MGE Energy, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2014; filed May 8, 2014. MGE Energy is a Wisconsin utility holding company whose principal subsidiary, Madison Gas and Electric Company (MGE), provides regulated electric and natural-gas service. The combined filing presents both companies; MGE is wholly owned by MGE Energy. Unless stated otherwise, financial results below are for consolidated MGE Energy. Amounts are in U.S. dollars.
Per-share figures reflect MGE Energy’s three-for-two stock split distributed in February 2014.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $210.2 million | $167.2 million | +25.7% |
| Operating income | $44.0 million | $37.6 million | +16.9% |
| Net income | $27.7 million | $22.6 million | +22.7% |
| Diluted EPS | $0.80 | $0.65 | +23.1% |
| Dividend per share | $0.272 | $0.263 | +3.4% |
| Cash from operations | $58.4 million | $28.7 million | +$29.7 million |
| Capital expenditures | $21.8 million | $29.2 million | -$7.4 million |
Operating margin was approximately 20.9% versus 22.5% a year earlier, calculated from reported revenue and operating income. Revenue growth substantially reflected higher gas sales and commodity costs passed through under the purchased gas adjustment (PGA), rather than equivalent growth in underlying profitability.
At March 31, 2014, MGE Energy reported cash of $93.5 million, current assets of $238.9 million, and current liabilities of $109.5 million. Long-term debt was $398.4 million, plus $4.1 million due within one year. Equity was $635.7 million; the reported capitalization mix was 61.2% equity and 38.8% long-term debt, including current maturities. No short-term borrowings were outstanding under credit lines. MGE Energy had $150 million of aggregate credit lines, including MGE; MGE separately reported $100 million of credit lines.
MGE Energy’s cash-flow increase was significantly affected by pension contributions: none were made in Q1 2014, compared with $30.8 million in Q1 2013. Thus, the operating-cash-flow improvement should not be read solely as earnings-driven. Cash dividends paid by MGE Energy were $9.4 million.
Material changes versus prior year
- Electric revenue rose 5.7%; retail electric sales volume increased 2.8%. Management cited stronger demand, increased market sales, and higher AFUDC equity earnings associated with the Columbia environmental project. Electric segment net income increased to $10.0 million from $7.0 million.
- Gas revenue rose 52.8%, while retail gas deliveries increased 23.5%. Colder winter weather contributed to demand: heating degree days were up 14.2%. Higher gas commodity costs lifted the average retail rate per therm; the PGA passes gas costs through to customers. Gas segment net income increased to $11.4 million from $9.0 million.
- Nonregulated energy net income declined to $4.7 million from $5.1 million, principally because Q1 2013 included recovery of Elm Road construction force-majeure costs.
- Operating and maintenance expense declined overall in utility operations, partly due to lower pension and postretirement benefit costs. MGE Energy’s effective tax rate decreased to 37.0% from 37.7%, primarily reflecting higher AFUDC equity earnings.
Outlook, risks, contingencies, and unusual items
- Rates: In April 2014, MGE requested a 2.8% electric-rate increase and a 2.3% gas-rate decrease for 2015, followed by a proposed 2016 rate freeze subject to fuel-cost review. The filing reports a request, not an approved outcome. MGE’s 2014 electric and gas rates were frozen at 2013 levels; the PSCW authorized 100% AFUDC on the Columbia project during construction.
- Columbia project: MGE’s estimated share of scrubbers, baghouses, and associated work is approximately $135 million. Through March 31, $124.3 million had been accumulated, excluding carrying costs; approximately $10.7 million of additional expenditures were expected for the remainder of 2014. Unit 2 entered service in April 2014; Unit 1 was expected in the third quarter. Management expects project costs to be recoverable through rates, but estimates and timing may change.
- Environmental regulation and litigation: On April 29, 2014, the Supreme Court upheld CSAPR and remanded proceedings to the D.C. Circuit. The timing and applicability of reinstatement remained uncertain; CAIR remained in effect until CSAPR reinstatement. The Columbia owners entered a consent decree requiring emission controls and limits; MGE paid about $0.2 million of a civil penalty and expects to complete about $0.6 million of mitigation projects. MGE intends to seek rate recovery of compliance costs.
- Purchase-power exposure: A ten-year power agreement had a $60.3 million fair-value loss position at March 31, 2014, with corresponding regulatory accounting. If MGE’s credit rating falls below investment grade, the contract may require $20 million to $40 million of collateral; none was posted at quarter-end.
- Other risks: Management identifies weather, demand and economic conditions, fuel and commodity prices, regulatory cost recovery, environmental requirements, pension asset returns and discount rates, construction execution, interest rates, and counterparty credit as risk factors. No material legal accrual was reported; routine legal matters were described as not material.
- Management commentary: Management emphasized reliable service, competitive customer prices, cost control, investment in generation and transmission, and maintaining strong credit standing. No earnings guidance was provided in the supplied filing text.
Important facts for investors to verify
- Whether the PSCW approves the requested 2015 rate changes and proposed 2016 freeze, including transmission-cost escrow treatment.
- Columbia project final cost, schedule, commissioning of Unit 1, and the scope and timing of recovery through customer rates.
- CSAPR implementation timing and resulting emissions-compliance costs after the Supreme Court decision.
- How much reported cash-flow growth reflects the absence of pension contributions and working-capital movements versus recurring operating performance.
- Exposure and potential collateral requirements under the ten-year power agreement, and any changes in the contract’s valuation or MGE’s credit rating.