MGE Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. MGE Energy is the holding company; its subsidiary Madison Gas and Electric (MGE) accounts for most consolidated operations. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $139.5 | $136.7 | $422.8 | $405.8 |
| Operating income | $43.0 | $46.5 | $102.5 | $104.3 |
| MGE Energy net income | $26.6 | $27.9 | $61.5 | $61.1 |
| MGE Energy diluted EPS | $0.77 | $0.80 | $1.77 | $1.76 |
| Cash from operating activities | Not presented quarterly | $99.0 | $129.2 |
MGE’s net income attributable to MGE was $19.9 million in Q3, down from $22.0 million, and $41.5 million for nine months, down from $43.1 million. Nine-month operating margin was approximately 24.2%, compared with 25.7% in 2016.
- Nine-month electric revenue rose 2.8% and gas revenue rose 9.7%. Gas revenue growth largely reflected higher gas costs passed through under the purchased gas adjustment (PGA), which management says does not affect net income.
- Nine-month electric sales volume declined 5.9%, including a 13.9% decline in industrial sales after a large customer relocated and a 6.3% reduction in residential volume amid less favorable weather. Lower wholesale market sales also weighed on revenue.
- Operating income declined despite higher revenue, reflecting higher purchased power, operating and maintenance, and depreciation expenses. Lower electric-generation fuel costs partly offset the increases.
- Quarterly electric utility earnings were affected by cooler weather; management cited cost control as a main contributor to higher nine-month electric utility earnings. Transmission investment income benefited from a more favorable comparison with ATC’s prior-year reserve expense.
Cash flow, debt and liquidity
- MGE Energy provided $99.0 million of operating cash in the first nine months, versus $129.2 million a year earlier. Capital expenditures were $66.3 million, and investing activities used $71.1 million.
- Cash and cash equivalents at quarter-end were $104.7 million for MGE Energy consolidated, versus $96.0 million at year-end 2016. MGE itself held $2.0 million, down from $10.8 million. Management stated that available liquidity, operating cash flow and borrowing capacity were adequate for operations and capital spending over the next 12 months.
- At September 30, MGE Energy reported $389.4 million of long-term debt, $4.4 million due within one year and $7.0 million of short-term debt. Its capitalization mix was 65.3% common equity, 34.1% long-term debt and 0.6% short-term debt.
- In January 2017, MGE issued $40 million of 3.76% senior notes due 2052, refinancing $30 million of maturities and funding capital needs. After quarter-end, MGE issued another $30 million of 3.11% notes due 2027.
- MGE Energy paid $32.5 million in common dividends during the nine-month period; declared dividends were $0.938 per share, compared with $0.898 in 2016.
Outlook, regulation and risks
- 2017 PSCW-approved rates reduced retail electric rates by 0.8% ($3.3 million annualized) and increased retail gas rates by 1.9% ($3.1 million annualized). The authorized return on common equity was 9.8% on a 57.2% equity capital structure.
- The PSCW ordered a $6.0 million refund of additional 2015–2016 fuel savings, to be credited to customers in October 2017. MGE had deferred $3.3 million of 2017 fuel savings at quarter-end, subject to regulatory review expected in 2018.
- MGE filed for approval to build a 66 MW Saratoga wind farm in Iowa, estimated to cost $107 million, with construction anticipated to start in early 2018 if approved. In October 2017, MGE also agreed with other utilities to acquire the Forward Wind Energy Center; MGE’s expected share is approximately $23 million, subject to PSCW and FERC approvals and an expected spring 2018 closing.
- MGE was reducing its Columbia coal plant ownership through an arrangement tied to foregone capital spending. Its share fell from 22.0% to 20.4% in January 2017; management forecast approximately 19% by June 2020. MGE could acquire up to 50 MW of capacity in WPL’s planned Riverside gas-fired plant, expected to be completed by early 2020.
- Environmental rules and litigation remain uncertain. The EPA proposed repeal of the Clean Power Plan in October 2017; management said final requirements and timing are unclear and could materially affect MGE if implemented substantially as previously proposed. The company expects to seek recovery of compliance costs in customer rates, but timing and scope of recovery are uncertain.
- ATC return-on-equity proceedings could reduce future equity earnings and distributions. MGE Energy attributed about 7.2% of nine-month 2017 net income to its ATC investment. MGE also reported a $43.1 million fair-value loss on a purchased-power agreement, offset by regulatory accounting; a downgrade below investment grade could trigger $20–$40 million of collateral requirements.
- Management identified weather, customer demand, commodity prices, interest rates, pension asset returns, regulation, environmental requirements and counterparty performance as risks. It reported no derivative counterparty defaults and no material adverse effect expected from ordinary-course legal matters.
Investor verification points
- Verify the drivers and sustainability of lower operating income despite year-to-date revenue growth, particularly purchased-power costs, depreciation and transmission spending.
- Track electric and industrial sales volumes, weather effects, and whether lost industrial demand is offset by other customer growth.
- Confirm the outcome and accounting for the 2015–2017 fuel savings review and the October 2017 customer refund.
- Review approvals, cost estimates and financing for the Saratoga and Forward wind projects, Riverside capacity option, and Columbia ownership reductions.
- Monitor ATC FERC ROE proceedings and potential environmental rule changes, including the Clean Power Plan proposal and associated cost recovery.
- Reconcile MGE Energy’s consolidated cash position with MGE’s comparatively low standalone cash balance and assess planned capital spending and post-quarter debt issuance.