MGE Energy, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. MGE Energy is a Wisconsin utility holding company; its wholly owned subsidiary Madison Gas and Electric (MGE) conducts the regulated electric and gas operations and represents most of the consolidated business. Figures below are primarily for MGE Energy consolidated unless identified otherwise.
Financial performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $544.7 million | $564.0 million | Down 3.4% |
| Operating income | $128.2 million | $124.3 million | Up 3.2% |
| Net income | $75.6 million | $71.3 million | Up 5.9% |
| Diluted earnings per share | $2.18 | $2.06 | Up 5.8% |
| Cash from operating activities | $147.5 million | $141.2 million | Up $6.3 million |
| Capital expenditures | $83.7 million | $72.0 million | Up $11.6 million |
| Cash dividends per share declared | $1.21 | $1.16 | Up 4.3% |
- Electric revenue was $410.2 million, down 2.4%; gas revenue was $134.5 million, down 6.4%. Lower gas commodity costs reduced reported gas revenue and related costs, with PGA pass-through changes not affecting net income.
- Operating expenses fell to $416.5 million from $439.8 million, largely reflecting lower purchased-power and gas costs; internal electric-generation fuel expense increased. Operating margin was approximately 23.5%, versus 22.0% in 2015.
- Electric utility segment net income increased to $40.6 million from $36.4 million, helped by a 5.4% rise in residential electric sales amid more favorable weather. Gas utility earnings were $10.6 million, little changed. Nonregulated energy earnings declined to $19.1 million from $20.1 million as recovery of construction carrying costs ended in 2015. Transmission investment earnings rose to $5.6 million from $4.6 million.
- MGE reported $51.2 million of net income attributable to MGE, compared with $45.4 million in 2015. This is distinct from MGE Energy’s $75.6 million consolidated net income, which includes subsidiary earnings.
Cash, debt and liquidity
- At year-end, MGE Energy had $96.0 million in cash, $1.80 billion in total assets, $724.1 million in common equity, and $387.1 million in long-term debt. Capitalization was 65.2% equity and 34.8% long-term debt.
- Operating cash flow less capital expenditures was approximately $63.9 million. Cash provided by investing activities was negative $86.8 million; financing activities used $46.1 million.
- MGE Energy had a $50 million revolving credit facility available; MGE had $100 million available. Neither had borrowings or commercial paper outstanding at year-end. Debt-to-capital ratios under the credit agreements were 34.8% for MGE Energy and 36.5% for MGE, below the 65% covenant limit.
- Combined contractual obligations were substantial: MGE Energy disclosed $1.14 billion, including purchase obligations and scheduled debt interest. These totals include long-term commitments and are not equivalent to balance-sheet debt.
Outlook, developments and risks
- For 2017, the PSCW authorized a 0.8% ($3.3 million) electric rate decrease and a 1.9% ($3.1 million) gas rate increase, with an authorized 9.8% return on equity on a 57.2% common-equity ratio. Transmission-cost accounting treatment was extended through 2018.
- Management forecast capital expenditures of $114.2 million for 2017 and an annual average of $119.2 million for 2018–2020. These estimates depend on environmental requirements, load growth and rate recovery. MGE also planned to issue $30 million of additional long-term debt in 2017; in January 2017 it issued $40 million of 35-year debt at 3.76%, refinancing $30 million of maturing notes and supporting capital spending.
- MGE began reducing its Columbia coal-plant ownership from 22.0%: it fell to 20.4% in January 2017 and was forecast at approximately 19% by June 2020. MGE may acquire up to 50 MW of capacity at a planned gas-fired Riverside plant. A proposed 66 MW Iowa wind farm had an estimated cost of $107 million, subject to regulatory approval.
- A large industrial customer expected to close its local facilities in early 2017 contributed approximately $3.4 million of pre-tax earnings in 2016. MGE addressed the expected closure in its rate case.
- Environmental exposure includes MGE’s estimated $22–$24 million share of the Columbia Unit 2 SCR installation, expected by year-end 2018. Future costs for air, water and coal-ash rules remain uncertain. Management expects to seek rate recovery, but timing and amount are not assured. The Clean Power Plan was stayed pending litigation; management said it could materially affect MGE if implemented substantially as written. Updated CSAPR allowance requirements could also be material.
- ATC return-on-equity proceedings could reduce future equity earnings and distributions; MGE Energy derived about 6.8% of 2016 net income from its ATC investment. Other key risks include weather, fuel and power prices, generation and transmission availability, pension assumptions, cyber incidents and regulatory recovery.
- A purchased-power agreement had a $50.6 million fair-value loss at year-end, recorded with regulatory deferral; actual costs are recognized as power is purchased. The filing reported no derivative-counterparty defaults. Management stated that liquidity was adequate for operations and capital needs over the next 12 months.
Important facts for investors to verify
- Track actual earnings and customer impacts after the 2017 industrial-customer closure and electric rate decrease.
- Confirm Columbia ownership-sale timing, proceeds and remaining environmental obligations, including the SCR project.
- Assess whether projected capital spending, the proposed wind project and potential Riverside capacity lead to additional financing or rate recovery.
- Monitor PSCW fuel-cost reconciliation and customer refunds, and FERC decisions affecting ATC’s allowed return on equity.
- Review subsequent environmental rulemaking and litigation, and the company’s assumptions for pension funding and the fair value of the purchased-power agreement.