MGE Energy, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. MGE Energy is a utility holding company; its wholly owned subsidiary, Madison Gas and Electric (MGE), accounts for most consolidated operations. Amounts below are in U.S. dollars unless noted.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $149.9 million | $167.6 million | Down 10.6% |
| Operating income | $31.4 million | $30.5 million | Up $0.9 million |
| Net income, MGE Energy consolidated | $26.0 million | $24.0 million | Up 8.5% |
| Basic and diluted EPS | $0.75 | $0.69 | Up 8.7% |
| Net income attributable to MGE | $19.1 million | $16.6 million | Up $2.5 million |
| Cash from operating activities, MGE Energy | $53.8 million | $53.2 million | Up $0.6 million |
| Capital expenditures, MGE Energy | $46.8 million | $31.9 million | Up $14.8 million |
Utility margins: Electric margin, a non-GAAP measure, was $72.8 million versus $72.6 million. Gas margin, also non-GAAP, was $26.0 million versus $26.8 million. Management reconciles these measures to GAAP operating income in the filing.
Balance sheet and liquidity: At March 31, MGE Energy reported $17.5 million cash and cash equivalents, $2.07 billion total assets, $3.0 million short-term debt, $522.6 million long-term debt, and $19.7 million long-term debt due within one year. Common shareholders’ equity was $869.5 million. Management reported $147 million of available borrowing capacity under revolving credit facilities and said liquidity was expected to be adequate for operations and capital spending over the next 12 months, subject to the pandemic’s duration and severity.
MGE Energy paid $12.2 million in common dividends during the quarter; declared dividends were $0.353 per share, compared with $0.338 a year earlier. Cash, cash equivalents, and restricted cash ended the quarter at $19.8 million, down from $25.8 million at year-end 2019.
Changes and management commentary
- Revenue declined largely with lower gas sales and milder weather. Retail electric sales volume fell 3.3%; retail gas deliveries fell 14.0%. Heating degree days were down 16.2% year over year.
- Despite lower revenue, net income rose. Management cited lower fuel and gas costs, reduced operations and maintenance expense, customer growth, and a higher rate base. Electric and gas utility net income increased; the nonregulated energy and transmission investment segments were broadly steady.
- Operating cash flow was nearly unchanged, while investing cash outflow increased as capital spending rose, principally for the Two Creeks and Badger Hollow I solar projects. Combined expected project cost was approximately $130 million. Two Creeks was expected online by year-end 2020; Badger Hollow I’s expected completion moved to April 2021, with no significant cost increase anticipated.
- COVID-19 had no material adverse impact on Q1 results, but management reported lower retail sales beginning in late March and expected Q2 and later 2020 sales to be negatively affected. The company could not reliably estimate the financial impact. Wisconsin’s PSCW suspended disconnections for most customers, late charges, and certain deposits; MGE had deferred $0.2 million of eligible pandemic-related costs by quarter-end. Recovery is subject to future rate proceedings.
- Management said it was assessing cost containment and the timing of discretionary spending and capital projects. It did not then expect COVID-19 to significantly disrupt Two Creeks. The Badger Hollow I delay’s effect on Badger Hollow II’s schedule remained under assessment.
Risks, contingencies, and unusual items
- COVID-19 could reduce energy demand, delay customer payments, raise bad debts, disrupt employees or suppliers, delay regulatory approvals, and affect benefit-plan assets and liquidity. Recovery of deferred costs is not assured; unrecovered costs could be expensed.
- Environmental compliance requirements and legal challenges concerning emissions, water, coal ash, and greenhouse gases may affect fossil-generation costs and operations. Management said the timing and cost impacts were uncertain and expected to seek recovery through rates.
- FERC proceedings concerning ATC’s authorized return on equity may affect future equity earnings and distributions. Rehearing requests remained pending on a separate complaint; a potential refund remained possible.
- In April 2020, MGE refinanced $19.3 million of bonds with new bonds bearing 2.05% interest, subject to tender or repricing in April 2023. This occurred after the reporting date.
- Employee benefit plan assets declined approximately 16% in Q1; sustained weakness could affect future benefit costs. MGE also had a $23.6 million fair-value loss position on a purchased power agreement, offset by regulatory accounting treatment.
Important facts for investors to verify
- How COVID-19 affected customer demand, collections, bad-debt reserves, operating cash flow, and regulatory cost recovery after March 31.
- Whether solar project schedules and spending changed, particularly Badger Hollow I and the related Badger Hollow II timeline.
- Actual capital requirements, borrowing capacity, and debt terms, including the April 2020 refinancing and its 2023 tender provision.
- Developments in PSCW rate proceedings, environmental rules, and FERC’s ATC return-on-equity matters.
- Whether lower benefit-plan asset values led to higher pension or postretirement costs in subsequent periods.