MGE Energy, Inc. — Q2 2015 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2015, compared with the same periods in 2014. MGE Energy is a utility holding company; its principal subsidiary, Madison Gas and Electric (MGE), provides regulated electric and natural gas service in Wisconsin. The filing presents both entities’ statements.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $122.1 million | $128.8 million | $292.3 million | $339.0 million |
| Operating income | $24.0 million | $24.4 million | $55.9 million | $68.4 million |
| Net income | $13.5 million | $14.1 million | $31.8 million | $41.8 million |
| EPS, basic and diluted | $0.39 | $0.41 | $0.92 | $1.21 |
| Dividends per share | $0.283 | $0.272 | $0.565 | $0.543 |
- Revenue declined approximately 5% in Q2 and 14% in the first half; net income declined approximately 4% and 24%, respectively.
- Operating margin was approximately 19.7% in Q2 versus 19.0% a year earlier, and 19.1% for the first half versus 20.2%. Net margin was approximately 11.0% and 10.9% for Q2, and 10.9% and 12.3% for the first half, respectively.
- Management attributed the first-half earnings decline chiefly to lower gas demand following the unusually cold 2014 winter, lower electric demand and market sales, reduced AFUDC income, and higher depreciation after Columbia environmental equipment entered service. Lower gas commodity costs reduced both gas revenue and cost of gas sold; gas commodity costs are generally passed through to customers.
- Six-month operating cash flow was $73.0 million, down from $84.7 million. Capital expenditures were $33.2 million, down from $42.3 million, mainly reflecting lower Columbia project spending. Cash at June 30 was $75.8 million, versus $87.9 million at June 30, 2014.
- At June 30, total current assets were $230.8 million and current liabilities were $76.2 million. Long-term debt was $393.1 million, with $4.2 million due within one year; short-term debt was zero. MGE Energy’s capitalization consisted of 62.8% common equity and 37.2% long-term debt.
- New revolving facilities effective June 1 provide $50 million to MGE Energy and $100 million to MGE. Neither entity had borrowings under the facilities at June 30, and MGE had no commercial paper outstanding. Management said liquidity was adequate for operations and capital needs over the next 12 months.
Material changes, outlook, and risks
- For 2015, regulators authorized a 3.8% ($15.4 million) increase in retail electric rates and a 2.0% ($3.8 million) decrease in gas rates. Revised gas rate design shifts more recovery to fixed monthly charges, which management expects to make earnings less weather-sensitive.
- MGE had deferred $5.7 million of 2015 electric fuel savings through June 30. A July application proposed returning savings through customer bill credits, including approximately $2.7 million for 2015 and a proposed approximately $5.0 million credit for 2016; final amounts depend on fuel-cost audits. The PSCW also extended transmission-cost accounting treatment through 2016, conditioned on no 2016 base-rate filing.
- No specific earnings guidance is provided. Management says it will focus on reliable service, cost control, and long-term value, and expects to seek rate recovery of environmental compliance costs; timing and recovery may lag expenditures.
- Environmental rules are a significant uncertainty. MGE’s share of the Columbia Unit 2 SCR system is projected at $30–$40 million, with installation required by December 31, 2018. The Clean Power Plan, finalized August 3, 2015, is expected by management to have a material impact on MGE, though compliance costs are not yet clear. Columbia’s future operating requirements may also be affected by SO2 attainment designations and other air- and water-quality rules.
- Pending FERC proceedings could reduce ATC/MISO transmission returns or require refunds. ATC provided an earnings adjustment for its estimate of potential refund liability; MGE derived approximately 7.7% of first-half net income from its ATC investment.
- The purchased power agreement had a $56.0 million fair-value loss recorded as a derivative liability, with regulatory accounting treatment. If MGE’s debt rating falls below investment grade, the agreement may require $20–$40 million of collateral; none was required or posted at June 30.
- Other notable items: new accounting guidance brought chattel-paper financing on balance sheet, increasing assets and liabilities by approximately $3.7 million and reducing retained earnings by $0.1 million. MGE also contributed $11.6 million to pension and postretirement plans in the first half, versus $1.6 million in the prior-year period.
Most important facts for investors to verify
- Whether customer demand and weather normalize, and how the new gas rate design affects seasonal revenue and earnings.
- Final fuel-credit amounts and the treatment of deferred fuel savings in customer rates.
- Estimated Columbia compliance spending, the outcome of environmental rulemaking, and the timing and extent of rate recovery.
- The result of the FERC ATC/MISO ROE proceedings and any resulting refund or earnings impact.
- Future pension contributions, capital spending, and available liquidity; confirm credit-facility terms and any borrowing needs.
- How the purchased power agreement’s fair value and any credit-rating-related collateral requirements change.