MGE Energy, Inc. — 2010 Form 10-K Summary
Business context and reporting period. Fiscal year ended December 31, 2010. MGE Energy is a Wisconsin utility holding company; its wholly owned subsidiary Madison Gas and Electric (MGE) supplies electricity and natural gas in south-central Wisconsin. The filing is an annual report, not a standalone fourth-quarter report. It presents both MGE Energy consolidated results and, where noted, MGE results.
Financial results and key metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| MGE Energy operating revenue | $532.6 million | $533.8 million | -0.2% |
| Operating income | $96.6 million | $84.7 million | +14.1% |
| Net income | $57.7 million | $51.0 million | +13.2% |
| Diluted EPS | $2.50 | $2.21 | +13.1% |
| Cash from operations | $124.0 million | $117.9 million | +$6.1 million |
| Capital expenditures | $60.1 million | $77.9 million | -$17.8 million |
| Year-end total assets | $1.318 billion | $1.282 billion | +$36.0 million |
| Year-end cash | $7.1 million | $4.7 million | +$2.4 million |
- Operating margin was approximately 18.1%, versus 15.9% in 2009; net margin was approximately 10.8%, versus 9.6%.
- Electric revenue rose 8.5% to $360.7 million, with retail sales volume up 4.1%; warmer-than-normal summer weather was a significant contributor. Gas revenue fell 13.7% to $165.9 million, reflecting 8.8% lower retail deliveries amid milder winter weather and lower gas rates/costs.
- Elm Road Unit 1 entered commercial operation in February 2010, increasing nonregulated energy revenue and reducing purchased-power needs. Unit 2 entered service on January 12, 2011.
- MGE Energy’s 2010 net income included a $2.6 million pretax gain on a property sale to ATC and a $0.5 million pretax gain on another property sale.
- Cash from operations less capital expenditures was approximately $64.0 million. Investing activities used $57.4 million; financing activities used $64.2 million.
- At year-end, MGE Energy had $336.0 million of long-term debt and $22.5 million of short-term debt. Common equity was 59.4% of capitalization; long-term debt was 38.0% and short-term debt 2.6%. Reported debt-to-capital ratios under credit-agreement calculations were 40.6% for MGE Energy and 37.3% for MGE.
- Current assets were $162.3 million and current liabilities $81.2 million, implying a current ratio of about 2.0. Cash was modest relative to short-term obligations; reported available capacity under the respective credit agreements was $21.0 million for MGE Energy and $71.5 million for MGE.
- Dividends declared were $1.49 per share, up from $1.46. MGE paid $26.2 million in dividends to MGE Energy; its regulatory equity ratio was estimated at 58.5%, above the 55% threshold relevant to a dividend restriction.
Material changes, outlook and risks
- Profit improved despite nearly flat total revenue, driven notably by stronger electric results and Elm Road Unit 1. Gas segment income declined to $7.4 million from $9.9 million; electric utility income rose to $30.2 million from $23.9 million; nonregulated energy income rose to $15.8 million from $11.1 million.
- The PSCW authorized 2011 retail rate increases of 2.3% for electricity ($8.0 million) and 1.0% for gas ($1.9 million). The electric increase primarily reflects Elm Road costs. The filing provides no quantified 2011 earnings or EPS guidance.
- Management budgeted 2011 capital expenditures of $66.9 million. Expected pension and postretirement plan contributions were approximately $21 million in 2011, followed by $11–$13 million annually in 2012–2015, subject to change.
- MGE Power Elm Road estimated its share of total project capital costs at approximately $180 million, excluding capitalized interest. The project manager reported total-unit construction costs $191 million, or 8.7%, above the initially approved amount; MGE’s estimated share of the overrun was approximately $14 million. Recovery of excess costs depends on PSCW review and approval, and management expected to seek recovery.
- MGE and the other Columbia co-owners face EPA and Sierra Club Clean Air Act claims concerning alleged past permitting and emissions-control violations. MGE recorded no loss contingency at year-end; management could not predict the outcome and said an adverse result could have a significant effect. MGE’s estimated share of a proposed Columbia emissions-control project was approximately $140 million, subject to regulatory authorization and rate recovery.
- Environmental rules covering air emissions, water discharges, coal byproducts and greenhouse gases may require additional capital spending or operating changes; the filing says potential costs cannot be reliably estimated in several cases. Management generally expects to seek recovery through rates, but recovery and timing are not assured.
- A ten-year power purchase agreement had a $19.0 million fair-value loss at year-end, up from $12.8 million in 2009; regulatory accounting defers the customer-related impact. If MGE’s credit rating falls below investment grade after purchases begin in 2012, the agreement could require $20–$40 million of collateral, depending on nominated capacity.
- Other exposures include commodity and interest-rate volatility, pension funding and assumptions, weather and economic demand, counterparty performance, and reliance of the holding company on subsidiary cash flows. A 1% change in variable borrowing rates was estimated to change 2010 interest expense and net income by $0.2 million for MGE Energy.
Most important facts for investors to verify
- Whether the PSCW permits recovery of Elm Road construction overruns and whether the additional expected $30 million financing was completed on the terms described.
- Developments, potential remedies and financial exposure in the Columbia Clean Air Act litigation and the Columbia emissions-control approval process.
- Actual 2011 capital spending, pension contributions, and realized customer-rate recovery of Elm Road and environmental costs.
- Whether 2010 earnings gains persist after accounting for unusually favorable summer weather, property-sale gains, and the timing of new generation entering service.
- The valuation assumptions and regulatory treatment of the $19.0 million power-purchase-agreement liability, including any collateral requirements.
- Liquidity and dividend capacity at both MGE Energy and MGE, including available credit, debt maturities and regulatory dividend restrictions.