MGE Energy, Inc. — Q1 2011 Form 10-Q
Business context and period. For the three months ended March 31, 2011, MGE Energy reported consolidated results, with wholly owned utility subsidiary Madison Gas and Electric (MGE) accounting for most operations. MGE provides regulated electric and gas service in Wisconsin; the group also owns nonregulated generation interests and an investment in transmission operator ATC. Comparisons are with Q1 2010 unless noted. Dollar amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior balance |
|---|---|---|
| Operating revenue | $164.6 | $159.6 |
| Operating income | $30.9 | $21.8 |
| Net income, MGE Energy consolidated | $17.8 | $14.3 |
| Diluted EPS | $0.77 | $0.62 |
| Dividend per share | $0.375 | $0.368 |
| Cash from operations | $38.0 | $30.0 |
| Capital expenditures | $9.8 | $14.4 |
| Cash and equivalents at March 31 | $30.7 | $7.1 at Dec. 31, 2010 |
| Long-term debt, including current portion | $365.5 carrying value | $336.0 at Dec. 31, 2010 |
| Short-term debt | $0 | $22.5 at Dec. 31, 2010 |
Operating margin was approximately 18.8%, compared with 13.6%; net margin was approximately 10.8%, compared with 8.9%. These are calculated from reported revenue and income. MGE’s net income was $17.9 million, of which $11.9 million was attributable to MGE and $5.9 million to noncontrolling interests.
Current assets were $155.5 million and current liabilities $51.5 million at March 31. Operating cash flow improved largely through working-capital movements; pension and other postretirement contributions were $19.2 million, $10.5 million more than in Q1 2010. Cash flow from investing was negative $12.5 million and financing was negative $2.0 million. MGE Energy’s long-term-debt share of capitalization rose to 40.6% from 38.0% at year-end.
Material changes and drivers
- Revenue increased 3.1%; operating income rose 41.9% and net income rose 24.7%.
- Electric retail sales volume increased 2.5%; electric revenue rose 4.9%, supported by higher volume and rates. Fuel expense rose $2.1 million, but purchased-power expense fell $3.9 million as Elm Road Unit 2 entered service and Columbia generation increased. Electric operations and maintenance expense declined $1.7 million.
- Gas deliveries increased 13.6%, reflecting colder weather (heating degree days up 6.4%). Gas revenue grew 1.2% as lower gas rates partly offset higher deliveries; cost of gas sold declined $1.7 million.
- Elm Road Unit 2 began commercial operation on January 12, 2011. Increased nonregulated revenue from the unit was partly offset by higher depreciation and interest costs.
- Q1 2010 included a one-time $2.6 million pretax gain on a land sale to ATC; its absence reduced year-over-year other income in 2011.
- On February 28, 2011, MGE Power Elm Road issued $30 million of 4.74% secured notes due 2041, using proceeds to repay short-term borrowings used for construction. Its debt-service coverage covenant requires at least 1.25-to-1.00; the company reported compliance at quarter-end.
Outlook, risks, and unusual items
- Rates and outlook: The PSCW authorized 2011 retail electric and gas rate increases of 2.3% ($8.0 million) and 1.0% ($1.9 million), respectively. On May 4, 2011, MGE filed a limited-scope 2012 rate reopener seeking changes that would produce requested increases of 4.9% for electric and 1.2% for gas, effective January 1, 2012, if approved. The filing provides no formal earnings guidance.
- Major capital and environmental exposure: The PSCW authorized Columbia air-emissions-control work. MGE estimates its share at approximately $140 million, expected during 2011–2014, and expects recovery through rates. Proposed and evolving air, water, and greenhouse-gas rules could add costs; the filing says their impacts are not yet estimable in several cases.
- Columbia litigation: The EPA issued a notice alleging Clean Air Act permitting violations, and the Sierra Club sued the plant operator over alleged violations. MGE and co-owners are pursuing settlement options while defending the claims. MGE cannot predict the outcome; an adverse result could have a significant effect and could entail penalties, controls, or operating restrictions.
- Other contingencies: A Superfund-site cleanup liability attributable to MGE was less than $0.1 million at quarter-end. The filing also describes uncertainty over proposed coal-ash, cooling-water, phosphorus, and mercury rules and permit requirements.
- Commodity and credit risks: Electric fuel costs are subject to a PSCW tolerance band of plus or minus 2%; costs were within the band at March 31, so no surcharge or credit was needed. The ten-year purchased-power agreement had a $22.2 million fair-value liability, deferred under regulatory accounting. A future downgrade below investment grade could require $20–$40 million of collateral under that agreement once energy purchases begin in 2012. No derivative counterparties had defaulted.
- Blount: MGE still plans to stop burning coal by the end of 2011, but expects to retain full 190 MW capacity until MISO determines the additional 90 MW are no longer needed for reliability; MGE currently estimates the capacity reduction in 2013.
- Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the requested 2012 rate changes are approved and whether cost recovery keeps pace with fuel, generation, and environmental spending.
- Updated cost, timing, and regulatory recovery estimates for MGE’s approximately $140 million share of Columbia emissions controls.
- Developments and potential remedies in the Columbia permitting litigation and the resulting financial exposure, which management cannot currently estimate.
- Funding needs and balance-sheet effects of environmental projects, generation investment, pension contributions, and the Elm Road debt structure.
- Whether the $22.2 million purchased-power fair-value liability, collateral provisions, and other market exposures change materially as 2012 deliveries approach.
- How much of the earnings improvement is recurring, given weather-driven gas demand, newly operational Elm Road Unit 2, and the prior-year property-sale gain.