MGE Energy, Inc. — 2015 Form 10-K
Business context and reporting period. This is a combined annual report for MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE), for the fiscal year ended December 31, 2015. MGE Energy operates regulated electric and gas utilities, nonregulated generation interests, and a 3.6% investment in American Transmission Company (ATC). The filing includes fourth-quarter results but is not a quarterly report.
Key financial results
| Metric | 2015 | 2014 |
|---|---|---|
| Operating revenue | $564.0 million | $619.9 million |
| Operating income | $124.3 million | $138.1 million |
| Operating margin | 22.0% | 22.3% |
| Net income | $71.3 million | $80.3 million |
| Diluted EPS | $2.06 | $2.32 |
| Operating cash flow | $141.2 million | $128.8 million |
| Capital expenditures | $72.0 million | $92.7 million |
| Cash and cash equivalents at year-end | $81.4 million | $65.8 million |
| Long-term debt, including current maturities | $395.3 million | $399.4 million |
Current assets were $254.8 million and current liabilities $84.1 million, implying working capital of about $170.6 million and a current ratio of approximately 3.0. There was no short-term debt at year-end. MGE Energy and MGE had $50 million and $100 million of committed credit facilities, respectively, with no outstanding borrowings; covenant debt-to-capitalization ratios were 36.4% and 36.1%, as calculated under the agreements. MGE Energy’s equity was $690.5 million. The annual dividend was $1.16 per share, up from $1.11.
Fourth-quarter MGE Energy earnings were $11.2 million, or $0.32 per share, compared with $15.2 million, or $0.44 per share, in fourth-quarter 2014.
Material changes versus the prior year
- Revenue fell 9.0% and net income fell 11.2%. Lower gas sales and commodity costs drove much of the revenue decline; natural gas revenue is largely pass-through under the purchased gas adjustment and does not directly determine net income.
- Regulated electric revenue rose 4.5% to $412.5 million, mainly reflecting 2015 rate increases. Retail electric sales volume declined 0.3%; electric segment net income fell to $36.4 million from $41.4 million, reflecting lower AFUDC, higher depreciation after Columbia environmental equipment entered service, and slightly lower sales.
- Regulated gas revenue declined 35.2% to $143.7 million, and retail gas deliveries fell 27.0%. Warmer winter weather than in 2014 and a large commercial customer’s switch to third-party gas supply contributed. Gas segment net income fell to $10.4 million from $15.8 million.
- Nonregulated energy segment net income increased to $20.1 million from $19.3 million. ATC investment income declined to $4.6 million from $5.5 million, including the effect of ATC’s estimated refund liability in return-on-equity proceedings.
- Operating cash flow increased 9.7% despite lower earnings, aided by working-capital movements and a $10 million IRS refund; pension contributions increased to $13.7 million from $3.3 million. Capital expenditures declined as Columbia environmental project spending tapered.
Outlook, risks, and contingencies
- Rates and fuel: 2015 rates included a 3.8% electric increase and a 2.0% gas decrease. MGE returned $2.6 million of fuel savings to electric customers in 2015 and reported a $9.5 million year-end regulatory liability for deferred fuel savings. The PSCW’s annual review was expected in 2016; the filing also describes $11.6 million of 2015 fuel-related savings deferred in expense discussions.
- Capital plan: Forecast capital expenditures are $91.2 million for 2016 and average $101.2 million annually for 2017–2019. Forecasts depend on environmental requirements, load growth, and rate recovery and may change.
- Generation plans: MGE was negotiating a possible arrangement with Alliant Energy to reduce its Columbia coal ownership and potentially acquire up to 50 MW of capacity in the proposed Riverside natural-gas project. This was not a completed commitment in the filing.
- Customer departure: A large industrial customer planned to close local facilities in early 2017. It contributed approximately $3.8 million of 2015 pretax earnings; curtailment could affect 2016 revenue, and management expected to address the closure in a future rate request.
- Environmental exposure: MGE’s estimated share of Columbia Unit 2’s required SCR system is $19–$29 million, with installation due by December 31, 2018. New wastewater rules may require equipment upgrades, with costs not yet estimable. The proposed CSAPR update could have material effects. The Clean Power Plan was stayed by the Supreme Court in February 2016 pending litigation; management said it could materially affect MGE if upheld substantially as written. Management expects to seek rate recovery of compliance costs, but timing and recovery are uncertain.
- Other contingencies: ATC faced proceedings that could reduce its allowed return on equity and future earnings or distributions. MGE also reported the Columbia Clean Air Act consent decree, without admitting liability, and other routine legal matters; accrued amounts for other legal matters were not material.
- Management commentary: Management emphasized reliable service, competitive prices, cost control, and long-term shareholder value. Its Energy 2030 framework aims for renewables of 25% of retail electric sales by 2025 and 30% by 2030, and a 40% reduction in CO₂ emissions from 2005 levels by 2030.
No formal earnings guidance was provided in the supplied filing text. Management said liquidity was adequate for the next 12 months. Independent auditors gave unqualified opinions on the financial statements; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Track the PSCW’s fuel-cost review and clarify the filing’s different stated amounts for 2015 fuel savings deferred.
- Confirm the outcome and cost allocation of Columbia SCR work, other environmental rules, and any rate recovery.
- Monitor the industrial customer’s closure schedule and the effect on earnings and future rate applications.
- Verify whether the proposed Alliant/Riverside and Columbia ownership arrangements proceed, and their capital and earnings effects.
- Follow ATC return-on-equity proceedings and assess potential impacts on MGE Energy’s equity earnings and distributions.