MGE Energy, Inc. — Q3 2012 Form 10-Q
Business context and period. MGE Energy is a Wisconsin utility holding company whose principal subsidiary, Madison Gas and Electric (MGE), provides regulated electric and gas service. This filing covers the quarter and nine months ended September 30, 2012; financial statements are unaudited. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $137.8 | $133.6 | $404.3 | $415.4 |
| Operating income | $39.9 | $36.3 | $93.4 | $90.4 |
| Net income | $23.6 | $21.0 | $54.0 | $51.5 |
| Diluted EPS | $1.02 | $0.91 | $2.33 | $2.23 |
| Dividends per share | $0.395 | $0.383 | $1.161 | $1.133 |
Q3 revenue increased about 3.2% and net income about 12.4% year over year. Nine-month revenue declined about 2.7%, while net income rose about 4.7%. Approximate operating margin was 28.9% in Q3 versus 27.2%; for the nine-month period it was 23.1% versus 21.8%.
- Revenue and demand: Nine-month regulated electric revenue rose 4.6% to $305.2 million, mainly reflecting higher rates and warmer weather; retail electric sales volume was nearly flat. Regulated gas revenue fell 23.0% to $92.2 million as milder winter weather reduced deliveries 11.8% and lower commodity costs reduced customer rates.
- Cash flow: Nine-month operating cash flow was $115.9 million, compared with $106.5 million. Capital expenditures were $65.9 million, up from $44.9 million; operating cash flow less capital expenditures was approximately $50.0 million. Financing activities used $29.7 million. Cash increased to $59.2 million from $41.2 million at year-end 2011.
- Liquidity and debt: Current assets were $219.8 million and current liabilities $60.0 million at September 30, giving a current ratio of approximately 3.7. Book long-term debt was $359.5 million, plus $2.7 million due within one year. Debt represented 38.5% of capitalization, versus 39.8% at year-end 2011. The filing reports committed credit facilities of $115 million for MGE Energy, including MGE, and $75 million for MGE.
Material changes and management commentary
- Higher electric rates and increased cooling demand supported electric results; nine-month electric revenue also benefited from the 2012 rate increase. Lower gas sales and commodity rates drove the decline in gas revenue, with lower gas costs partly offsetting the revenue reduction.
- Electric fuel expense declined, but the fuel-cost rules required MGE to defer $5.9 million of fuel savings for customer benefit during the first nine months. Increased pension and other operating costs partly offset lower fuel and depreciation expenses.
- Management describes its priorities as reliable service, competitive customer prices, earnings growth, cost control, and maintaining strong credit. No earnings guidance is stated in the provided filing text.
Outlook, commitments, and risks
- Rates: MGE requested a 5.8% electric-rate increase and a 2.6% gas-rate increase, proposed to take effect January 1, 2013. The filing does not report a decision on this application.
- Columbia environmental project: MGE estimates its share of scrubber, baghouse, and related construction costs at approximately $140 million, with completion expected in mid-to-late 2014. Estimated remaining spending was $18 million for the rest of 2012, $68 million in 2013, and $12 million in 2014. Contractual commitments for MGE’s share were $89.1 million at September 30. Management expects project costs to be recoverable through rates, but warns that overruns may not be recoverable.
- Environmental and legal uncertainty: Air and water rules, permits, and litigation could require additional operating costs, capital spending, or operational changes. Columbia Clean Air Act claims were under settlement discussions; MGE recorded an immaterial accrual and said a materially greater liability was remote based on then-current discussions. Environmental compliance cost and timing remain uncertain.
- Power purchase agreement: A ten-year PPA beginning June 2012 had a $77.1 million fair-value loss at September 30, recorded with regulatory deferral. Its valuation depends in part on significant unobservable assumptions. A separate dispute over termination of the Riverside PPA could result in deferred capacity payments being credited to customers or paid to the supplier, depending on the outcome.
- Other exposures: Commodity prices, weather, economic conditions, pension investment returns, interest rates, counterparties, and regulatory cost recovery may affect results. MGE reported no counterparty defaults at September 30. The filing also identifies a $2.0 million venture-fund commitment and ongoing commodity-supply and purchase-power commitments.
Most important facts for investors to verify
- PSCW’s decision and timing on MGE’s requested 2013 rate increases and treatment of environmental and other costs.
- Columbia project cost, schedule, contractual commitments, and the extent to which spending is ultimately recovered in rates.
- Developments in Columbia environmental litigation and the Riverside PPA termination dispute.
- Assumptions and regulatory treatment underlying the $77.1 million ten-year PPA fair-value liability.
- Whether operating cash generation can sustain the planned capital program, pension contributions, and dividends without materially increasing borrowing.