MGE Energy, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. This combined filing covers MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE). MGE Energy is a regulated electric and gas utility holding company with nonregulated generation and transmission investments; MGE accounts for most consolidated operations.
Financial performance
Amounts below are MGE Energy consolidated unless noted; dollars in millions except per-share data.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $133.6 | $127.9 | $415.4 | $396.7 |
| Operating income | $36.3 | $34.4 | $90.4 | $76.2 |
| Net income | $21.0 | $19.9 | $51.5 | $45.7 |
| Diluted EPS | $0.91 | $0.86 | $2.23 | $1.98 |
| Dividend per share | $0.383 | $0.375 | $1.133 | $1.112 |
- Revenue rose 4.4% in Q3 and 4.7% year to date. Operating income increased about 5.8% and 18.6%, respectively; operating margin was approximately 27.2% for Q3 and 21.8% year to date, versus 26.9% and 19.2% in 2010.
- Management attributed earnings growth to higher electric revenue and lower electric operations and maintenance costs, plus greater nonregulated generation income as Elm Road Unit 2 entered service in January 2011. Year-to-date gas deliveries also benefited from a colder winter. The prior-year comparison included a $2.6 million pretax gain on a property sale to ATC.
- Cash flow, nine months: Operating cash flow was $106.5 million versus $97.4 million; capital expenditures were $44.9 million versus $43.2 million. Cash increased to $44.9 million from $7.1 million at year-end 2010. Higher earnings and lower taxes paid helped operating cash flow; increased pension contributions partly offset the improvement.
- Liquidity and debt: Current assets were $173.7 million and current liabilities $52.5 million at September 30. MGE Energy reported $361.6 million of long-term debt and $2.7 million due within one year; short-term debt was zero. Its capitalization was 60.2% common equity and 39.8% long-term debt. MGE Energy had a $40 million revolving facility and MGE a $75 million facility; neither had borrowings/commercial paper outstanding at quarter-end, respectively. Facilities were extended to July 31, 2015.
- MGE Energy net income includes consolidated operations; MGE reported $21.1 million consolidated net income in Q3 and $51.8 million year to date, of which $15.1 million and $33.8 million, respectively, were attributable to MGE after noncontrolling interests.
Material changes and outlook
- MGE requested 2012 rate changes effective January 1: a 5.7% electric increase and a 0.4% gas increase, including updated fuel, purchased-power, transmission, Elm Road, and energy-efficiency costs. It also sought deferral of CSAPR-related costs. These were requests, not approved rates in this filing.
- MGE estimated CSAPR compliance could increase fuel costs by as much as $14.5 million in 2012. It expected to seek rate recovery, but regulatory timing and recovery were uncertain.
- MGE’s estimated share of Columbia air-emission control investment was approximately $140 million, with planned spending of $5 million for the remainder of 2011, $53 million in 2012, $68 million in 2013, and $13 million in 2014. Management expected recovery through rates. The Columbia owners also faced potential allowance shortages and possible generation reductions before planned controls are completed.
- EPA and state environmental requirements—including air, water, cooling-water, and greenhouse-gas rules—could raise operating and capital costs. MGE said costs and impacts could not yet be estimated for several proposed or pending rules.
- MGE and co-owners were defending Columbia Clean Air Act allegations and litigation. Potential penalties or injunctive remedies could have a significant effect; management could not predict the outcome. Other environmental contingencies included Superfund cleanup and pending water-permit determinations.
- MISO determined that 90 MW at Blount were no longer needed for reliability; MGE expected to reduce capacity and transition the station to natural gas by year-end 2011, earlier than its prior 2013 estimate. Approximately $0.4 million of severance benefits were expected in 2011 and would not be sought for rate recovery.
- After quarter-end, MF Global-affiliated entities filed for bankruptcy and the CME froze related accounts. MGE had approximately $3.3 million in a customer-segregated margin account at MF Global as of October 31, 2011; the ultimate impact and any regulatory recovery were uncertain.
- In August 2011, MGE Energy terminated two Iowa wind development agreements. The $2.0 million paid was to be returned; $1.8 million remained outstanding at September 30, with expected receipts split between year-end 2011 and year-end 2012.
Key facts for investors to verify
- Progress and final approval of the 2012 rate reopener, including recovery of environmental and CSAPR costs.
- Actual Columbia project spending, allowance availability, schedule, and litigation or permit outcomes.
- Recoverability of the $3.3 million MF Global margin balance and any associated loss.
- Operating and financial effects of the Blount transition and continued Elm Road performance.
- Collection of the outstanding Iowa wind-rights refund and the timing and cost of remaining capital commitments.