MGE Energy, Inc. — Q2 2018 Form 10-Q
Business context and period. The combined filing covers MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE). MGE provides regulated electric and natural gas service primarily in Wisconsin; MGE Energy also has nonregulated generation and transmission investments. Financial results are unaudited for the three and six months ended June 30, 2018, compared with 2017.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $124.3 million | $126.5 million | $281.9 million | $283.3 million |
| Operating income | $24.2 million | $25.6 million | $50.4 million | $57.4 million |
| Net income attributable to MGE Energy | $18.4 million | $15.5 million | $38.4 million | $34.8 million |
| EPS, basic and diluted | $0.53 | $0.45 | $1.11 | $1.01 |
- Revenue declined 1.7% in Q2 and 0.5% in the first half. Electric revenue fell while gas revenue rose.
- Net income rose despite lower operating income, principally reflecting lower income-tax expense following the federal corporate tax-rate reduction. MGE Energy’s effective tax rate was 24.1% for the first half, versus 36.4% a year earlier.
- Q2 electric margin, a company-defined non-GAAP measure, declined $2.9 million to $70.8 million; gas margin rose $0.5 million to $15.4 million. For the first half, electric margin fell $8.1 million to $136.3 million, while gas margin increased $1.0 million to $38.5 million. Management attributed margin pressure largely to revenue deferrals/refunds, including tax-related customer credits.
- For MGE, net income attributable to the utility was $11.1 million in Q2 and $23.5 million in the first half, compared with $8.8 million and $21.5 million, respectively, in 2017.
Cash flow, balance sheet and capital
- First-half operating cash flow was $91.6 million, up from $67.0 million, while capital expenditures were $100.4 million, versus $42.2 million. Investing cash outflow was $103.1 million. The company attributed the higher investment chiefly to Saratoga Wind construction and the Forward Wind purchase.
- Cash, cash equivalents and restricted cash totaled $100.3 million at June 30, 2018, versus $112.1 million at year-end 2017. MGE Energy reported $28.2 million of short-term debt, $4.5 million of long-term debt due within one year, and $416.1 million of long-term debt. Its capitalization ratios were 63.9% equity, 33.8% long-term debt and 2.3% short-term debt.
- Common dividends declared were $0.323 per share in Q2 and $0.645 for the first half, up from $0.308 and $0.615, respectively, in 2017.
- Management stated that liquidity was adequate for operations and capital expenditures over the next 12 months. In July, MGE issued $40 million of long-term debt and committed to issue another $60 million, partly to fund investment and refinance $20 million maturing in September.
Material changes, outlook and risks
- Weather contributed to higher electric and gas sales volumes, while a large industrial customer’s relocation reduced industrial electric sales. Colder April weather and customer growth supported gas sales.
- MGE purchased a 12.8% share of Forward Wind in April for approximately $23 million, replacing an existing power purchase agreement. The PSCW-authorized 66 MW Saratoga Wind Farm was under construction; approximately $42.6 million had been spent by June 30, with estimated total cost of $108 million and completion expected by year-end 2018.
- A July 2018 settlement application, subject to PSCW approval, proposed electric rate decreases of 1.94% in 2019 and gas increases of 1.06% in 2019 and 1.46% in 2020. Proposed electric rates for 2020 remain subject to the 2020 fuel-cost plan.
- The PSCW directed tax-reform-related customer credits; customers received $4.1 million in June, with further monthly credits planned for the rest of 2018. At June 30, MGE had deferred $1.7 million of net tax-related over-collection as a regulatory liability. MGE also had deferred $5.2 million of 2018 fuel savings, subject to PSCW review. A July preliminary decision called for a $4.2 million refund of additional 2017 fuel savings.
- Key risks include uncertain environmental requirements for fossil-fuel generation, potential changes to ATC’s allowed return on equity, fuel and commodity-price exposure, weather and demand variability, and regulatory timing of cost recovery. MGE reported that environmental compliance costs were not expected to be significant for the Elm Road Units under the coal-ash rule, but broader regulatory outcomes remain uncertain. Management said the Clean Power Plan, if implemented substantially as written, could materially affect MGE.
- MGE’s long-term purchased-power agreement had a $38.8 million fair-value loss at June 30; regulatory accounting defers the effect. A downgrade below investment grade could require $20 million to $40 million of collateral under the agreement. No collateral was then required, and no derivative counterparties had defaulted. Routine legal matters were not expected to have a material adverse effect.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. The filing provides no full-year earnings or EPS guidance.
Investor facts to verify
- PSCW approval and final terms of the proposed 2019–2020 rate settlement, including fuel-plan adjustments and the timing of tax and fuel refunds.
- Saratoga Wind’s remaining construction cost, schedule and financing, and the realized economics of the Forward Wind acquisition.
- Future capital spending, short-term borrowing needs and completion of the committed $60 million debt financing.
- Developments in ATC return-on-equity proceedings and their potential effect on transmission investment earnings and distributions.
- Environmental rulemaking and litigation, especially requirements affecting coal and gas generation and the timing and recovery of compliance costs.