Consumers Energy Company — FY2013 Form 10-K Summary
Reporting period and business: Fiscal year ended December 31, 2013. Consumers Energy is a regulated Michigan electric and gas utility and a wholly owned subsidiary of CMS Energy. The filing is a combined 10-K for both companies; figures below are for Consumers unless identified otherwise. Consumers served approximately 1.8 million electric and 1.7 million gas customers.
Financial performance and position
- Revenue and earnings: Operating revenue was $6.321 billion, up 5.1% from $6.013 billion in 2012. Net income was $534 million versus $439 million; net income available to the common stockholder was $532 million versus $437 million.
- Margins: Operating income was $1.118 billion, up from $984 million. Operating margin was approximately 17.7%, compared with 16.4% in 2012; net margin was approximately 8.4%, compared with 7.3%.
- Fourth quarter: Q4 2013 revenue was $1.674 billion, operating income $258 million, and net income $119 million. In Q4 2012, these were $1.608 billion, $207 million, and $78 million, respectively.
- Cash flow and investment: Cash from operations was $1.351 billion, essentially flat with $1.353 billion in 2012. Capital expenditures were $1.320 billion, up from $1.222 billion; operating cash flow less capital expenditures was approximately $31 million. Consumers received a $69 million renewable-energy grant during 2013.
- Debt and liquidity: Long-term debt, excluding current maturities, was $4.579 billion, up from $4.297 billion. Aggregate principal debt was $4.625 billion. Year-end cash and cash equivalents were $49 million, including $31 million restricted. Consumers had $650 million available under its main revolving facility; another $30 million facility was fully committed by letters of credit. It also had $80 million of additional eligible receivables under a $250 million receivables program. Consumers reported compliance with its debt covenants.
- Balance sheet: Total assets were $16.179 billion versus $16.275 billion; equity was $4.857 billion versus $4.582 billion. Current liabilities were $1.480 billion and current assets $2.157 billion.
Changes and notable items
- Higher gas deliveries and rate-related revenue contributed to the earnings increase. Gas deliveries to end-use customers rose to 307 bcf from 259 bcf, mainly due to colder weather. Electric deliveries were 37 billion kWh versus 38 billion kWh; milder summer weather reduced higher-margin sales.
- Consumers’ electric and gas utility net income increased to $363 million and $168 million, respectively, from $325 million and $110 million. Lower earnings in CMS Energy’s non-utility enterprises segment do not represent Consumers’ utility results.
- Severe November–December storms increased electric service-restoration costs by $51 million, partly offset by $16 million of estimated insurance proceeds.
- OPEB plan amendments and remeasurement reduced Consumers’ reported OPEB liability by $614 million in 2013; the OPEB regulatory asset of $580 million was eliminated and a $34 million OPEB regulatory liability established. This is a significant balance-sheet change, not equivalent to cash generated from operations.
- Consumers recorded a $362 million regulatory asset for the remaining book value of ten generating units designated for planned retirement, following MPSC approval of securitization financing.
Outlook, commitments, and risks
- Capital plan: Consumers expects approximately $7.1 billion of capital expenditures from 2014–2018, including about $4.8 billion for electric utility operations and $2.3 billion for gas. Management expects rate-base growth of 5%–7% annually and said cost-control initiatives should allow base rates to avoid increases through 2014, subject to assumptions and regulatory outcomes.
- Demand outlook: Management expected 2014 weather-adjusted electric deliveries to increase 1.5% versus 2013, with average annual growth of approximately 0.5%–1.0% through 2018; gas deliveries were expected to remain broadly stable through 2018. The filing does not provide a clear numerical earnings or EPS forecast.
- Generation and securitization: The MPSC authorized up to $389 million of securitization bonds for recovery of costs associated with ten units. Subject to a successful transaction, Consumers planned to retire the units by April 2016; management estimated initial annual savings of $15 million for full-service customers. The company also agreed to buy a 540-MW gas plant for $155 million, subject to approvals, with closing expected by January 2016, and deferred development of a proposed 700-MW plant estimated at $700 million.
- Long-term commitments: Consumers disclosed $11.8 billion of purchase obligations, including long-term fuel, energy, transportation, construction, and service contracts. It separately estimated future capacity and energy payments under long-term PPAs of $12.1 billion from 2014 through 2032; these disclosed obligation categories have different scopes and should not be added without checking the notes.
- Environmental exposure: Estimated 2014–2018 spending includes approximately $507 million for air compliance, $204 million for ash-disposal requirements assuming ash is treated as non-hazardous waste, and $131 million for expected wastewater rules. Management expects rate recovery but cannot assure it; final rules or more stringent requirements could change costs.
- Contingencies: Consumers recorded $117 million for remediation obligations at 23 former manufactured-gas-plant sites, with an undiscounted estimate of $127 million. Other matters include environmental proceedings and a lawsuit relating to the Lake Winds wind farm. CMS Energy separately disclosed a disputed $142 million Equatorial Guinea tax claim plus penalties and interest, and legacy gas-price-reporting litigation for which potential loss was not estimable; these are parent-company matters, not automatically Consumers liabilities.
- Principal risks: Regulatory decisions and cost recovery, potential changes to Michigan’s electric choice cap, weather and Michigan economic conditions, commodity and fuel supply prices, environmental regulation, generation capacity, major outages, pension/OPEB assumptions, and access to financing. Management identified a possible capacity shortfall of up to 1,500 MW in 2016 following planned unit retirements and potential tightening of the MISO capacity market.
Important facts for investors to verify
- Whether securitization financing was completed on acceptable terms and whether planned retirements and customer savings occurred as described.
- Actual costs, timing, and rate recovery for the $7.1 billion capital program and environmental compliance spending.
- Final regulatory treatment of rates, power-supply costs, and potential changes to Michigan’s electric choice rules.
- Updates to remediation estimates, environmental proceedings, and other contingencies, including the separation of Consumers matters from CMS Energy parent-company exposures.
- Debt maturities, borrowing availability, restricted cash, and the effect of large contractual purchase and PPA commitments on future cash flow.
- Assumptions underlying the substantial OPEB liability reduction and its implications for future benefit costs and funding.