MGE Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The combined filing covers MGE Energy and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE); figures below primarily refer to MGE Energy consolidated results unless specified. Amounts are in millions except per-share data.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $117.2 | $117.3 | $266.5 | $281.9 |
| Operating income | $25.1 | $23.2 | $53.5 | $54.1 |
| Net income | $14.3 | $12.7 | $30.3 | $30.5 |
| EPS, basic and diluted | $0.62 | $0.55 | $1.31 | $1.32 |
| Operating margin | 21.4% | 19.8% | 20.1% | 19.2% |
Q2 revenue was essentially unchanged; six-month revenue fell 5.5%, mainly as lower gas sales and commodity costs reduced reported gas revenue. Q2 net income rose 12.2%, while first-half net income slipped 0.6%. The first-half effective tax rate was 37.8%, versus 37.4% a year earlier.
Cash flow and capital spending: First-half operating cash flow was $60.8, down from $67.4; investing used $40.8, including $39.6 of capital expenditures; financing used $19.8. Cash and equivalents were $41.3 at June 30, 2012. Pension and postretirement contributions used $21.6 of cash. MGE Energy reported $178.7 of current assets and $62.1 of current liabilities.
Debt and equity: Long-term debt was $360.2, plus $2.7 due within one year. The capitalization mix was 60.8% common equity and 39.2% debt, including current maturities. In April, MGE issued $28.0 of unsecured 4.38% senior notes due 2042 and used proceeds and other funds to retire $28.0 of 5.875% bonds. Separately, $19.3 of bonds were remarketed at 3.45%. MGE Energy declared dividends of $0.766 per share for the first half, versus $0.750.
Material changes and management commentary
- Electric revenue increased 5.3% for the first half, reflecting rate increases and warmer weather; retail electric sales volume rose 0.8%. Q2 cooling degree days were 61.5% higher than the prior year.
- Gas revenue declined 26.2% for the first half as heating degree days fell 26.6%, retail gas deliveries fell 16.5%, and gas commodity costs and rates were lower. Gas cost of sales declined $21.4.
- Higher pension costs contributed to increased operating and maintenance expense. Lower natural-gas prices reduced electric generation costs, while purchased power expense included a year-over-year $5.4 difference from fuel-rule deferrals. MGE had deferred $2.7 of fuel savings for return to customers at June 30.
- Management emphasized reliable service, cost control, investment in generation and environmental compliance, and maintaining credit strength. The filing provides no specific earnings guidance.
Outlook, commitments, and risks
- MGE requested PSCW approval for electric rates 5.8% higher and gas rates 2.6% higher, effective January 1, 2013. The proposed electric increase would address Columbia environmental equipment, Elm Road costs, transmission reliability, and purchased power costs; approval was pending.
- MGE’s estimated share of the Columbia environmental project is approximately $140, with expected spending of $33 for the remainder of 2012, $68 in 2013, and $14 in 2014. At June 30, $25.1 had been accumulated in construction work in progress and MGE’s share of vendor commitments was $99.9. Management expects costs to be recoverable in rates, but project cost and schedule may change.
- A ten-year purchased-power agreement began June 1, 2012. Its fair-value liability was $79.8 at June 30, up from $39.5 at year-end; the filing says it is subject to regulatory deferral, with actual fuel cost recognized as power is purchased. The agreement may require $20–$40 of collateral if MGE’s debt rating falls below investment grade; none was posted.
- MGE is contesting its termination of the Riverside Energy Center power agreement. Deferred capacity payments would be credited to customers if MGE prevails, but would be payable to the counterparty if it does not. Columbia air-permitting litigation and permit proceedings remain unresolved; potential adverse outcomes could be significant, and no clear loss estimate is provided.
- Environmental regulation—including air and water rules—could raise costs or constrain plant operations. The filing says some potential costs cannot yet be estimated; recovery through rates is expected for certain costs but is not assured in every scenario. Columbia construction overrun or delay risks were added to the stated risk factors.
- Management reported $115 of credit lines for MGE Energy, including MGE, and $75 for MGE. Commodity, interest-rate, pension-asset, counterparty-credit, weather, and regulatory risks remain relevant. No derivative counterparties had defaulted at June 30.
Most important facts for investors to verify
- PSCW disposition and timing of MGE’s requested 2013 rate increases and the treatment of fuel-cost deferrals.
- Columbia project cost, schedule, remaining commitments, rate recovery, and any developments in related litigation or permitting.
- Riverside PPA dispute outcome and any resulting customer credits or payments.
- Movement in the $79.8 fair-value loss on the ten-year power agreement, its regulatory accounting, and potential collateral requirements.
- Whether operating cash flow and liquidity can support planned capital spending, pension contributions, and debt obligations.
- Whether earnings trends persist after separating weather effects, gas commodity-price changes, and regulatory rate adjustments.