MGE Energy, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This combined filing covers MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE). The 10-K reports full-year results; fourth-quarter figures below are unaudited.
Business context
MGE Energy is a regulated utility holding company serving south-central Wisconsin, with regulated electric and gas operations conducted primarily through MGE. Other businesses include leased generation interests in the Elm Road coal units and West Campus cogeneration facility, and an investment in American Transmission Company (ATC). MGE served approximately 140,000 electric and 145,000 gas customers at year-end.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Operating revenues | $541.3 million | $546.4 million |
| Operating income | $112.8 million | $107.9 million |
| Net income attributable to MGE Energy | $64.4 million | $60.9 million |
| Basic and diluted EPS | $2.79 | $2.64 |
| Cash provided by operating activities | $146.0 million | $130.8 million |
| Capital expenditures | $98.4 million | $65.2 million |
| Cash and cash equivalents, year-end | $46.4 million | $41.2 million |
| Long-term debt, including current maturities | $361.5 million | $363.6 million |
| Common shareholders’ equity | $579.4 million | $551.0 million |
| Dividends declared per share | $1.56 | $1.52 |
Operating margin was approximately 20.8%, up from 19.7%; net margin was approximately 11.9%, up from 11.2%. Year-end current assets were $222.9 million and current liabilities $75.8 million. MGE Energy’s capitalization was 61.6% common equity and 38.4% long-term debt. At year-end, MGE Energy and MGE had no short-term borrowings outstanding; disclosed committed credit facilities were $40 million and $75 million, respectively.
For the fourth quarter, MGE Energy reported revenue of $137.0 million and earnings of $10.5 million, or $0.46 per share, compared with $130.9 million and $9.4 million, or $0.41 per share, in fourth-quarter 2011.
Changes and drivers versus prior year
- Full-year revenue declined about 0.9%, while operating income rose about 4.5% and net income about 5.8%.
- Electric revenue increased 4.4%, principally reflecting the 4.3% 2012 retail rate increase. Retail electric sales volume declined 0.3%; warmer-than-normal cooling weather contributed to higher residential demand.
- Gas revenue fell 15.5%, reflecting a 11.4% lower average retail rate per therm and a 4.8% decline in retail deliveries amid milder winter weather. Lower gas costs also reduced cost of gas sold.
- Lower electric generation fuel costs were partly offset by higher purchased-power expense, including a $6.2 million regulatory deferral of fuel savings for return to customers. Pension-related operating costs increased.
- Operating cash flow increased $15.2 million, aided by lower income taxes and fuel savings to be returned to customers. Capital spending rose substantially, chiefly because of the Columbia environmental project.
- MGE Energy’s nonregulated energy segment earned $18.1 million versus $17.9 million; transmission investment income was $5.4 million versus $5.1 million; gas utility segment income decreased to $5.1 million from $8.4 million.
Outlook, risks, and unusual items
- Rates: The PSCW authorized 2013 retail electric rate increases of 3.8% ($14.9 million) and gas rate increases of 1.0% ($1.6 million). The authorized return on common equity remained 10.3%.
- Columbia environmental project: MGE’s estimated share of the scrubber, baghouse, and related work is approximately $140 million. MGE had accumulated $59.9 million at year-end and expected about $68 million of spending in 2013 and $12 million in 2014. Completion was expected in early 2014. Cost overruns, delays, and rate recovery remain important uncertainties; management expected eligible costs to be recovered through rates.
- Environmental and legal exposure: Air, water, mercury, greenhouse-gas, and other requirements may increase costs or constrain generation. A Columbia Clean Air Act matter was under settlement negotiations; the accrued amount was not material, and management considered a materially greater liability remote based on the discussions then underway. Several regulatory requirements and compliance costs remained uncertain.
- Power contract: The ten-year purchased-power agreement, running from June 2012 through May 2022, had a reported fair-value loss position of $72.6 million at year-end, compared with $39.5 million in 2011. The filing states the contract qualifies for regulatory deferral; actual purchased energy costs are recognized as incurred. A downgrade below investment grade could trigger collateral requirements of $20 million to $40 million; none was posted at year-end.
- Other contingencies: A PJM resettlement refund of $1.2 million received in 2012 could potentially have to be repaid. Arbitration over Elm Road steam-turbine corrosion repairs was scheduled for October 2013; final acceptance of the units remained subject to resolution of disputes.
- Funding and benefits: The 2013 capital budget was $143.2 million. Pension and postretirement contributions were expected to be approximately $32 million in 2013, of which $30 million was paid in January 2013. Weather, commodity costs, regulatory decisions, pension assumptions, construction execution, and access to credit were identified as risk factors.
Management stated that its primary focus was reliable, competitively priced service, controlled operating and fuel costs, and long-term shareholder value. Management and the independent auditor reported effective internal control over financial reporting as of December 31, 2012; the auditor issued unqualified opinions on the consolidated financial statements.
Important facts for investors to verify
- Progress, final cost, schedule, and regulatory recovery for MGE’s share of the Columbia environmental project.
- Whether the Columbia environmental settlement and outstanding air-permit matters were finalized, and whether any liability or required spending changed.
- How the $72.6 million fair-value loss on the long-term power agreement, regulatory deferral, and any collateral provisions develop.
- Actual 2013 rate revenues, electric and gas demand, fuel-rule refunds, and the extent to which earnings depend on weather and rate adjustments.
- Cash generation after capital spending, pension contributions, dividends, and planned debt financing; also confirm the availability and terms of credit facilities.
- Resolution of the Elm Road turbine warranty arbitration and any consequences for costs or unit acceptance.