MGE Energy, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. This combined filing covers MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE). MGE Energy’s businesses include regulated electric and gas utilities, nonregulated energy, and a transmission investment. The quarter and nine-month periods ended September 30, 2013; results below are unaudited and in millions except per-share data.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $140.1 | $137.8 | $435.6 | $404.3 |
| Operating income | $39.9 | $39.9 | $102.0 | $93.4 |
| Net income | $24.4 | $23.6 | $60.8 | $54.0 |
| Basic and diluted EPS | $1.05 | $1.02 | $2.63 | $2.33 |
| Operating margin | 28.5% | 28.9% | 23.4% | 23.1% |
For the nine months, cash from operations was $108.6 million, capital expenditures were $92.1 million, and cash dividends paid were $27.7 million. Cash and equivalents were $75.3 million at September 30, versus $46.4 million at year-end 2012. Long-term debt, including current maturities, was $404.5 million; total capitalization was $1,013.2 million. The current ratio was approximately 2.7x ($213.9 million current assets against $78.7 million current liabilities). MGE Energy’s capitalization consisted of 60.2% common equity and 39.8% long-term debt, including current maturities.
MGE Energy reported nine-month EPS growth of 13% and net income growth of 13% year over year. MGE’s net income attributable to MGE was $40.3 million for the nine months, compared with $35.9 million in 2012; its Q3 attributable net income was $17.5 million, essentially unchanged. MGE Energy’s dividend was $1.198 per share for the nine-month period, compared with $1.161 a year earlier.
Material changes and drivers
- Nine-month regulated gas revenue rose 31.6% to $121.4 million, primarily because colder winter weather increased gas deliveries 26.6%; higher commodity costs also contributed. Gas utility segment income increased to $8.0 million from $1.9 million.
- Nine-month electric revenue increased 1.6%, supported by 2013 rate increases, but retail electric sales volume fell 1.9% amid more normal weather. Electric utility segment income decreased to $33.1 million from $34.7 million, reflecting lower demand and higher Columbia operating costs.
- Nonregulated energy segment income rose to $15.5 million from $13.5 million, partly reflecting recovery of Elm Road force-majeure construction costs approved in rates. Transmission investment income was $7.0 million, versus $6.8 million.
- Operating cash flow declined $7.3 million year over year, partly due to $9.6 million of additional pension contributions and a $6.8 million debt make-whole premium. Capital spending increased $26.2 million, principally because of the Columbia environmental project.
Outlook, risks and unusual items
- The Wisconsin PSC authorized a freeze of electric and gas rates at 2013 levels for 2014. The order also authorized 100% AFUDC on the Columbia scrubber project and deferral of increased ATC and MISO Schedule 26 fees. A $6.2 million 2012 fuel-rule surplus credit is to be retained and amortized in 2014; authorized ROE remains 10.3%.
- MGE estimated its share of the Columbia environmental project at approximately $140 million. By September 30, $113.6 million had been accumulated in construction work in progress; expected spending was about $12 million for the remainder of 2013 and $14 million in 2014. MGE expects project costs to be recoverable through rates, but estimates and timing may change.
- A consent decree requires Columbia scrubbers and baghouses by December 31, 2014, and an SCR system at Unit 2 by December 31, 2018. MGE’s preliminary share of the SCR cost is estimated at $50–$60 million. MGE paid about $0.2 million as its share of a civil penalty and expects to complete about $0.6 million of mitigation projects.
- Environmental regulation remains a significant uncertainty. Proposed greenhouse-gas standards for existing plants and proposed wastewater rules could lead to material costs; the filing says their effects cannot yet be reliably estimated. MGE expects to seek rate recovery, but the timing and scope of recovery are uncertain.
- MGE issued $85 million of senior notes during 2013, including $40 million used to refinance debt. The refinancing included a $6.8 million make-whole premium, deferred as a regulatory asset. Credit facilities were increased to $50 million for MGE Energy and $100 million for MGE, extended to July 2017; neither had borrowings outstanding at quarter-end.
- A ten-year purchased-power agreement had a $69.0 million fair-value loss liability, offset by regulatory accounting treatment. If MGE’s debt rating falls below investment grade, the agreement may require $20–$40 million of collateral; none was posted at quarter-end.
Key facts for investors to verify
- Progress, final cost, schedule, and rate recovery for the Columbia environmental controls, including the separate estimated $50–$60 million SCR obligation.
- Whether the 2014 rate freeze, retained fuel credit, and fuel-cost deferrals affect earnings or customer refunds as expected.
- Cash generation and funding needs as capital expenditures continue, including pension contributions and planned debt issuance.
- Effects of weather-normalized electric and gas demand, purchased-power costs, and Elm Road cost recovery on future segment results.
- Potential costs and compliance requirements from evolving greenhouse-gas, water-quality, and other environmental rules.