MGEE

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2013, for MGE Energy, Inc. (MGE Energy) and its principal subsidiary, Madison Gas and Electric Company (MGE). MGE Energy is an investor-owned public utility holding company operating in Wisconsin through five segments: regulated electric utility, regulated gas utility, nonregulated energy, transmission investments (American Transmission Company), and corporate operations. MGE serves approximately 140,000 electric and 145,000 gas customers.

Key Financial Metrics (Six Months Ended June 30, 2013)

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 11% year-over-year. Regulated gas revenues surged 35.5% due to a 32% increase in gas deliveries driven by colder weather (38% increase in heating degree days). Regulated electric revenues increased 2.2% despite a 1.9% decrease in sales volume, offset by a 3.8% rate increase authorized in December 2012.
• Profitability: Net income for MGE Energy increased 20% to $36.5 million. The Gas Utility segment turned profitable ($9.3 million net income) compared to a loss of $3.8 million in the prior year. The Electric Utility segment net income decreased slightly to $14.1 million due to lower sales volumes and increased operating costs at the Columbia plant.
• Capital Spending: Capital expenditures increased significantly by $23.6 million to $63.1 million, primarily driven by $19.5 million in additional spending on the Columbia environmental project.
• Debt Structure: Short-term debt increased by $14.0 million due to commercial paper issuances. Long-term debt remained relatively stable, though the company amended credit facilities to increase capacity and lower interest rate adders.

Guidance, Outlook, and Risks

• Rate Matters: On July 26, 2013, the Public Service Commission of Wisconsin (PSCW) authorized MGE to freeze electric and natural gas rates at 2013 levels for 2014. The order also authorized 100% AFUDC (Allowance for Funds Used During Construction) on the Columbia scrubber project and deferred certain transmission costs.
• Environmental Compliance: Significant capital is required for the Columbia Environmental Project (estimated total share of $140 million). As of June 30, 2013, $98.9 million had been accumulated. A consent decree entered in June 2013 requires the installation of scrubbers/baghouses by December 2014 and an SCR system by December 2018. MGE expects to recover these costs through rates.
• Regulatory Risks: The company faces uncertainty regarding federal greenhouse gas regulations (EPA directives) and the status of the Cross-State Air Pollution Rule (CSAPR), which is under Supreme Court review. These could impact future capital expenditures and operating costs.
• Outlook: Management expects to continue growing earnings while controlling costs. Future performance remains sensitive to weather conditions, commodity prices, and the timing of regulatory cost recovery.

Investor Verification Checklist

• Columbia Project Costs: Verify the remaining capital requirements for the Columbia environmental project ($29 million for remainder of 2013, $12 million for 2014) and the status of the consent decree compliance.
• Rate Freeze Impact: Assess the financial impact of the PSCW order freezing rates for 2014, specifically regarding the amortization of the $6.2 million fuel rule surplus credit.
• Environmental Litigation: Monitor the resolution of the EPA and Sierra Club lawsuits regarding Columbia and the potential costs associated with new GHG regulations.
• Debt Refinancing: Track the issuance of new senior notes (Series C and D) scheduled for September 2013 to finance the Columbia project and the associated interest savings.
• Weather Sensitivity: Evaluate the volatility of gas and electric sales volumes relative to heating and cooling degree days, as demonstrated by the significant variance in the first half of 2013.