Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2007, for MGE Energy, Inc. (MGE Energy) and its principal subsidiary, Madison Gas and Electric Company (MGE). MGE Energy is a holding company operating through five segments: electric utility, gas utility, nonregulated energy, transmission investments, and all other. MGE serves approximately 135,000 electric and 138,000 gas customers in Wisconsin. The report is unaudited but includes all normal recurring adjustments.
Key Financial Metrics
| Metric (in thousands) | Q1 2007 | Q1 2006 |
|---|---|---|
| Total Operating Revenues | $167,886 | $158,585 |
| Operating Income | $21,633 | $20,859 |
| Net Income (MGE Energy) | $12,302 | $11,516 |
| Earnings Per Share (Basic/Diluted) | $0.59 | $0.56 |
| Cash Provided by Operating Activities | $35,328 | $41,616 |
| Capital Expenditures | $(23,875) | $(17,360) |
| Total Assets | $978,023 | $982,232 |
| Long-term Debt | $237,299 | $237,284 |
| Short-term Debt | $47,000 | $57,000 |
| Common Shareholders' Equity | $386,018 | $375,348 |
Effective Tax Rate: 36.6% for Q1 2007, compared to 38.5% for Q1 2006.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 5.9% year-over-year. Electric revenues rose 5.8% due to increased sales volumes and sales for resale, partially offset by lower rates in 2007 compared to 2006 (which included a fuel credit). Gas revenues increased 5.6% driven by an 18.9% increase in retail gas deliveries due to colder weather (higher heating degree days), despite a 9.6% decrease in the average retail rate per therm.
- Expense Increases: Fuel for electric generation increased 22.3% ($2.5 million) due to higher internal generation volumes and per-unit fuel costs. Natural gas purchased increased 6.1% ($3.9 million) due to higher volumes, offset by lower per-therm costs.
- Profitability: Net income increased 6.8% to $12.3 million. The effective tax rate decreased primarily due to the completion of tax recovery for prior year flow-through and increased domestic manufacturing tax deductions.
- Cash Flow: Operating cash flow decreased $6.3 million compared to the prior year, largely attributable to the absence of the interim fuel credit and refund adjustments recorded in Q1 2006.
- Capital Spending: Capital expenditures increased 37.5% to $23.9 million, driven by construction activity for the Elm Road project ($7.2 million increase) and the Top of Iowa III wind project ($0.8 million).
Guidance, Outlook, and Risks
- Regulatory Developments:
- Fuel Surcharge: On April 26, 2007, the Public Service Commission of Wisconsin (PSCW) approved a $0.00339 per kWh fuel surcharge, expected to increase annual electric revenues by $10.8 million. This is subject to refund and interest.
- Rate Filing: On May 7, 2007, MGE filed an application requesting a 5.7% increase in electric rates and a 3.7% increase in gas rates for 2008 to cover new wind projects, energy efficiency programs, and coal discontinuance costs.
- Fuel Refund: A $2.4 million credit was applied to customer accounts in April 2007 following a PSCW audit of 2006 fuel costs.
- Capital Projects:
- Elm Road: Remaining capital expenditures are estimated at $109.2 million. Construction continues despite a court remand regarding the WPDES permit; the court did not vacate the permit.
- Top of Iowa III: Total project cost estimated at $59.3 million. Additional contracts in April/May 2007 added $7.1 million in commitments.
- Risks and Contingencies:
- Environmental: MGE is a potentially responsible party for the Lenz Oil Superfund site (accrued liability $0.1 million). State mercury rules proposed in March 2007 may increase compliance costs for Columbia, Blount, and Elm Road facilities.
- Restructuring: MGE plans to discontinue coal use at the Blount plant by end of 2011, eliminating 60 positions. Severance costs are deferred as regulatory assets.
- Market Risk: Exposure to commodity prices (gas, coal, electricity) and weather volatility. MGE uses derivatives and fuel rules to mitigate these risks.
Investor Verification Checklist
- Fuel Surcharge Impact: Verify the implementation and potential refund obligations of the $0.00339/kWh surcharge approved in April 2007.
- Elm Road Permit Status: Monitor the outcome of the Dane County circuit court remand regarding the WPDES permit, as invalidation could incur significant additional costs.
- Capital Expenditure Execution: Track spending against the $109.2 million remaining estimate for Elm Road and $59.3 million for Top of Iowa III to ensure no cost overruns exceed regulatory recovery caps.
- 2008 Rate Case: Assess the likelihood of approval for the requested 5.7% electric and 3.7% gas rate increases filed in May 2007.
- Coal Exit Plan: Confirm the timeline and cost recovery for the 2011 discontinuance of coal at the Blount plant.