MGE Energy, Inc. — Q2 2016 Form 10-Q
Business context and period. This unaudited combined filing covers the quarter and six months ended June 30, 2016. MGE Energy is a holding company whose principal subsidiary, Madison Gas and Electric (MGE), operates regulated electric and gas utilities in Wisconsin; MGE Energy also has nonregulated generation and transmission investments. Unless noted, figures below are for MGE Energy consolidated.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $121.6m | $122.1m | $269.1m | $292.3m |
| Operating income | $28.2m | $24.0m | $57.7m | $55.9m |
| Net income | $16.2m | $13.5m | $33.2m | $31.8m |
| EPS | $0.47 | $0.39 | $0.96 | $0.92 |
| Operating margin | 23.2% | 19.7% | 21.5% | 19.1% |
Cash flow and liquidity. Six-month operating cash flow was $93.5m, versus $73.0m a year earlier; capital expenditures were $40.8m, versus $33.2m. Cash ended at $110.3m, up from $81.4m at year-end 2015. Management said liquidity was adequate for operations and capital expenditures over the next 12 months. MGE Energy had $150m of aggregate credit lines, including MGE, and MGE had $100m of lines; neither had borrowings outstanding at June 30.
Debt and capitalization. Long-term debt, including $34.3m due within one year, totaled approximately $389.1m at June 30, compared with approximately $391.0m at December 31. Equity was $703.0m; the reported capitalization mix was 64.4% common equity and 35.6% long-term debt, including current maturities. Current liabilities rose to $128.6m from $84.1m, principally alongside the reclassification of debt due within one year. The filing reports long-term debt fair value of $472.7m, including current maturities.
Dividend. MGE Energy declared dividends of $0.590 per share for the first half, up from $0.565 in the comparable 2015 period.
Changes and management commentary
- First-half revenue fell 7.9%, largely reflecting lower gas revenues and commodity pass-through costs; gas cost recoveries affect revenue but generally not net income. Electric revenue declined 2.1%, including fuel-savings deferrals and customer credits.
- Net income rose despite lower revenue. Management attributed the improvement mainly to stronger electric utility earnings, supported by warmer second-quarter weather and higher residential electric sales, and lower purchased-power expense as internal generation increased. Six-month gas utility earnings were slightly lower.
- Second-quarter retail electric sales volume increased 1.4%; residential volume rose 8.4%. First-half gas retail deliveries fell 9.2%, partly due to warmer first-quarter weather. MGE Energy’s nonregulated segment and ATC transmission investment earnings were lower year over year for the first half.
- Cash from operations benefited from working-capital movements, including lower gas inventories and receivables, higher payables, and deferred fuel savings. These timing effects should be distinguished from recurring operating performance.
Outlook, risks, and unusual items
- Rates and customer refunds: MGE requested 2017 rate increases of 1.7% for electric and 3.7% for gas, primarily for transmission and gas-system infrastructure costs; these were proposals, not approved rates. A July 2016 PSCW order directed a $15.7m one-time refund of additional 2015–2016 electric fuel savings, expected by the end of Q3 2016, in addition to previously scheduled fuel credits. At June 30, $14.8m of fuel-related savings were deferred, including $2.3m subject to later review.
- Industrial customer: A large industrial customer planned to close and relocate out of state in early 2017. It contributed about $1.7m of pre-tax earnings in the first half of both 2016 and 2015; MGE’s 2017 rate filing addresses the expected closure.
- Environmental regulation: The Clean Power Plan was stayed by the Supreme Court. Management said it could materially affect MGE if upheld and implemented. Costs and requirements under other emissions and coal-ash rules remain uncertain; management expects many compliance costs to be recoverable in future rates, but timing may lag expenditures.
- ATC investment: Pending FERC proceedings could reduce ATC’s allowed return on equity and MGE Energy’s related earnings and distributions. ATC contributed about 7.1% of first-half 2016 net income. In July, MGE’s ownership of MGE Transco fell below a majority; MGE will deconsolidate the related noncontrolling interest, with no gain or loss recognized. A PSCW-accepted transfer of MGE’s remaining ATC interest to MGE Energy was expected to occur in 2016.
- Generation plans: MGE may acquire up to 50 MW in a WPL gas-fired plant expected to be completed by early 2020, subject to the agreement’s terms. A related proposed arrangement would reduce MGE’s Columbia ownership and certain capital-expenditure obligations, subject to PSCW approval; MGE had accrued $10.3m of related 2016 Columbia capital expenditures.
- Contracts and contingencies: A purchased-power agreement had a $52.2m fair-value loss, offset by regulatory accounting treatment; actual costs are recognized as power is purchased. A downgrade below investment grade could trigger $20m–$40m of collateral requirements under the agreement; none was required or posted at June 30. Routine legal matters were not expected to have a material adverse effect. The filing provides no full-year earnings or EPS guidance.
Important facts for investors to verify
- Progress and final outcome of the 2017 rate case, and timing and accounting for the $15.7m fuel refund and remaining deferred fuel savings.
- Whether the industrial customer’s closure proceeds as expected and its eventual impact on sales, earnings, and rates.
- Developments in the Clean Power Plan litigation and environmental compliance costs, including whether recovery in customer rates is timely and complete.
- FERC decisions on ATC return on equity and completion/accounting for the MGE Transco and ATC ownership changes.
- Funding and refinancing plans for MGE’s $30m note maturing in 2017, alongside planned capital spending and the proposed generation arrangements.