Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2009, for MGE Energy, Inc. (MGE Energy) and its principal subsidiary, Madison Gas and Electric Company (MGE). MGE Energy is a holding company operating through five segments: electric utility, gas utility, nonregulated energy operations, transmission investments, and all other. MGE serves approximately 138,000 electric customers and 142,000 gas customers primarily in Dane County and surrounding areas of Wisconsin. The company is regulated by the Public Service Commission of Wisconsin (PSCW) and the Federal Energy Regulatory Commission (FERC).
Key Financial Metrics
| Metric (in thousands) | 2009 | 2008 |
|---|---|---|
| Operating Revenues | $533,819 | $595,993 |
| Operating Income | $84,665 | $87,782 |
| Net Income | $50,997 | $52,768 |
| Earnings Per Share (Basic/Diluted) | $2.21 | $2.38 |
| Cash Provided by Operating Activities | $117,909 | $74,712 |
| Capital Expenditures | $77,929 | $105,777 |
| Total Assets | $1,281,885 | $1,268,275 |
| Long-Term Debt | $320,942 | $272,408 |
| Short-Term Debt | $64,500 | $124,500 |
| Common Shareholders' Equity | $501,795 | $478,202 |
Segment Performance (Net Income): Electric Utility ($23.9M), Gas Utility ($9.9M), Nonregulated Energy ($11.1M), Transmission Investments ($4.9M), All Other ($1.2M).
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 10.4% to $533.8 million. Electric revenues fell 3.9% due to cooler-than-normal weather (32% decrease in cooling degree days) and reduced economic activity. Gas revenues dropped 20.7% primarily due to significantly lower natural gas commodity costs passed through to customers.
- Profitability: Net income decreased 3.4% to $51.0 million. Despite lower revenues, operating expenses decreased due to lower fuel costs and reduced internal generation.
- Cash Flow Improvement: Cash provided by operating activities increased 57.8% to $117.9 million, driven by favorable working capital changes, including decreased inventory and lower accounts receivable.
- Capital Spending: Capital expenditures decreased 26.4% to $77.9 million, reflecting lower construction activity on the Elm Road Units and the completion of the Top of Iowa III wind project in the prior year.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance
Management expects 2010 capital expenditures to be approximately $76.6 million. The company anticipates lower borrowing needs in 2010 following the commercial operation of Elm Road Unit 1 and the issuance of $50 million in senior secured notes in February 2010. A 3.3% increase in retail electric rates and a 0.74% decrease in gas rates were authorized by the PSCW for 2010.
Risks and Contingencies
- Environmental Compliance: Significant uncertainty exists regarding future costs for air quality regulations (CAIR, MACT, Mercury rules) and water quality standards. An emissions reduction project at the Columbia plant is estimated to require $140 million in capital expenditures (MGE's share), expected to be recoverable in rates.
- Legal Proceedings: The EPA issued a Notice of Violation (NOV) to the owners of the Columbia plant regarding New Source Review requirements. Potential penalties could reach $37,500 per day per violation, though the company intends to defend the allegations.
- Construction Risk: The Elm Road Unit 2 is under construction with a target commercial operation date of August 2010. A settlement with the general contractor (Bechtel) resulted in a $5.4 million cost increase for MGE Energy and schedule extensions.
- Regulatory Risk: The company faces risks related to the recovery of fuel and purchased power costs if they exceed base rates, and potential changes in rate-making methodologies.
Unusual Items
In 2009, the company recognized a $4.1 million fuel credit to customers due to lower-than-expected fuel costs. Additionally, a $5.7 million fuel refund from 2008 was applied to customer accounts in March 2009.
Investor Verification Checklist
- Elm Road Project Status: Verify the commercial operation dates for Unit 1 (Feb 2010) and Unit 2 (Aug 2010) and the impact of the Bechtel settlement on final costs.
- Environmental Capital Expenditures: Monitor the PSCW decision on the Columbia emissions reduction project and the final cost estimates for compliance with CAIR and Mercury rules.
- Legal Outcomes: Track the resolution of the EPA Notice of Violation regarding the Columbia plant and the Sierra Club lawsuit.
- Weather Sensitivity: Assess the impact of weather normalization on 2010 electric and gas sales volumes compared to the cool 2009 summer and mild 2009 winter.
- Debt Refinancing: Confirm the terms of credit facility renewals expiring in 2010 and the impact of the new $50 million senior secured notes on the capital structure.