MGE Energy, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 26, 2015. Although the request refers to 2014 Q4, this is an annual filing. The filing covers MGE Energy and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE); MGE represents most of the consolidated business.
Business context and financial performance
MGE Energy is a regulated Wisconsin electric and gas utility holding company, with additional nonregulated generation interests and a 3.6% investment in American Transmission Company (ATC). Its electric and gas utilities serve approximately 143,000 and 149,000 customers, respectively.
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $619.9 million | $590.9 million | +4.9% |
| Operating income | $138.1 million | $128.0 million | +7.9% |
| Net income | $80.3 million | $74.9 million | +7.2% |
| Basic and diluted EPS | $2.32 | $2.16 | +7.4% |
| Operating margin | 22.3% | 21.7% | +0.6 percentage points |
| Net margin | 13.0% | 12.7% | +0.3 percentage points |
| Operating cash flow | $128.8 million | $140.3 million | −8.2% |
| Capital expenditures | $92.7 million | $119.0 million | −22.2% |
| Cash and cash equivalents, year-end | $65.8 million | $68.8 million | −$3.1 million |
2014 fourth-quarter unaudited results were revenue of $145.7 million, earnings of $15.2 million, and EPS of $0.44. The comparable 2013 quarter reported revenue of $155.3 million, earnings of $14.1 million, and EPS of $0.41.
Revenue, segment results, and material changes
- Regulated electric revenue declined 2.3% to $394.8 million. Retail electric sales volume fell 0.5%, while a $6.5 million customer fuel credit and lower demand-related revenues also weighed on sales. Electric segment net income rose to $41.4 million from $36.7 million, primarily on lower operating and maintenance expense.
- Regulated gas revenue increased 22.2% to $221.7 million, mainly reflecting higher gas commodity costs passed through under the purchased gas adjustment and a 4.8% increase in retail deliveries amid colder winter weather. Gas segment net income rose to $15.8 million from $13.4 million.
- Nonregulated energy segment net income fell to $19.3 million from $20.7 million. 2013 benefited from a one-time cumulative recovery of earlier Elm Road force majeure costs.
- ATC-related transmission investment segment net income was $5.5 million, versus $5.6 million. ATC contributed approximately 6.7% of MGE Energy net income in 2014.
- Operating cash flow decreased despite higher earnings, principally because of increased taxes paid and working-capital needs. Lower pension contributions provided a partial offset. Cash flow less capital expenditures was approximately $36.1 million in 2014.
Debt, liquidity, and capital
- At year-end, MGE Energy reported $399.4 million of long-term debt, including current maturities, and $7.0 million of short-term debt. Common shareholders’ equity was $659.4 million. The reported capitalization mix was 61.9% equity, 37.5% long-term debt, and 0.6% short-term debt.
- Cash was $65.8 million at MGE Energy and $4.6 million at MGE. Credit agreements totaled $150 million; $7.0 million of MGE commercial paper was outstanding, leaving $143 million of available capacity. Both registrants were within their 65% debt-to-capitalization covenant limits.
- MGE Energy declared dividends of $1.11 per share for 2014, up from $1.07. MGE’s dividend payments to its parent were $26.5 million. MGE’s regulatory dividend restriction requires a common equity ratio of at least 55%; its reported 13-month average was 56.9%.
- 2015 budgeted capital expenditures are $86.7 million, including $61.6 million for electric and $21.9 million for gas operations.
Outlook, management commentary, risks, and unusual items
- The PSCW approved a 3.8% increase in 2015 retail electric rates, or $15.4 million, and a 2.0% reduction in gas rates, or $3.8 million. The authorized return on common equity is 10.2%. Revised gas rate design increases fixed customer charges and reduces weather sensitivity; management also expects gas earnings to be spread more evenly through the year.
- Management gave no specific 2015 earnings or revenue guidance. It identified customer demand, weather, economic conditions, commodity prices, regulatory decisions, environmental rules, and pension costs as important uncertainties.
- Columbia’s scrubbers and baghouses entered service in 2014. Under an environmental consent decree, Columbia Unit 2 must receive a selective catalytic reduction system by December 31, 2018; MGE’s projected share is approximately $30–$40 million. Management expects project costs to be recoverable through rates.
- Proposed federal greenhouse-gas rules were expected to have a material impact on MGE, but their final terms and compliance costs were uncertain. Potential coal-ash and wastewater requirements also remained under evaluation; the filing does not provide a clear cost estimate. Management expects applicable compliance costs generally to be sought for recovery in rates.
- FERC proceedings could reduce ATC’s allowed return on equity. A formal hearing was underway, with an initial decision expected by November 30, 2015; ATC had recorded an estimated refund liability for the period beginning November 2013.
- The ten-year purchased power agreement had a reported fair-value loss of $53.4 million at year-end, offset for regulatory accounting by a regulatory asset/liability treatment. The agreement may require $20–$40 million of collateral if MGE’s debt rating falls below investment grade; none was posted at year-end.
- Pension and other postretirement benefit obligations were sensitive to discount rates and investment returns. Combined funded deficits were approximately $91.2 million at year-end, and $10 million of qualified-plan contributions for 2015 had been paid in January 2015.
- Management reported effective internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Track 2015 rate implementation, actual electric and gas demand, and whether the revised gas rate design reduces weather-driven earnings volatility.
- Confirm the timing, MGE share, rate recovery, and total funding needs for the Columbia SCR system and any new coal-ash, water, or greenhouse-gas compliance obligations.
- Monitor the FERC/ATC return-on-equity proceedings and any resulting refund or earnings effects.
- Review the $53.4 million purchased power agreement fair-value loss, regulatory deferral, collateral triggers, and key valuation assumptions.
- Assess cash generation relative to capital spending, debt maturities, pension contributions, and the utility’s regulatory dividend threshold.