MGE Energy, Inc. — 2014 Second-Quarter Form 10-Q
Business context and reporting period. The unaudited report covers the quarter and six months ended June 30, 2014, and includes both MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE). MGE Energy’s principal businesses are regulated electric and gas utilities, nonregulated generation, and its investment in transmission provider ATC. Per-share figures reflect the 2014 three-for-two stock split.
Key financial results
MGE Energy amounts below are consolidated; dollars in millions except per-share data. MGE’s net income attributable to MGE is shown separately because MGE’s consolidated results include noncontrolling interests.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $128.8 | $128.3 | $339.0 | $295.5 |
| Operating income | $24.4 | $24.5 | $68.4 | $62.1 |
| Net income | $14.1 | $13.9 | $41.8 | $36.5 |
| Diluted EPS | $0.41 | $0.40 | $1.21 | $1.05 |
| Dividends per share | $0.272 | $0.263 | $0.543 | $0.527 |
- For the six months, revenue rose 14.7% and net income rose 14.6% year over year. Gas revenue increased 38.5%, largely reflecting higher gas costs passed through under the purchased gas adjustment and colder winter weather; the corresponding cost of gas sold also increased.
- Electric revenue increased 2.7% for the six months, with retail sales volumes up 1.8%. Higher generation costs were partly offset by lower operating and maintenance expense and fuel-rule credits.
- Q2 operating income was nearly unchanged from the prior year despite slightly higher revenue. Management cited higher electric generation fuel expense, offset in part by lower maintenance costs and higher Columbia-project AFUDC equity.
- Six-month operating margin was approximately 20.2%, versus 21.0% in 2013; net margin was approximately 12.3% in both periods.
Cash flow, balance sheet, debt, and liquidity
- For the six months, MGE Energy generated $84.7 million of operating cash flow, used $44.6 million in investing activities, and used $21.0 million in financing activities. Capital expenditures were $42.3 million, down from $63.1 million in the prior-year period, primarily due to lower Columbia environmental-project spending.
- Cash and cash equivalents at June 30 were $87.9 million for MGE Energy and $26.3 million for MGE. MGE Energy reported current assets of $218.8 million and current liabilities of $86.6 million.
- MGE Energy reported $397.3 million of long-term debt, plus $4.1 million due within one year. Long-term debt represented 38.5% of capitalization, compared with 39.5% at year-end 2013. The fair value of debt, including its current portion, was estimated at $444.8 million.
- Credit facilities totaled $150 million for MGE Energy (including MGE) and $100 million for MGE; no borrowings were outstanding at June 30. MGE Energy’s operating cash flow improvement included substantially lower pension contributions than in 2013; it should not be viewed solely as an earnings-driven increase.
Material changes, outlook, and risks
- Rates: MGE requested a 2.8% electric rate increase and a 2.3% gas rate decrease for 2015, followed by a proposed 2016 rate freeze subject to fuel-cost review. The 2014 electric and gas rate freeze remained in effect. Requested rates and recovery remain subject to regulatory approval.
- Environmental investment: Columbia Unit 2 scrubbers and baghouses entered service in April 2014; Unit 1 equipment entered service in July 2014. The consent decree also requires a Unit 2 selective catalytic reduction system by December 31, 2018; MGE’s projected share of its cost is approximately $30–$40 million. Management expects material compliance costs to be recoverable through rates, but recovery and timing are not assured.
- Regulatory uncertainty: CSAPR’s status and compliance deadlines remained unsettled following the Supreme Court’s decision and further court proceedings. EPA’s proposed greenhouse-gas guidelines could affect fossil-fuel generation and future costs; final rules and state plans were not yet available.
- Fuel supply: Coal inventories declined amid rail transportation constraints. At June 30, inventories represented about 24 days at Columbia and 21 days at Elm Road, versus 28 and 40 days, respectively, at year-end. Disruptions could constrain generation or require higher-cost replacement power.
- Other exposures: Results are sensitive to weather, demand, commodity and market prices, regulation, interest rates, pension-asset returns, and counterparty performance. A ten-year purchased-power agreement had a $51.8 million fair-value loss, offset by regulatory accounting; it could require $20–$40 million of collateral if MGE’s debt rating fell below investment grade. No collateral had been posted, and no derivative counterparties had defaulted.
- The company provided no specific earnings guidance in the supplied filing text. Management emphasized reliable service, cost control, investment in generation and transmission, and long-term shareholder value. Management stated that the final water-intake rule was not expected to materially affect existing plants, although requirements at Columbia and Blount remained to be determined through permitting.
Most important facts for investors to verify
- PSCW decisions and timing for the pending 2015 rate application, including proposed transmission-cost escrow treatment.
- Final cost, schedule, and rate recovery for Columbia environmental controls, especially the estimated $30–$40 million MGE share of the Unit 2 SCR system.
- Whether coal transport constraints ease and whether inventory levels support reliable generation without materially higher purchased-power costs.
- How much of the strong six-month cash flow reflects sustainable operations versus the unusually lower pension contributions and working-capital movements.
- Developments in CSAPR, greenhouse-gas and other environmental rules, and the potential effects on costs and operations.