MGE Energy, Inc. — Q3 2010 Form 10-Q
Business context and period. Combined unaudited quarterly report for MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE), for the quarter and nine months ended September 30, 2010. MGE supplies electricity and natural gas in Wisconsin; MGE Energy also owns generation-related subsidiaries and an investment in transmission operator ATC. Unless indicated otherwise, financial figures below are for MGE Energy consolidated.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $127.9 million | $109.3 million | $396.7 million | $398.0 million |
| Operating income | $34.4 million | $21.1 million | $76.2 million | $62.1 million |
| Net income | $19.9 million | $12.7 million | $45.7 million | $37.6 million |
| EPS, basic and diluted | $0.86 | $0.55 | $1.98 | $1.63 |
| Dividends per share | $0.375 | $0.368 | $1.112 | $1.092 |
Operating margin was approximately 26.9% for Q3 versus 19.3% a year earlier, and 19.2% for the nine-month period versus 15.6%. Nine-month revenue was nearly flat, while operating income and net income increased. The filing does not provide a separate reported cash-flow margin.
- Cash flow, nine months: Operating cash flow was $97.4 million, down from $104.2 million; capital expenditures were $43.2 million, down from $54.1 million. Investing used $40.7 million and financing used $43.8 million. Cash increased $12.8 million to $17.5 million.
- Debt and liquidity at September 30: Short-term debt was $48.5 million and long-term debt, including current maturities, was approximately $321.4 million. Cash was $17.5 million. Current assets of $150.3 million exceeded current liabilities of $102.4 million. MGE Energy reported capitalization of 58.5% equity, 36.1% long-term debt and 5.4% short-term debt.
- Financing: MGE Power Elm Road issued $50 million of 5.04% senior secured notes due 2040 and used the proceeds to repay short-term borrowings. New revolving facilities provide $40 million to MGE Energy and $75 million to MGE, both expiring in 2013. The companies reported compliance with applicable debt covenants.
Material changes and operating drivers
- Q3 electric revenue rose 19.7%, primarily from higher demand in warmer weather and higher rates. Cooling degree days were 181% above the prior-year period; retail electric sales volume rose 12.5%.
- For the nine months, electric revenue rose 10.4%, reflecting higher volume and rates and comparison with a 2009 fuel-refund impact. Gas revenue fell 17.2%, mainly because milder winter weather reduced deliveries and lower gas costs reduced rates.
- Elm Road Unit 1 entered commercial operation in February 2010, increasing nonregulated energy revenue and generation while reducing purchased-power needs. Unit 2 remained under construction and was expected to enter service in Q4 2010, with a contractual in-service date of November 28, 2010.
- Higher operating and maintenance costs, including pension and transmission expenses, partly offset the operating improvements. The nine-month comparison also includes pretax property-sale gains of $2.6 million and $0.5 million in 2010.
Outlook, risks and contingencies
- MGE requested a 9.4% electric-rate increase and a 2.0% gas-rate increase, targeted for January 1, 2011; approval was pending. Management said proposed electric rates were intended to cover Elm Road, Columbia environmental equipment and transmission reliability costs.
- Management estimated MGE’s share of a proposed Columbia emissions-reduction project at approximately $140 million, expected to increase operating costs. MGE expected recovery through rates, but the project and recovery remained subject to regulatory approval.
- MGE disclosed EPA and citizen-group air-permitting matters related to Columbia. MGE was named in an EPA notice of violation; it was not named in the Sierra Club suit against Columbia’s operator. The filing says an adverse outcome could have a significant effect, including possible penalties or required pollution controls, and management could not predict the impact.
- Pending or developing air, water, greenhouse-gas, coal-ash and PCB requirements could require additional capital or operating spending; in several cases the cost could not yet be estimated. Management generally expected to seek rate recovery, but timing and scope were uncertain.
- MGE planned to end coal use at Blount by the end of 2011 and operate the plant on natural gas. MISO reliability requirements delayed the planned capacity reduction; MGE estimated that 90 MW might remain available until 2013, subject to a cost-recovery arrangement.
- A $5.5 million federal smart-grid grant requires MGE matching funds; total project costs were expected to exceed $11 million. MGE had spent $0.1 million by September 30 and entered purchase agreements for $2.5 million of products.
- Other disclosed exposures include a $17.7 million fair-value loss on a long-term purchased-power agreement, natural-gas and coal purchase commitments, and a possible $20–$40 million collateral requirement under that power agreement if MGE’s credit rating falls below investment grade once purchases begin in 2012. No derivative counterparties had defaulted.
Most important facts for investors to verify
- PSCW decisions and effective dates for the requested 2011 rate increases and Columbia environmental project.
- Elm Road Unit 2’s actual in-service timing, final project costs and subsequent impact on earnings, cash flow and debt.
- Developments in the Columbia permitting allegations and any resulting penalties, required controls, operating limits or rate recovery.
- Whether evolving environmental rules lead to material compliance costs and whether regulators permit recovery in customer rates.
- Underlying earnings trends after adjusting for weather, 2010 property-sale gains, the prior-year fuel-refund comparison and Elm Road Unit 1’s start-up.
- Liquidity, debt levels, pension contributions and the credit-rating terms associated with the purchased-power agreement.