MGE Energy, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. MGE Energy is a utility holding company whose principal subsidiary, Madison Gas and Electric (MGE), provides regulated electric and natural gas service in Wisconsin. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $167.2 | $149.3 | +12.0% |
| Operating income | $37.6 | $28.4 | +32.3% |
| Net income attributable to MGE Energy | $22.6 | $16.0 | +40.7% |
| Diluted EPS | $0.98 | $0.69 | +$0.29 |
| Operating margin | 22.5% | 19.1% | +3.4 percentage points |
| Net cash from operating activities | $28.7 | $24.7 | +$3.9 |
| Capital expenditures | $29.2 | $15.5 | +$13.7 |
Revenue growth was concentrated in regulated gas: gas revenue rose 27.1% to $72.5 million, while electric revenue increased 4.0% to $93.5 million. The gas increase primarily reflected a 37.8% rise in heating degree days and 31.8% higher gas deliveries. Electric retail revenue benefited from rate increases; total retail electric sales volume was nearly flat (+0.1%).
Cost of gas sold increased $9.8 million and electric-generation fuel expense rose $1.9 million; purchased-power expense fell $1.3 million. Higher revenue and lower operations and maintenance costs contributed to the improvement in operating income. MGE Energy declared dividends of $0.395 per share, versus $0.383 a year earlier.
Cash, debt and liquidity
- MGE Energy ended March with $45.9 million in cash, compared with $46.4 million at year-end 2012. Operating cash flow of $28.7 million was below capital spending of $29.2 million; financing included $10.5 million of new short-term borrowings.
- Long-term debt was $357.5 million, with $3.4 million due within one year; short-term debt was $10.5 million. The reported capitalization mix was 61.5% common equity, 37.4% long-term debt and 1.1% short-term debt.
- Current assets were $195.9 million and current liabilities $84.7 million at March 31. MGE Energy reported credit lines totaling $104.5 million, including MGE’s $64.5 million facility.
- Cash contributions to pension and postretirement plans were $30.8 million, up from $20.8 million in Q1 2012, reducing operating cash flow relative to earnings.
Material changes, outlook and risks
- Columbia environmental project: MGE’s estimated share of scrubbers, baghouses and related equipment is approximately $140 million. $78.8 million had been accumulated by March 31, excluding carrying costs. Estimated remaining spending was about $49 million for the rest of 2013 and $12 million in 2014. Management expected project costs to be recoverable through rates.
- Additional Columbia obligations: In April 2013, MGE and the other owners entered a consent decree with the EPA and Sierra Club, subject to court approval. It requires scrubbers and baghouses by December 31, 2014, and an SCR system on Unit 2 by December 31, 2018. MGE estimated its SCR share at $50–$60 million. MGE’s share of a civil penalty was approximately $0.2 million, with about $0.6 million of environmental mitigation projects; the company accrued an amount it considered immaterial for the matter.
- Rates: MGE applied to the Wisconsin PSC on April 15 to freeze electric and gas rates at 2013 levels for 2014. The request included treating all Columbia scrubber construction costs as AFUDC, deferring specified transmission-fee increases, and applying approximately $6.2 million of fuel-rule surplus credit toward increased costs. This was a request, not an approved rate outcome. Authorized 2013 retail rate increases were 3.8% for electric service and 1.0% for gas.
- Environmental and regulatory uncertainty: Future costs and compliance requirements remained uncertain, including cooling-water intake rules, air-emissions requirements and regulation of greenhouse gases. MGE said costs could affect fossil-fuel generation and that it expected to seek rate recovery, but timing and recoverability are not assured.
- Other exposures: A ten-year purchased-power agreement had a $70.7 million fair-value liability, offset by regulatory accounting; it may require $20–$40 million of collateral if MGE’s credit rating falls below investment grade. No collateral was posted and no derivative counterparties had defaulted at quarter-end. Management cited weather, demand, commodity prices, regulation, construction execution, pension-asset returns and credit-market conditions as risks.
Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. No quantitative earnings guidance was provided in the filing text.
Important facts for investors to verify
- Whether the PSC approved the proposed 2014 rate freeze and related AFUDC and fuel-credit requests.
- Final court approval, scope, schedule and recoverability of the Columbia consent decree requirements, especially the estimated $50–$60 million SCR share.
- Actual remaining Columbia project costs and timing versus the $49 million remainder-of-2013 and $12 million 2014 estimates.
- Funding needs and liquidity as capital spending continues, including short-term borrowing and pension contributions.
- How weather-normalized gas demand, electric sales, fuel and purchased-power costs affect future earnings after the unusually cold comparative quarter.