MGE Energy, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. The combined filing reports MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE); MGE’s results include consolidated generation entities and noncontrolling interests. Unless noted, figures below are for MGE Energy consolidated and are in millions of dollars.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $109.1 | $107.6 | $268.7 | $288.7 |
| Operating income | $20.1 | $16.7 | $41.9 | $41.0 |
| Net income | $11.6 | $9.9 | $25.8 | $24.8 |
| EPS, basic and diluted | $0.50 | $0.43 | $1.12 | $1.08 |
| Operating margin | 18.4% | 15.5% | 15.6% | 14.2% |
| Net margin | 10.6% | 9.2% | 9.6% | 8.6% |
Six-month operating cash flow was $64.4 million, down from $82.6 million; investing used $26.8 million, including $28.6 million of capital expenditures; financing used $28.6 million. Cash ended June at $13.8 million, versus $4.7 million at year-end 2009. Dividends paid were $17.0 million; declared dividends were $0.737 per share for the half-year.
At June 30, MGE Energy had $54.5 million of short-term debt and $320.1 million of long-term debt, including $1.7 million due within one year; shareholders’ equity was $510.5 million. Current assets were $143.0 million and current liabilities $110.1 million. MGE Energy’s reported capitalization mix was 57.6% equity, 36.3% long-term debt, and 6.1% short-term debt.
Material changes versus the prior comparable period
- Second-quarter earnings rose to $11.6 million from $9.9 million, supported by 7.7% higher electric revenue and warmer weather: cooling degree days increased 38.4%. Elm Road Unit 1 began commercial operation in February, reducing purchased-power expense.
- Six-month revenue fell 6.9%, principally as gas revenue declined 21.2% amid milder winter weather, lower gas prices, and lower deliveries. Gas utility earnings also lacked the $1.9 million pretax GCIM benefit recorded in 2009.
- Six-month net income increased modestly, including a one-time $2.6 million pretax gain on land sold to ATC. Higher nonregulated energy earnings reflected Elm Road Unit 1 operations.
- MGE’s six-month net income attributable to MGE (after noncontrolling interests) decreased to $16.0 million from $17.4 million, despite consolidated MGE net income increasing to $25.9 million from $24.3 million.
Outlook, risks, contingencies, and unusual items
- MGE requested PSCW approval for 2011 rate increases of 9.4% for electric service and 2.0% for gas service, targeted for January 1, 2011. No earnings guidance was provided.
- Elm Road Unit 2 was expected to enter commercial operation in Q4 2010, with a contractual in-service date of November 28. The estimated MGE share of capital costs for both Elm Road units was approximately $180 million, excluding capitalized interest.
- MGE estimated its share of Columbia emissions-reduction project capital expenditures at approximately $140 million, expected to be recoverable through rates. Columbia also faced Clean Air Act allegations and an EPA notice of violation; MGE had recorded no related loss contingency at June 30. Potential penalties, injunctive relief, and additional operating or capital costs remained uncertain.
- Pending air- and water-quality requirements, including thermal discharge, phosphorus, mercury, coal ash, and greenhouse-gas rules, could require additional spending; management said impacts could not yet be estimated for several initiatives. Management expects to seek rate recovery of compliance costs, but recovery and timing are uncertain.
- On July 30, 2010, MGE Energy entered a $40 million revolving credit facility and MGE entered a $75 million facility, both expiring in 2013. MGE’s facility remained subject to PSCW approval. No borrowings were outstanding under either facility on that date.
- MGE Power Elm Road issued $50 million of 5.04% secured notes due 2040 to refinance construction-related short-term borrowing; it was compliant with its 1.25-to-1.00 debt-service coverage covenant at June 30. A 10-year power purchase agreement had a $17.9 million fair-value loss position, deferred through regulatory accounting; it may require $20–$40 million of collateral if MGE’s rating falls below investment grade once purchases begin in 2012.
- Other exposures include a $1.9 million liability for uncertainty over the tax accounting method for repairs, a $1.5 million accrual for other legal matters, and pension and postretirement obligations. The Blount primary-fuel switch from coal to natural gas occurred in March; management expected coal use to end by 2011, while full-capacity availability could be required until MISO releases 90 MW, currently estimated for 2013.
Important facts for investors to verify
- Track PSCW decisions on the requested 2011 rates, Columbia environmental project, and MGE credit facility approval.
- Verify Elm Road Unit 2’s completion date, final project costs, and rate treatment of construction and operating costs.
- Monitor the Columbia permit and Clean Air Act proceedings, including any settlement, remediation, or penalty exposure; no related contingency was accrued at June 30.
- Assess cash generation against capital requirements, debt maturities, and dividend payments, and note the decline in six-month operating cash flow.
- Review environmental rulemaking and the potential for capital or operating costs and regulatory recovery, which the filing says are not yet reliably quantifiable in several cases.