MGE Energy, Inc. — FY 2011 Form 10-K Summary
Business context and reporting period. The combined filing covers MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE), for the fiscal year ended December 31, 2011. MGE Energy is a regulated electric and gas utility holding company with nonregulated generation and an investment in American Transmission Company (ATC). Figures below distinguish MGE Energy consolidated results from MGE’s earnings attributable to its parent where relevant. The filing also provides unaudited fourth-quarter results.
Financial performance and position
| Metric | FY 2011 | FY 2010 | Change / context |
|---|---|---|---|
| Operating revenue | $546.4 million | $532.6 million | Up 2.6% |
| Operating income | $107.9 million | $96.6 million | Up 11.7%; operating margin was 19.7%, versus 18.1% (calculated) |
| Net income, MGE Energy | $60.9 million | $57.7 million | Up 5.6% |
| Diluted EPS, MGE Energy | $2.64 | $2.50 | Up 5.6% |
| Net income attributable to MGE | $37.3 million | $37.7 million | Down slightly |
| Operating cash flow | $130.8 million | $124.0 million | Up $6.7 million |
| Capital expenditures | $65.2 million | $60.1 million | 2012 budget: $121.7 million |
| Long-term debt, including current maturities | $363.6 million | $336.0 million | No short-term debt outstanding at year-end |
| Cash and cash equivalents | $41.2 million | $7.1 million | Consolidated balance-sheet amounts |
| Common shareholders’ equity | $551.0 million | $525.1 million | 60.2% of reported capitalization; short-term debt was zero |
| Dividends declared per share | $1.52 | $1.49 | Up approximately 2.0% |
Revenue growth reflected higher electric revenue, partly offset by slightly lower gas revenue. Electric retail revenue rose 3.0% and sales volume rose 0.8%; gas revenue fell 0.4% despite 3.8% higher retail deliveries, mainly because lower natural-gas costs reduced rates. Electric generation fuel expense rose $8.9 million as both Elm Road units operated, while purchased-power expense fell $7.2 million. Nonregulated energy revenue increased $9.0 million with Unit 2’s entry into commercial service.
Operating cash flow exceeded capital expenditures by approximately $65.6 million (calculated). MGE Energy reported $115 million of aggregate available credit facilities—$40 million for MGE Energy and $75 million for MGE—with no year-end borrowings. The reported debt-to-capitalization covenant ratios were 39.8% for MGE Energy and 36.2% for MGE. Liquidity also depends on continued access to credit and cash distributions from subsidiaries.
For the fourth quarter, MGE Energy reported revenue of $130.9 million and earnings of $9.4 million, or $0.41 per share, compared with revenue of $135.9 million and earnings of $12.0 million, or $0.52 per share, in fourth-quarter 2010.
Material changes versus the prior year
- MGE Energy net income increased $3.2 million; MGE’s attributable net income decreased $0.4 million. The increase at the holding-company level included greater earnings from nonregulated energy operations.
- Elm Road Unit 2 began commercial operation in January 2011. Its output contributed to higher generation fuel costs and lower purchases from third parties; MGE Energy also issued $30 million of 4.74% senior secured notes through its Elm Road subsidiary.
- Electric retail rates increased 2.3% in 2011. For 2012, the PSCW authorized a 4.3% electric rate increase and a 0.3% gas rate increase.
- MGE’s Columbia environmental project moved into implementation planning. MGE’s estimated share of the project is approximately $140 million, with expected spending of $53 million in 2012, $68 million in 2013, and $15 million in 2014.
- MGE reduced Blount Station capacity from 190 MW to approximately 100 MW and completed its transition from coal to natural gas at year-end 2011.
- The pension and other postretirement benefit liability increased to $183.6 million from $123.6 million, reflecting higher obligations; MGE contributed $23.7 million to the plans during 2011.
Outlook, risks, contingencies, and unusual items
- Outlook and investment. Management emphasized reliable service, earnings growth, cost control, and maintaining strong credit. The filing gives no formal earnings or EPS guidance. The 2012 capital-expenditure budget is $121.7 million, including the Columbia work. MGE expects to finance that project primarily from internal sources, with some long-term debt financing likely.
- Environmental regulation and Columbia litigation. CSAPR was stayed by a federal appeals court in December 2011, leaving CAIR in place pending review. If CSAPR is reinstated, Columbia could face allowance shortfalls and interim costs or generation limits before planned controls are completed. MGE expects approved compliance costs to be recoverable in rates, but recovery timing and regulatory outcomes remain uncertain. EPA and Sierra Club claims concerning alleged Clean Air Act permitting violations at Columbia could result in penalties, controls, operating restrictions, or other remedies; management said an adverse outcome could have a significant effect but could not predict the impact.
- Other environmental costs. New or changing air, water, hazardous-material, and greenhouse-gas rules may require additional capital or operating expenditures. Some potential costs could not be estimated because rules or permit requirements were not final.
- Derivative and counterparty exposure. A ten-year purchased-power agreement had a reported fair-value loss position of $39.5 million at December 31, 2011, compared with $19.0 million a year earlier; the loss was subject to regulatory deferral. If MGE’s credit rating falls below investment grade after power purchases begin, the agreement could require $20 million to $40 million of collateral, depending on nominated capacity.
- MF Global account. Following the MF Global bankruptcy, approximately $0.7 million remained in MGE’s customer-segregated margin account frozen at year-end. MGE could not predict the ultimate recovery or any related regulatory treatment.
- Pension funding. Expected 2012 plan contributions were approximately $22 million, of which $20 million had been paid in January 2012. Contributions for 2013–2015 were estimated at $11 million to $13 million annually; actual amounts may change with plan performance and assumptions.
- Debt and dividend restrictions. MGE’s $19.3 million of industrial development revenue bonds were subject to mandatory repurchase and remarketing on April 1, 2012, following expiration of the current interest-rate period. MGE’s dividends to MGE Energy are subject to regulatory and debt restrictions, although its year-end rate-case common-equity ratio was estimated at 57.3%, above the 55% threshold cited in the filing.
- Other unusual items. MGE’s 2011 cash flow benefited from tax accounting changes for repairs and bonus depreciation. The 2010 comparison included a one-time $2.6 million pretax gain on a property sale to ATC. The 2011 report also records a $0.5 million compensation charge following an amendment to the performance-unit plan.
Important facts for investors to verify
- Progress, total cost, schedule, and rate recovery for MGE’s approximately $140 million share of the Columbia environmental project.
- Developments and potential remedies in the Columbia Clean Air Act matters, including any impact on operating limits, penalties, or future capital spending.
- Actual 2012 rate realization, utility demand, fuel and purchased-power costs, and the treatment of costs outside the PSCW fuel-rule band.
- Recovery of the frozen MF Global margin-account funds and any collateral or valuation changes relating to the ten-year purchased-power agreement.
- Pension funding needs and the effect of discount-rate, return, and health-care-cost assumptions on the reported benefit liability.
- Completion of the $19.3 million bond remarketing and continued availability of credit facilities and subsidiary cash distributions.
The financial statements received unqualified audit opinions, and management reported effective internal control over financial reporting as of December 31, 2011.