-K filed February 24, 2011. Cited figures are marked; the original filing is the authoritative source.

CMS Energy Corporation's 2010 Form 10-K, filed February 24, 2011, is a combined filing with its principal subsidiary Consumers Energy.

CMS Energy is primarily a Michigan utility holding company. Consumers' electric and gas utility operations generate nearly all of the company's assets and revenue, and CMS Enterprises runs a small domestic independent power business. Consolidated operating revenue was $6.4 billion^a in 2010, up from $6.2 billion in 2009.

Net income available to common stockholders rose to $324 million^b, or $1.28 diluted EPS, from $218 million ($0.91) in 2009. Management attributed the improvement to electric and gas rate orders, the absence of the 2009 Big Rock refund, higher electricity deliveries, and a $31 million after-tax insurance settlement. These gains were partly offset by a $40 million charge for the Bay Harbor environmental liability.

The filing describes a large capital program. Consumers plans more than $6 billion^c of capital investment over 2011-2015, including renewable energy, a smart grid, and environmental controls. Consumers also deferred its proposed 830 MW coal plant and wrote off $22 million of related development costs.

Cash from operations was $959 million^d, but capital spending of about $821 million, pension and OPEB contributions of $463 million, and rising debt have kept financing needs high. Total debt was about $7.2 billion. Consumers' pending rate cases and self-implemented rate increases, along with the outcome of the gas price reporting litigation and environmental regulation, remain key risks.

For investors, the story is improving earnings and regulatory support in Michigan, balanced against a heavy capital plan, a leveraged balance sheet, and several contingent liabilities. These include the Bay Harbor remediation, the gas index price reporting lawsuits, and possible costs from tighter rules on coal ash, cooling water, and greenhouse gases.

02—Key points

Key Highlights

Consolidated operating revenue of $6.4 billion in 2010, up from $6.2 billion in 2009.
Net income available to common stockholders of $324 million; diluted EPS of $1.28, versus $0.91 in 2009.
Capital investment plan of more than $6 billion over 2011-2015, with Consumers' 2011 capital expenditures forecast at about $1.07 billion.
Electric rate order (November 2010) authorized a $146 million annual increase at a 10.7% return on equity; gas rate order (May 2010) authorized $66 million at 10.55%.
Total long-term debt principal of about $7.2 billion at CMS Energy; Consumers' revolving credit facilities and receivables program provide liquidity.
Cumulative Bay Harbor environmental liability charge of $222 million, with a $40 million increase recorded in 2010; the EPA has also demanded $7 million.
Ongoing gas index price reporting class actions and a DOJ investigation remain unresolved, and CMS Energy cannot predict their outcome.

03—One dollar

04—Financials

Financial Highlights

10-KFY2010filed February 24, 2011

Revenue$6.43B Net Income$343.00M5.3% Net Margin EPS (Diluted)$1.28 Total Assets$15.62B Cash & Equivalents$247.00M Free Cash Flow$138.00M

Financial Statements

FY2010 against FY2009

Line item	FY2010FY2009	FY2009	Change
Revenue	$6.43B$6.21B	$6.21B	+3.7%
Operating Expenses	$5.45B$5.51B	$5.51B	−1.0%
Operating Income	$978.00M$698.00M	$698.00M	+40.1%
Interest Expense	$431.00M$435.00M	$435.00M	−0.9%
Net Income	$343.00M$229.00M	$229.00M	+49.8%
EPS (Basic)	$1.40$0.96	$0.96	+45.8%
EPS (Diluted)	$1.28$0.91	$0.91	+40.7%
Shares Outstanding (Diluted)	252.90M237.90M	237.90M	+6.3%

05—Questions

Frequently Asked Questions

What drove the increase in CMS Energy's 2010 earnings?
Net income available to common stockholders rose to $324 million from $218 million. The main drivers were electric and gas rate orders, which added about $90 million after tax; weather-related and volume gains in electric sales; and a $31 million after-tax insurance settlement tied to a previously sold asset. The 2009 Big Rock decommissioning refund, which reduced 2009 earnings, did not recur. These gains were partly offset by a $40 million Bay Harbor charge and a $22 million write-off of coal-plant development costs.
How is CMS Energy funding its large capital program?
Consumers plans more than $6 billion of capital spending over five years. Funding comes from operating cash flow of $959 million in 2010, external debt (Consumers issued $600 million of first mortgage bonds and CMS Energy issued $800 million of senior notes in 2010), and equity contributions from CMS Energy to Consumers. Liquidity is supported by revolving credit facilities totaling about $1.2 billion and a $250 million receivables sale program. Management says these sources are sufficient for 2011 and beyond, though it notes that capital market disruptions could force spending cuts.
What are the most significant contingent liabilities for investors?
The most important are the Bay Harbor environmental remediation, with a remaining recorded liability of $98 million and an undiscounted obligation of $121 million; the gas index price reporting litigation, where the outcome could be material; and the DOJ investigation into that same matter. Other exposures include the Equatorial Guinea tax claim of $142 million, which the company disputes, and potentially substantial costs from future EPA rules on coal ash, cooling water intake, and greenhouse gases. CMS Energy expects Consumers to recover most environmental compliance costs through rates, but that outcome is not guaranteed.
Is CMS Energy's dividend and holding-company structure a risk?
Yes. As a holding company, CMS Energy depends on dividends from Consumers to meet its debt service. In 2010 Consumers paid $358 million in common dividends to CMS Energy. Consumers had $404 million of unrestricted retained earnings available for dividends at year-end, which limits how much cash it can send up the chain. CMS Energy's senior notes indenture limits its own common dividends to $959 million.
Are there any notable changes in regulatory or legislative conditions?
Several items bear watching. Consumers' 2010 gas rate case seeks a $55 million increase, and the MPSC delayed Consumers' self-implementation of a revised $29 million gas increase. The 2008 Energy Legislation caps alternative electric supplier access at 10% of sales and requires 10% renewable sales by 2015, and proposals in the legislature would raise the cap to 25%. The MPSC's Big Rock refund decision is under appeal. Consumers' pilot electric and gas decoupling mechanisms, which affect revenue stability, must also meet conditions to continue.

06—Continue

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