MGE Energy, Inc. — 2013 Form 10-K Summary
Business context and reporting period. This combined filing covers the fiscal year ended December 31, 2013, and reports both MGE Energy, Inc. and its wholly owned regulated utility subsidiary, Madison Gas and Electric Company (MGE). MGE Energy’s principal business is regulated electric and natural gas service in south-central Wisconsin; other operations include generation assets leased to MGE and an investment in American Transmission Company (ATC). Although the request identifies 2013 Q4, this 10-K presents full-year results; the filing also provides unaudited fourth-quarter figures. Per-share amounts reflect the three-for-two stock split distributed in February 2014.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenue | $590.9 million | $541.3 million |
| Operating income | $128.0 million | $112.8 million |
| Net income attributable to MGE Energy | $74.9 million | $64.4 million |
| Basic and diluted EPS | $2.16 | $1.86 |
| Operating margin | 21.7% | 20.8% |
| Net margin | 12.7% | 11.9% |
| Cash from operating activities | $140.3 million | $146.0 million |
| Capital expenditures | $119.0 million | $98.4 million |
| Cash and cash equivalents, year-end | $68.8 million | $46.4 million |
| Long-term debt, including current maturities | $403.5 million | $361.5 million |
| Common shareholders’ equity | $617.5 million | $579.4 million |
Operating cash flow less capital expenditures was approximately $21.2 million in 2013. MGE Energy’s current assets were $220.6 million and current liabilities were $96.7 million at year-end. It had $50 million of committed credit capacity; MGE had a separate $100 million facility. Neither facility had borrowings outstanding at December 31, 2013. MGE Energy’s reported capitalization mix was 60.5% common equity and 39.5% long-term debt.
Revenue increased approximately 9.2% and net income approximately 16.2% year over year. Electric revenue rose 3.0%, principally from a 3.8% retail rate increase effective January 2013, while retail electric sales volume fell 0.8%. Gas revenue rose 29.9% as retail deliveries increased 27.1% amid colder weather. The average heating degree days were 27.9% higher than in 2012. MGE Energy declared $1.07 per share in dividends, up from $1.04. Fourth-quarter 2013 earnings were $14.1 million, or $0.41 per share, compared with $10.5 million, or $0.30 per share, in fourth-quarter 2012.
Material changes and operating drivers
- Electric utility segment net income was $36.7 million, essentially unchanged from 2012. Lower retail volume due to more normal weather was offset by rate increases and other items, including $2.7 million after tax of AFUDC equity related to the Columbia environmental project.
- Gas utility segment net income increased to $13.4 million from $5.1 million, supported by colder weather and lower operating and maintenance costs. Higher gas deliveries and commodity costs increased both revenue and cost of gas sold.
- Nonregulated energy segment net income increased to $20.7 million from $18.1 million, primarily reflecting approved recovery of Elm Road force majeure construction costs beginning in 2013. ATC-related transmission investment income was $5.6 million versus $5.4 million.
- Operating cash flow declined $5.7 million, in part due to a $6.8 million debt make-whole premium and higher pension contributions. Capital expenditures rose $20.6 million, largely because of Columbia environmental work.
- Long-term debt increased as MGE issued $85 million of debt, including notes bearing 3.09% and 3.29% due in 2023 and 2026, and refinanced or redeemed $40 million of existing debt.
Outlook, risks, contingencies, and unusual items
- Rates and 2014 outlook: The PSCW authorized an electric and gas rate freeze at 2013 levels for 2014. The authorized return on equity remained 10.3%. Approximately $6.2 million of a prior fuel-rule surplus credit will not be refunded and is to be amortized in 2014. The 2014 capital expenditure budget is $86.6 million, including approximately $14 million for Columbia.
- Columbia environmental work: MGE’s estimated share of the scrubber, baghouse, and related project is approximately $135 million; $120.9 million had been accumulated through year-end 2013, excluding carrying costs. Completion was expected in mid-2014. A consent decree also requires an SCR system at Columbia Unit 2 by December 31, 2018; MGE’s share of the projected cost was estimated at $50–$60 million. MGE expects material compliance costs to be recoverable in rates, but project costs and recovery remain subject to execution and regulatory risk.
- Other environmental and regulatory uncertainty: Potential rules for greenhouse gas emissions, water discharges, cooling-water intakes, air quality, and coal combustion byproducts could raise operating or capital costs. The filing says some impacts cannot yet be estimated because rules were not final. The EPA/Sierra Club Columbia claims were resolved by a consent decree without admission of liability; MGE paid approximately $0.2 million as its share of a civil penalty and committed to approximately $0.6 million of mitigation projects.
- Commodity and weather exposure: Unusually cold weather early in 2014 had increased natural gas and purchased-power prices. Gas costs are generally passed through the PGA, while electric fuel-cost recovery is subject to PSCW rules with a plus-or-minus 2% tolerance band; MGE bears variances within the band.
- Derivative and pension items: The ten-year purchased-power agreement had a $65.7 million fair-value loss at year-end, offset by regulatory accounting treatment. Pension and postretirement funded status improved substantially in 2013, reflecting asset returns and actuarial changes, but benefit costs remain sensitive to investment returns and discount rates. Management did not expect the reported market and interest-rate changes through February 2014 to affect 2014 income, though they could raise future benefit costs.
- Dividend and financing constraints: MGE’s regulatory dividend restriction applies if its rate-case common-equity ratio falls below 55%; its reported rolling average was 57.6% at year-end. Credit agreements also impose debt-to-capitalization limits. MGE was in compliance with applicable debt covenants.
- Other risks: Management identifies extensive utility regulation, generation and transmission availability, construction overruns, cyber incidents, counterparty performance, credit-market access, and reliance on subsidiary cash flows to fund parent dividends as risks.
Most important facts for investors to verify
- Whether the Columbia scrubber and baghouse project was completed on schedule and within the estimated $135 million MGE share, and whether rate recovery proceeds as expected.
- The final cost, schedule, and rate treatment for the Columbia Unit 2 SCR requirement, currently estimated at $50–$60 million for MGE.
- How the 2014 rate freeze, $6.2 million fuel-credit amortization, and fuel-rule deferrals affect earnings and customer refunds or charges.
- Whether operating cash flow continues to cover capital spending and dividends as debt and environmental investment rise.
- Developments in environmental rules, the Columbia consent decree, and the FERC complaint seeking lower MISO/ATC transmission returns on equity.
- Whether cold-weather commodity costs, pension assumptions, and the purchased-power agreement’s fair value lead to material future costs despite regulatory deferrals.