MGE Energy, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited combined filing for MGE Energy and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE). Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | $149.3 | $164.6 | (9.3%) |
| Operating income | $28.4 | $30.9 | (7.9%) |
| Net income attributable to MGE Energy | $16.0 | $17.8 | (9.8%) |
| Diluted EPS | $0.69 | $0.77 | (10.4%) |
| Operating margin | 19.1% | 18.8% | Up 0.3 percentage points |
| Cash provided by operating activities | $24.7 | $38.0 | Down $13.3 |
| Capital expenditures | $15.5 | $9.8 | Up $5.6 |
Revenue and earnings comparisons reflect sharply lower gas sales in a milder winter. Gas revenue fell 26.4% to $57.0 million, while electric revenue rose 4.6% to $89.9 million, mainly due to rates. MGE Energy reported net income of $16.0 million; MGE reported $16.2 million of consolidated net income, of which $10.1 million was attributable to MGE after noncontrolling interests. Dividends declared were $0.383 per share, versus $0.375.
Cash from operations declined primarily because of working-capital differences from the prior-year quarter. Cash and cash equivalents were $40.7 million at March 31, versus $41.2 million at year-end. Current assets were $179.0 million and current liabilities $62.2 million. Long-term debt, including the current portion, was about $362.9 million; long-term debt represented 39.4% of capitalization.
Material changes and operating drivers
- Heating degree days declined 26.1% year over year; retail gas deliveries fell 21.2%. Lower gas volumes and a 6.7% lower average retail rate reduced gas revenue.
- Retail electric sales volume was nearly flat, up 0.3%; electric revenue increased principally from 2012 rate changes. Purchased-power expense rose $2.0 million, partly offset by lower generation fuel expense.
- MGE Energy’s electric utility segment net income rose to $5.4 million from $4.1 million; gas utility segment net income fell to $4.9 million from $8.1 million. Nonregulated energy income was approximately unchanged at $4.5 million.
- Pension and other postretirement plan costs increased, and cash contributions to these plans were $20.8 million, compared with $19.2 million.
Outlook, financing, and notable exposures
- Rates: MGE filed for a 5.8% electric-rate increase and a 2.6% gas-rate increase, requesting an effective date of January 1, 2013. The proposed electric increase is intended to cover Columbia environmental work, Elm Road costs, transmission reliability and purchased power. Separately, 2012 retail rates had been authorized to increase 4.3% for electric and 0.3% for gas.
- Columbia environmental project: MGE estimates its share of scrubbers, bag houses and related work at approximately $140 million, with $43 million expected for the rest of 2012, $68 million in 2013 and $14 million in 2014. At quarter-end, $10.5 million had been spent and $4.0 million accrued but unpaid; MGE’s share of vendor commitments was $109.7 million. Management expects project costs to be recoverable through rates, but estimates and timing may change.
- Environmental and legal risks: Future air- and water-quality rules may increase costs, with some impacts not yet estimable. Columbia faces EPA and Sierra Club Clean Air Act claims concerning past permitting and projects; adverse remedies, penalties or operating restrictions could have a significant effect, and the outcome is uncertain. MGE identifies Columbia construction cost and schedule risks and warns excess costs may not be recoverable.
- Purchased-power agreement: A ten-year contract beginning June 2012 had a $69.0 million fair-value loss at quarter-end, recorded with regulatory deferral. It may require $20–$40 million of collateral if MGE’s debt rating falls below investment grade after purchases begin.
- Financing after quarter-end: MGE issued $28 million of 4.38% senior notes due 2042 and used proceeds plus other funds to retire $28 million of 5.875% debt. A separate $19.3 million bond issue was remarketed at 3.45%, down from 4.875%.
- Liquidity and market risks: Credit lines aggregated $115 million for MGE Energy (including MGE) and $75 million for MGE. Risks include weather, demand, commodity prices, interest rates, pension-asset returns, counterparties, regulation and environmental compliance. No derivative counterparties had defaulted at quarter-end.
- No earnings forecast was provided. Management emphasizes reliable service, cost control, investment in generation and maintaining strong credit standing. The filing states disclosure controls were effective and reports no material change in internal controls during the quarter.
Important facts for investors to verify
- PSCW decisions and timing on the requested 2013 rate increases, and the extent and timing of cost recovery.
- Columbia project cost, schedule, vendor commitments and remaining funding needs, along with the outcome of the permit and Clean Air Act proceedings.
- Whether the mild-winter effect reverses and how weather, customer demand and gas prices affect subsequent results.
- Cash-flow capacity, pension contributions and capital spending relative to the Columbia program and other utility investments.
- The purchased-power agreement’s fair-value assumptions, future cash costs and possible collateral requirements tied to MGE’s credit rating.