MGE Energy, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is a combined annual report for MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE). Unless indicated otherwise, financial results below are for consolidated MGE Energy.
Business context
MGE Energy is a regulated electric and gas utility holding company serving south-central Wisconsin, with additional nonregulated generation and transmission investments. MGE served approximately 153,000 electric and 161,000 gas customers. Coal supplied 52.3% of electric delivery requirements in 2018; natural gas supplied 13.8%, renewables 10.5%, and purchased power 23.4%.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $559.8 million | $563.1 million | Down 0.6% |
| Operating income | $114.2 million | $124.6 million | Down 8.4% |
| Net income | $84.2 million | $97.6 million | Down 13.7% |
| Diluted earnings per share | $2.43 | $2.82 | Down 13.8% |
| Cash provided by operating activities | $153.0 million | $131.4 million | Up $21.7 million |
| Capital expenditures | $212.2 million | $108.1 million | Up $104.1 million |
| Dividends declared per share | $1.32 | $1.26 | Up 4.8% |
- Electric revenue was $402.0 million, down $12.3 million; gas revenue was $157.8 million, up $8.9 million. Electric margin, a non-GAAP measure, declined to $293.9 million from $302.2 million; gas margin rose to $72.8 million from $72.2 million.
- Net income fell primarily because 2017 included a $21.6 million one-time tax benefit from the Tax Cuts and Jobs Act (Tax Act). Utility segment earnings improved: electric utility net income was $45.9 million versus $41.4 million, and gas utility net income was $12.9 million versus $11.1 million. Nonregulated energy earnings declined to $20.2 million from $40.5 million, principally due to the prior-year tax benefit.
- Weather supported utility demand: cooling degree days increased 37.2% and heating degree days increased 11.2% year over year. Electric retail sales volume rose 1.6%; retail gas deliveries rose 11.8%.
- Year-end cash and cash equivalents were $83.1 million, down from $108.0 million. Total assets were $2.0 billion and shareholders’ equity was $816.6 million. Current assets were $240.6 million and current liabilities $120.6 million.
- Long-term debt, including amounts due within one year, was approximately $497.9 million; short-term debt was $13.0 million. Capitalization was 61.5% common equity, 37.5% long-term debt, and 1.0% short-term debt. MGE had $87 million of unused capacity under its $100 million credit facilities; MGE Energy had $50 million available under its facility. Both facilities were extended in February 2019 to February 2024.
Material changes and unusual items
- The Tax Act reduced the federal corporate tax rate from 35% to 21%. The 2017 results included the one-time nonregulated tax benefit; in 2018, the effective tax rate was 24.6% versus 18.5% in 2017. A $130.5 million regulatory liability was recorded for regulated-utility tax benefits expected to be passed to customers. MGE returned $8.2 million through customer bill credits in 2018 and recorded a further $3.1 million regulatory liability, net of credits.
- MGE invested in renewable generation: it purchased a 12.8% share of the Forward Wind Energy Center for approximately $23 million, replacing an existing power purchase agreement. The 66-MW Saratoga wind project had $95.8 million of expenditures at year-end and was expected to be completed in February 2019 for approximately $112 million.
- MGE reduced its Columbia coal plant ownership from 20.4% to 19.4% in January 2018 and to 19.1% in January 2019. It expects ownership to be approximately 19% by June 2020.
- Fourth-quarter 2018 earnings were $16.4 million, or $0.47 per share, compared with $36.1 million, or $1.04 per share, in fourth-quarter 2017; the prior-year quarter included the Tax Act benefit.
Outlook, management commentary, and risks
- The PSCW-approved 2019/2020 settlement lowers electric rates by 2.24%, or $9.2 million, in 2019; rates are held at that level in 2020 subject to a fuel-cost plan. Gas rates increase by 1.06%, or $1.7 million, in 2019 and 1.46%, or $2.4 million, in 2020. The authorized return on common equity is 9.8% for both years.
- Forecast capital expenditures are $144.8 million for 2019 and an annual average of $136.3 million for 2020–2022. These forecasts exclude MGE’s proposed 100-MW share of two solar projects, estimated to cost approximately $130 million and awaiting PSCW approval.
- MGE’s Energy 2030 framework targets renewables at 25% of retail electric sales by 2025 and 30% by 2030, and carbon emissions 40% below 2005 levels by 2030 and 80% below by 2050. These objectives depend on approvals and other conditions.
- Key uncertainties include environmental rules and litigation affecting fossil-fuel plants, especially the proposed Affordable Clean Energy rule; the company says final requirements and their impact are uncertain and that implementation substantially in the form described in the filing could materially affect MGE. Columbia’s operator plans to close an ash pond and install dry-ash handling equipment in 2020–2021.
- Other risks include fuel and purchased-power price or supply disruptions, weather and customer demand, rate recovery timing, cyber and operational failures, pension asset and interest-rate volatility, and a potential reduction in ATC returns on equity. MGE deferred $9.5 million of 2018 fuel savings pending PSCW review. Lower fourth-quarter investment returns are expected to increase 2019 pension and postretirement costs; MGE requested permission to defer an estimated $5.9 million of 2019 costs.
- Management stated that liquidity is adequate for operations and capital spending over the next 12 months. The financial statements received unqualified audit opinions, and management and the auditor reported effective internal control over financial reporting as of year-end. The filing says ordinary-course legal matters are not expected to have a material adverse effect.
Important facts for investors to verify
- Track PSCW review of the $9.5 million fuel-savings deferral, implementation of the 2019/2020 rate settlement, and timing of customer refunds from the tax-related regulatory liability.
- Confirm Saratoga’s completion and final cost, and whether the proposed solar projects receive approval and proceed within the stated budget.
- Monitor environmental rulemaking and litigation, particularly ACE/CPP developments and Columbia compliance costs, including ash-pond closure and water-discharge requirements.
- Assess effects of Columbia ownership reductions and any FERC decision changing ATC’s authorized return on equity.
- Review 2019 pension expense and the PSCW decision on the requested benefit-cost deferral, alongside the company’s substantial capital program and increased debt.