Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2006, for MGE Energy, Inc. (MGE Energy) and its principal subsidiary, Madison Gas and Electric Company (MGE). MGE Energy is a holding company operating through five segments: electric utility, gas utility, nonregulated energy operations, transmission investments, and all other. MGE serves approximately 136,000 electric and 137,000 gas customers in Wisconsin. The report includes unaudited condensed consolidated financial statements for both entities.
Key Financial Metrics (Nine Months Ended Sept 30, 2006)
| Metric | MGE Energy (in thousands) | MGE (in thousands) |
|---|---|---|
| Total Revenues | $368,935 | $368,935 |
| Operating Income | $57,456 | $40,272 |
| Net Income | $31,270 | $23,893 |
| Earnings Per Share (MGE Energy) | $1.53 | N/A |
| Cash Provided by Operating Activities | $92,327 | $89,255 |
| Capital Expenditures | ($60,014) | ($60,014) |
| Total Assets | $932,877 | $935,200 |
| Long-Term Debt | $207,352 | $207,352 |
| Short-Term Debt | $67,000 | $40,000 |
| Working Capital | Deficit ($30,917) | Deficit ($1,579) |
Note: MGE Energy's working capital deficit is largely due to the reclassification of $15.0 million of long-term debt maturing in 2007 to current liabilities.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 4.3% to $368.9 million compared to $353.8 million in the prior year. Electric revenues rose 3.6% driven by rate increases, while gas revenues increased 4.8% due to higher gas costs passed through to customers.
- Profitability: Net income for MGE Energy increased 32.7% to $31.3 million from $23.6 million. Earnings per share rose to $1.53 from $1.15.
- Cost Reductions: Fuel costs for electric generation decreased 24.6% ($11.7 million) due to lower per-unit fuel costs and reduced internal generation volume. Natural gas purchased costs increased 4.9% due to higher market prices.
- Regulatory Adjustments: MGE recorded a $16.5 million reduction in other electric revenues to account for fuel credits and refunds mandated by the Public Service Commission of Wisconsin (PSCW) due to lower actual fuel costs compared to rate orders.
- Capital Spending: Capital expenditures increased 22.1% to $60.0 million, primarily driven by construction activity for the Elm Road generating units ($21.4 million).
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Elm Road Project: MGE Power Elm Road continues construction of two 615 MW coal-fired units. Estimated remaining capital commitments are $124.7 million. Costs are expected to be recovered through a lease arrangement with MGE.
- Worth County Wind Project: MGE formalized plans to acquire a 29.7 MW wind facility in Iowa. Total estimated cost is $57 million, with completion expected by December 31, 2007. The project is pending PSCW approval.
- Blount Station Restructuring: MGE plans to discontinue coal use at the Blount plant by the end of 2011, reducing capacity from 190 MW to 100 MW. This will result in the elimination of 60 positions. Severance costs are being deferred as regulatory assets pending rate recovery.
- Dividends: Dividends paid per share for the nine months were $1.038, an increase from $1.029 in the prior year.
Risks and Contingencies
- Construction Risk: Delays or cost overruns on the Elm Road and Worth County projects could impact financial results. Specifically, if the Worth County facility is not in service by December 31, 2007, MGE may lose federal tax credits estimated at $1.9 million annually.
- Regulatory Risk: MGE faces risks regarding the recovery of fuel costs and the costs associated with the Blount coal discontinuance plan. The PSCW has modified fuel rules to a +/- 2% bandwidth, requiring refunds if costs fall below 98% of projections.
- Environmental Compliance: Ongoing compliance with EPA regulations (CAIR, CAMR) and state mercury limits may require additional capital expenditures at Blount and Columbia plants.
- Accounting Changes: Adoption of SFAS 158 (Pension Accounting) in 2006 is expected to increase pension liabilities by approximately $48.4 million, offset by an increase in regulatory assets.
Investor Verification Checklist
- Regulatory Recovery: Verify the PSCW's final approval of the fuel credit refunds and the recovery of costs related to the Blount coal exit plan.
- Project Timelines: Monitor the construction progress of the Elm Road and Worth County wind projects to ensure they meet the December 31, 2007, deadline for tax credit eligibility.
- Debt Refinancing: Confirm the refinancing of the $15.0 million long-term debt maturing in September 2007, which currently contributes to a working capital deficit.
- Weather Sensitivity: Assess the impact of weather variations (heating and cooling degree days) on gas and electric sales volumes, as margins are sensitive to temperature fluctuations.
- Pension Funding: Review the impact of the Pension Protection Act of 2006 and SFAS 158 on future cash flow requirements for pension funding.