Business Context and Reporting Period
This Form 10-Q is a combined quarterly report for MGE Energy, Inc. (the holding company) and its principal subsidiary, Madison Gas and Electric Company (MGE), for the period ended June 30, 2009. MGE Energy operates as an investor-owned public utility holding company with segments including electric utility, gas utility, nonregulated energy, and transmission investments. MGE serves approximately 137,000 electric and 141,000 gas customers in Wisconsin.
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | 2009 (YTD) | 2008 (YTD) |
|---|---|---|
| Total Operating Revenues | $288.7 million | $314.7 million |
| Net Income (MGE Energy) | $24.8 million | $24.4 million |
| Earnings Per Share (Basic/Diluted) | $1.08 | $1.11 |
| Operating Cash Flow | $82.6 million | $62.5 million |
| Capital Expenditures | $34.8 million | $61.1 million |
| Short-term Debt | $94.0 million | $124.5 million (Dec 31, 2008) |
| Long-term Debt | $272.4 million | $272.4 million (Dec 31, 2008) |
| Common Shareholders' Equity | $492.6 million | $478.2 million (Dec 31, 2008) |
Segment Performance (Six Months 2009): Electric Utility net income was $8.0 million; Gas Utility net income was $8.4 million; Nonregulated Energy net income was $5.5 million; Transmission Investment net income was $2.4 million.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 8.3% year-over-year. Electric revenues fell 3.1% due to lower demand (economic conditions) and reduced sales for resale. Gas revenues dropped 14.9% primarily due to a 16.0% decrease in the average retail rate per therm driven by lower natural gas commodity costs.
- Cost Reductions: Fuel for electric generation expenses decreased 40.2% ($11.6 million) due to lower internal generation. Cost of gas sold decreased 20.9% ($21.8 million) due to lower gas prices and volume.
- Capital Expenditures: Capital spending dropped significantly by 43.0% ($26.4 million) compared to the prior year, attributed to reduced construction activity at the Elm Road generating station and the completion of the Top of Iowa III wind project in early 2008.
- Working Capital: Cash provided by operating activities increased $20.1 million, largely driven by favorable changes in working capital (lower accounts receivable and unbilled revenues).
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Rate Filings: In April 2009, MGE filed for a 4.5% electric rate increase and a 2.3% gas rate increase for 2010 to cover Elm Road costs, transmission enhancements, and gas infrastructure.
- Fuel Credits: MGE implemented an interim fuel credit of $0.00204 per kWh in May 2009 due to lower actual fuel costs, estimated to reduce 2009 electric revenues by $4.6 million.
- Elm Road Project: Construction continues on the 1,230 MW coal-fired generating units. The contractor (Bechtel) has filed claims for cost and schedule relief totaling approximately $485 million (MGE's share ~$40 million). These claims are in binding arbitration expected to conclude in 2010.
Risks and Contingencies
- Environmental Regulation: Significant uncertainty exists regarding future costs related to the Clean Air Mercury Rule (CAMR) vacatur, potential Maximum Achievable Control Technology (MACT) standards, and the American Clean Energy and Security Act (ACESA). MGE estimates a $140 million capital expenditure for emissions reductions at the Columbia plant.
- Weather and Economic Conditions: Revenues remain sensitive to weather patterns (heating/cooling degree days) and general economic conditions affecting customer demand.
- Derivative Positions: As of June 30, 2009, MGE held derivative instruments with a net fair value loss position of approximately $17.4 million (gross basis), primarily related to commodity hedges and a ten-year purchased power agreement. These are largely deferred as regulatory assets/liabilities.
Investor Verification Checklist
- Elm Road Arbitration Outcome: Monitor the resolution of Bechtel's cost and schedule claims, as a loss could impact construction costs and rate recovery.
- 2010 Rate Order Approval: Verify the Public Service Commission of Wisconsin's (PSCW) final decision on the requested 4.5% electric and 2.3% gas rate increases.
- Environmental Compliance Costs: Track final regulatory determinations on MACT standards and climate change legislation (ACESA) to assess potential capital expenditure impacts beyond current estimates.
- Working Capital Deficit: Note that MGE Energy reported a working capital deficit (current liabilities exceeded current assets) as of June 30, 2009, funded partly by short-term debt for Elm Road commitments.
- Derivative Valuation: Review the impact of the $9.6 million loss position on the ten-year purchased power agreement and other hedging instruments on future earnings.