Business context and reporting period
Consumers Energy Company’s Form 10-K covers the fiscal year ended December 31, 2012; it is an annual report, not a standalone quarterly filing. Consumers is a regulated Michigan electric and natural-gas utility serving approximately 6.6 million residents. Unless stated otherwise, financial amounts below are in millions of dollars. Fourth-quarter figures are included where available.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Operating revenue | $6,013 | $6,253 |
| Operating income | $984 | $985 |
| Net income | $439 | $467 |
| Cash from operations | $1,353 | $1,323 |
| Capital expenditures | $1,222 | $876 |
| Long-term debt, excluding current portion | $4,297 | $3,987 |
| Total assets | $16,275 | $15,662 |
- Operating margin was approximately 16.4% in 2012, versus 15.8% in 2011; net margin was approximately 7.3%, versus 7.5%.
- Year-end cash and cash equivalents were $5, with a further $28 restricted. Consumers reported $648 available under revolving credit facilities; a separate $30 facility was fully supported by outstanding letters of credit. Its accounts-receivable program had $110 drawn and $140 eligible for transfer.
- Consumers’ 2012 cash generation exceeded capital expenditures by approximately $131, calculated as operating cash flow less reported capital expenditures. Net cash used in financing was $154.
- Current assets were $2,255 and current liabilities $1,410. The balance sheet also reported $110 of notes payable and $153 of non-current capital and finance lease obligations.
- Fourth quarter 2012 revenue was $1,608, operating income $207 and net income available to the common stockholder $78; fourth quarter 2011 figures were $1,565, $173 and $67, respectively.
Material changes versus prior year
- Annual revenue declined $240, or about 3.8%, while operating income was nearly flat and net income fell $28, or about 6.0%.
- Electric utility net income declined $8 to $325. Rate increases and higher deliveries helped, but were offset by increased depreciation and taxes, a $59 write-off of the electric revenue-decoupling regulatory asset, and the absence of prior-year decoupling revenue.
- Gas utility net income declined $20 to $110. Gas delivery revenue fell $29, principally because of lower deliveries in milder weather; deliveries to end-use customers decreased 10%.
- Operating cash flow rose $30, partly reflecting lower pension contributions and the effect of lower gas prices on inventory purchases. Capital expenditures increased $346, primarily reflecting the utility investment program.
- Long-term debt excluding current maturities increased $310. Consumers issued $1,075 of first mortgage bonds during the year and retired $1,064 of debt.
Outlook, risks and unusual items
- Management forecast weather-adjusted electric deliveries to be broadly stable in 2013 and average annual electric growth of about 0.5%–1.0% over five years; gas deliveries were expected to grow about 2% in 2013 but remain broadly stable over five years.
- Consumers planned approximately $7 billion of capital investment for 2013–2017. Plans included a proposed 700-MW gas plant, estimated at $750, subject to MPSC approval and permits, and a proposed $150, 24-mile gas pipeline, also subject to approvals.
- Environmental compliance spending was estimated at approximately $1.1 billion from 2013 through 2018. Recovery through customer rates is expected by management but is not assured. Coal-unit compliance, potential retirements or mothballing, ash disposal rules and wastewater requirements create cost and reliability uncertainty.
- Seven smaller coal units were planned for mothballing in 2015, potentially creating a capacity shortfall of up to 1,500 MW. Consumers was also assessing compliance options and had not received all requested environmental extensions.
- Electric alternative-supplier deliveries were at the statutory 10% cap; a legislative proposal to raise the cap could expose Consumers to increased customer loss. The company also challenged certain MISO transmission cost-allocation decisions.
- Consumers recorded a $59 electric-decoupling asset write-off after a court ruling found the MPSC lacked authority to approve electric decoupling. The MPSC approved a $118 annual electric rate increase in June 2012; a later electric case sought $145 annually. A new gas case sought $49 annually. These later requests remained pending at filing.
- Recorded environmental liabilities included $122 for former manufactured-gas-plant sites, offset in part by a $152 regulatory asset. The filing also describes unresolved gas-price-reporting litigation, environmental proceedings, and other contingencies; some potential losses cannot be estimated clearly.
- Long-term purchase obligations totaled $12.326 billion, in addition to $1.469 billion of related-party purchase obligations. Power-purchase agreements and fuel and transportation contracts are significant commitments.
- Management said available cash flows and liquidity sources were expected to meet requirements. The filing cautions that regulatory outcomes, weather, Michigan economic conditions, fuel and power prices, financing access, pension assumptions and environmental rules could materially affect results.
Most important facts for investors to verify
- Progress and final rulings on the pending electric and gas rate cases, including any refunds or approved recovery mechanisms.
- Whether the 10% retail choice limit changes, and the effect on customer retention and utility earnings.
- Final environmental requirements, compliance costs, rate recovery and decisions on coal-unit operations and replacement capacity.
- Funding and execution of the $7 billion investment plan, including approvals, cost, schedule and customer-rate impacts of proposed projects.
- Liquidity and refinancing needs in light of low unrestricted cash, increased debt and substantial contractual purchase obligations.
- Resolution and potential financial exposure from environmental remediation, gas-price-reporting litigation and other contingencies.
The independent auditor issued an unqualified opinion on Consumers’ financial statements and internal control over financial reporting as of December 31, 2012.