MGE Energy, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. MGE Energy is a utility holding company; its subsidiary Madison Gas and Electric (MGE) provides regulated electric and gas service. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $137.8 | $139.5 | $419.7 | $422.8 |
| Operating income | $39.8 | $42.0 | $90.2 | $99.4 |
| Net income | $29.5 | $26.6 | $67.9 | $61.5 |
| EPS, basic and diluted | $0.85 | $0.77 | $1.96 | $1.77 |
- For the nine months, electric margin, a company-defined non-GAAP measure, declined $7.6 million to $225.7 million; gas margin rose $0.9 million to $52.1 million. In Q3, electric margin increased $0.6 million to $89.4 million and gas margin decreased $0.2 million to $13.5 million.
- The effective income tax rate fell to 24.3% for the nine months from 36.6% in 2017, primarily reflecting the federal tax-rate reduction. This helped net income rise despite lower operating income. Revenue and operating income declined 0.7% and 9.3%, respectively, year over year for the nine months.
- Nine-month operating cash flow was $138.4 million, compared with $96.1 million. Capital expenditures were $149.0 million, versus $66.3 million; operating cash flow less capital expenditures was negative $10.6 million. Cash provided by financing was $37.9 million, including $100 million of debt issuance.
- At September 30, cash and cash equivalents were $133.9 million ($135.0 million including restricted cash and margin-account receivable). Current assets were $280.7 million and current liabilities $98.5 million. Long-term debt was $494.4 million, with $4.5 million due within one year; short-term debt was zero. Shareholders’ equity was $812.0 million.
- Common dividends were $0.338 per share in Q3 and $0.983 per share for the nine months, up from $0.323 and $0.938, respectively, in 2017.
Drivers, outlook and material items
- Management attributed improved electric utility operating income mainly to more favorable weather. Nine-month residential electricity sales volume rose 10.5%, while industrial volume fell 11.2%, partly because a large industrial customer relocated. Colder April weather and customer growth supported higher nine-month gas sales.
- Tax Act-related customer bill credits and revenue deferrals reduced reported utility revenue. MGE had returned $5.9 million to customers by September 30 and recorded a $2.6 million regulatory liability, net of bill credits. The timing of returning remaining tax benefits depends on PSCW determinations.
- MGE issued $40 million of 35- and 40-year unsecured notes in July and $60 million of 30-year notes in September, at stated annual rates of 4.24%, 4.34% and 4.19%, respectively. Proceeds supported capital spending and refinanced $20 million of maturing debt.
- Capital investment accelerated: the 66-MW Saratoga wind farm had incurred $66.5 million through September, with estimated total cost of $108 million and completion expected by early 2019. MGE’s share of the Forward Wind acquisition was about $23 million. The filing also describes a proposed 100-MW MGE share of solar projects, with approximately $130 million expected cost, subject to PSCW approval.
- A proposed 2019–2020 rate settlement, subject to PSCW approval, would lower electric rates 1.94% in 2019 and hold that level in 2020 subject to fuel-plan adjustments; gas rates would rise 1.06% in 2019 and 1.46% in 2020. The proposed authorized return on common equity is 9.8%.
- MGE had deferred $7.2 million of 2018 fuel savings pending PSCW review expected in 2019. Separately, a $4.2 million refund of 2017 fuel savings was scheduled for customer bills in October 2018.
- Key uncertainties include environmental rules and litigation affecting fossil-fueled plants, particularly proposed greenhouse-gas requirements; management said impacts of the proposed ACE rule were not yet determinable. Changes to ATC’s authorized return on equity could reduce investment earnings and distributions. The filing also identifies commodity, interest-rate, pension-asset and counterparty risks. A purchased-power agreement has a $36.3 million fair-value loss and could require $20–$40 million of collateral if MGE’s debt rating falls below investment grade; none was required at quarter-end.
- Management stated liquidity was adequate for operations and capital expenditures over the next 12 months. The filing provides no earnings or EPS guidance. Management cautions that forward-looking estimates are subject to risks and actual results may differ.
Important facts for investors to verify
- Whether the PSCW approves the proposed 2019–2020 rate settlement and determines the ultimate treatment of tax-related customer refunds and deferred fuel savings.
- Completion timing and final cost of Saratoga, and approvals and costs for the proposed solar projects.
- Whether environmental rule changes or ATC ROE proceedings alter expected costs, earnings or investment distributions.
- How ongoing capital spending is funded and how new debt affects leverage, interest expense and liquidity.
- The drivers of lower electric margin and operating income, including customer departures, weather, fuel costs and regulatory revenue adjustments.