MGE Energy, Inc. — Q3 2014 Form 10-Q
Business context and period. The combined filing covers the quarter and nine months ended September 30, 2014. MGE Energy is a Wisconsin utility holding company; its principal subsidiary, Madison Gas and Electric (MGE), provides regulated electric and natural-gas service. MGE Energy also has nonregulated generation operations and an investment in transmission operator ATC. Unless stated otherwise, figures below are for consolidated MGE Energy; dollar amounts are in millions except per-share data.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $135.1 | $140.1 | $474.1 | $435.6 |
| Operating income | $40.1 | $39.9 | $108.5 | $102.0 |
| Operating margin | 29.7% | 28.5% | 22.9% | 23.4% |
| Net income | $23.3 | $24.4 | $65.1 | $60.8 |
| EPS, split-adjusted | $0.67 | $0.70 | $1.88 | $1.75 |
| Dividends per share | $0.283 | $0.272 | $0.826 | $0.799 |
- Quarterly revenue declined 3.5% and net income 4.2% year over year; nine-month revenue rose 8.8% and net income 7.1%.
- Q3 electric retail sales volume fell 4.4%, with cooling degree days down 25.1%. Nine-month gas retail deliveries rose 14.6%, reflecting a colder winter; gas revenue increased 34.6%, largely from higher commodity pass-through rates and volumes.
- Nine-month operating cash flow was $121.0 million, versus $108.6 million. Capital expenditures were $66.1 million, down $26.0 million; operating cash flow less capital expenditures was approximately $54.8 million, compared with $16.5 million.
- At September 30, cash was $88.7 million, current assets $225.4 million, and current liabilities $82.2 million. Long-term debt was $396.3 million, plus $4.2 million due within one year. Capitalization comprised 62.0% equity and 38.0% debt. No credit-facility borrowings were outstanding; MGE Energy’s facilities aggregate $150 million, including MGE, and MGE separately reports $100 million of facilities.
- Quarterly and nine-month MGE Energy net income per share and amounts reflect the three-for-two stock split distributed in February 2014.
Material changes and management commentary
- Q3 electric utility earnings were lower mainly because of reduced retail demand, lower Columbia project AFUDC equity, and cooler summer weather; lower operating and maintenance costs partly offset the decline. Nine-month earnings improved with higher gas demand and lower operating and maintenance costs, partly offset by weaker nonregulated results.
- Gas revenue and cost of gas sold both increased substantially over nine months. The filing says MGE passes natural-gas commodity costs through to customers under the purchased gas adjustment clause.
- Columbia Units 1 and 2 emissions-control equipment entered service in July and April 2014, respectively. MGE expects related project costs to be recoverable through rates. A separate Columbia Unit 2 selective catalytic reduction system is required by the consent decree by December 2018; MGE’s projected share is approximately $30–40 million.
- MGE’s 2015 rate application initially sought a 2.8% electric increase and 2.3% gas decrease. Updated estimates would instead produce a 4.3% electric increase and 1.4% gas decrease; a PSCW decision was expected by year-end 2014. These were requests, not approved rates.
Outlook, risks, and contingencies
- Management identifies weather, customer demand, regulation, commodity costs, pension investment returns, interest rates, and environmental requirements as factors that could affect results. Coal rail-transport constraints could reduce generation and require higher-cost replacement power.
- Environmental rules remain uncertain. CSAPR was reinstated after Supreme Court action, but litigation and implementation issues remained; management expected Columbia’s installed controls to support compliance and anticipated rate recovery of compliance costs. The proposed federal greenhouse-gas guidelines could materially affect fossil-fuel generation; final rules were expected in 2015. MGE estimated no material effect from the cooling-water intake rule on existing plants, though site permit requirements remained unsettled.
- A FERC complaint seeks to reduce transmission owners’ authorized return on equity, including ATC’s 12.2% base ROE; the financial effect was undetermined. ATC represented about 7% of MGE Energy’s nine-month net income.
- A ten-year purchased-power agreement had a $54.9 million fair-value loss liability, down from $65.7 million at year-end 2013. The loss is offset by regulatory accounting and actual power costs are recovered through rates. If MGE’s credit rating falls below investment grade, the contract may require $20–40 million of collateral; none was posted at quarter-end.
- Other disclosed exposures include commodity purchase commitments, a customer-financing guarantee program, and ordinary-course legal matters. The Columbia consent decree requires additional controls and environmental mitigation; MGE’s share of the civil penalty was approximately $0.2 million and mitigation projects approximately $0.6 million. Management stated that material compliance costs are expected to be recoverable through rates.
Important facts for investors to verify
- PSCW’s final 2015 electric and gas rate decision versus the revised requested increases and decreases.
- Columbia SCR project timing, final MGE cost share, and rate-recovery treatment, alongside remaining CSAPR and greenhouse-gas rule developments.
- Coal supply and rail transportation conditions and any resulting generation or purchased-power cost effects.
- Whether the ATC ROE complaint or other transmission-rate decisions change income from the ATC investment.
- Future pension funding needs, the credit-rating triggers and collateral terms of the purchased-power agreement, and liquidity needs relative to capital spending and dividends.