MGE Energy, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. MGE Energy is a utility holding company; its subsidiary Madison Gas and Electric (MGE) accounts for most consolidated operations. Amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Operating revenue | $136.7 | $140.8 | $405.8 | $433.1 |
| Operating income | $46.5 | $46.2 | $104.3 | $102.1 |
| Net income | $27.9 | $28.4 | $61.1 | $60.1 |
| EPS | $0.80 | $0.82 | $1.76 | $1.73 |
| Operating margin | 34.0% | 32.8% | 25.7% | 23.6% |
| Net margin | 20.4% | 20.1% | 15.0% | 13.9% |
- For the nine months, operating cash flow was $129.2 versus $122.7; capital expenditures were $62.3 versus $52.3, leaving cash flow after capital expenditures of about $66.9 versus $70.3. Dividends paid were $31.1.
- At September 30, cash was $111.6 and current assets/current liabilities were $249.3/$86.2 (about 2.9x current coverage). Long-term debt was $383.8 and debt due within one year was $4.3. Capitalization was 65.0% equity and 35.0% debt.
- Dividend declared per share for the first nine months rose to $0.898 from $0.860.
Material changes versus prior periods
- Nine-month revenue fell 6.3%, while net income rose 1.6% and EPS increased from $1.73 to $1.76. Q3 revenue declined 2.9% and net income declined 1.7% year over year.
- Lower gas commodity costs and warmer first-quarter weather reduced nine-month gas revenue by $15.7, including lower PGA recoveries; gas costs sold also declined $14.6. These revenue and cost pass-through changes generally do not drive gas net income directly.
- Electric retail sales volumes increased 0.7% for nine months, with residential volumes up 5.5%, aided by more favorable weather. Electric revenue nevertheless declined 2.1%, primarily reflecting fuel credits and deferred fuel savings. Higher internal generation and lower purchased-power volumes reduced purchased-power expense, while electric fuel expense and operating and maintenance costs increased.
- Nonregulated energy income declined to $14.3 from $15.1 for nine months, partly because the rate-recovery period for construction carrying costs ended in 2015. Transmission investment income declined to $6.0 from $6.6.
- Capital spending increased by $10.0, primarily for electric and gas distribution assets. MGE Energy’s operating cash flow improved, while MGE’s standalone operating cash flow declined slightly to $129.0 from $130.1.
Outlook, commentary, risks and unusual items
- Rates: MGE requested 2017 rate increases of 1.7% for electric and 3.7% for gas, mainly for transmission and gas-system infrastructure costs. A PSCW decision was expected in Q4 2016; the filing provides no earnings guidance.
- Fuel refunds: MGE returned $15.5 to electric customers in September under a PSCW order requiring a total $15.7 refund. A further $4.1 of 2016 fuel savings was deferred pending the PSCW’s 2017 review.
- Generation plans: In October, the PSCW approved an agreement to reduce MGE’s Columbia ownership in exchange for avoiding certain future capital expenditures; MGE expected an $11.2 reduction in property and equipment in Q4 2016. MGE’s Columbia share was forecast to fall from 22% to about 19% by June 2020. Separately, MGE may acquire up to 50 MW from a planned gas-fired plant expected to be completed by early 2020.
- Debt financing: MGE priced $40 of 35-year unsecured debt at 3.76% in October, with funding expected in January 2017. Proceeds were intended to refinance $30 of notes maturing in 2017 and help fund capital expenditures.
- Regulatory and operating risks: The Clean Power Plan was stayed pending litigation; management said it could materially affect MGE if upheld. A finalized CSAPR update may require MGE to buy ozone-season NOx allowances, with potential material cost depending on allowance prices. Other environmental compliance obligations and recovery timing remain uncertain, although management generally expects eligible costs to be recovered through rates.
- Other risks: FERC proceedings could reduce ATC transmission returns and future earnings/distributions. A large industrial customer planned to close its local facilities in early 2017; it contributed about $2.8 of pretax earnings in the first nine months of 2016. Pension costs, weather, commodity prices, economic conditions and regulatory cost recovery are also risks.
- Corporate structure: MGE’s ownership of MGE Transco fell below a majority in July, so MGE deconsolidated MGE Energy’s proportionate share of Transco equity prospectively; no gain or loss was recorded. MGE Energy held 50.5% of Transco at quarter-end. A PSCW-accepted recommendation calls for MGE to transfer its Transco interest to MGE Energy by December 31, 2022.
- Routine legal matters were not expected to have a material adverse effect. MGE reported no derivative-counterparty defaults and no collateral posted at quarter-end; its purchased-power agreement has a $50.5 fair-value liability and could require $20–$40 of collateral if MGE’s debt rating falls below investment grade.
Most important facts for investors to verify
- Outcome and timing of the 2017 rate case, and the treatment of deferred fuel savings.
- Actual costs and rate recovery for environmental rules, especially the Clean Power Plan litigation and CSAPR allowance requirements.
- FERC decisions on ATC return on equity and their effect on MGE Energy’s investment earnings.
- Execution and financial effects of the Columbia ownership/capital-expenditure agreement, Riverside capacity option and planned debt issuance.
- Impact of the industrial customer’s closure, weather and utility cost trends on sales, margins and cash generation.