MGE Energy, Inc. — First-Quarter 2019 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2019, MGE Energy reported results for its regulated electric and gas utility, nonregulated energy, transmission investments, and other operations. Its principal subsidiary, Madison Gas and Electric (MGE), serves customers in Wisconsin. The filing is a combined report; MGE is wholly owned by MGE Energy.
Financial results and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenue | $167.6 million | $157.6 million |
| Operating income | $30.5 million | $26.2 million |
| Net income, MGE Energy | $24.0 million | $20.0 million |
| EPS, basic and diluted | $0.69 | $0.58 |
| Operating cash flow, MGE Energy | $53.2 million | $47.0 million |
| Capital expenditures | $31.9 million | $37.6 million |
- Revenue increased 6.3% and net income increased 20.0% year over year. MGE reported $22.1 million net income, of which $16.6 million was attributable to MGE after $5.5 million attributable to noncontrolling interests.
- Electric margin, a non-GAAP measure, rose to $72.6 million from $65.5 million; gas margin rose to $26.8 million from $23.1 million. Management attributes the gains chiefly to lower purchased-power costs, higher gas demand and revenue subject to refund in the prior-year comparison.
- At March 31, MGE Energy reported $2.00 billion in assets, $82.4 million cash and cash equivalents, and $84.4 million in cash, cash equivalents and restricted cash. Balance-sheet debt comprised $492.3 million long-term debt, $4.6 million due within one year, and $6.0 million short-term debt. Common equity was $829.0 million.
- Quarter-end current assets were $221.3 million and current liabilities $112.5 million. Management stated liquidity was adequate for operations and capital spending over the next 12 months.
- Cash dividends paid were $11.7 million; the quarterly dividend was $0.338 per share versus $0.323 a year earlier.
Material changes and management commentary
- Electric revenue increased about $3.0 million, while purchased-power costs fell $6.1 million, partly because the Forward Wind Energy Center purchase and increased internal generation reduced reliance on purchased power.
- Gas revenue increased $7.3 million; heating degree days were 7.3% higher and retail gas deliveries increased 9.3% year over year. Management also cited customer growth.
- Operating and maintenance expense rose $2.5 million, mainly from administrative, payroll, customer-account and technology costs, including the multiyear Enterprise Forward project. Depreciation and amortization increased $3.5 million, reflecting accelerated depreciation and revised rates for certain electric assets.
- The 66 MW Saratoga Wind Farm entered commercial operation in February 2019 after approximately $112 million of construction cost. The filing cites a wind-energy tax credit as a contributor to the lower effective tax rate.
- Cash flow from operations improved year over year, while capital expenditures declined from the prior-year quarter, which included more Saratoga construction spending. Investing activities used $32.9 million; financing activities used $20.8 million.
Outlook, risks and unusual items
- The PSCW-approved 2019–2020 rate settlement reduced electric rates 2.24% (about $9.2 million) in 2019, with rates generally held at that level in 2020 subject to a fuel-cost plan. Gas rates increase 1.06% (about $1.7 million) in 2019 and 1.46% (about $2.4 million) in 2020. The settlement authorizes a 9.8% return on common equity.
- MGE requested PSCW permission to defer pension and postretirement costs; management estimated 2019 actual costs could be about $5.9 million above the amount included in the rate settlement. No costs had been deferred pending a PSCW decision expected in 2019.
- In April 2019, after quarter-end, the PSCW approved MGE’s share of two solar projects: 100 MW combined, with an estimated MGE cost of approximately $130 million and expected operation by the end of 2020.
- Environmental rulemaking and litigation remain uncertain. Management said implementation of an ACE rule substantially in the form of the Clean Power Plan could materially affect MGE; coal-fired Columbia and Elm Road units represented about 43% of electric generating capacity. Management expects to seek rate recovery of compliance costs, but timing and extent are uncertain.
- Potential ATC return-on-equity reductions could lower future equity earnings and distributions. MGE derived approximately 6.4% of Q1 2019 net income from its ATC investment, compared with 8.9% in Q1 2018.
- MGE’s purchased-power agreement had a $31.6 million fair-value loss position, offset by regulatory accounting; it could require $20–$40 million collateral if MGE’s debt rating falls below investment grade. No collateral was required at quarter-end. The filing reports no counterparty defaults and no material adverse expected effect from ordinary-course legal matters.
- The new lease standard was adopted January 1, 2019, adding recognized lease assets and liabilities but with no material effect on net income or cash flows. New ERP and human-capital systems were implemented during the quarter; management said disclosure controls were effective and related internal controls will continue to be evaluated.
- The filing provides no specific earnings or EPS guidance. Management identifies weather, demand, commodity prices, regulation, environmental requirements, pension asset returns and interest rates as factors that may affect results.
Important facts for investors to verify
- Whether the PSCW approves MGE’s requested pension-cost deferral and how actual pension expense compares with the estimated $5.9 million excess.
- Execution, cost and rate recovery for the approved solar projects, and the effect of the 2020 fuel-cost plan on electric rates.
- Developments in greenhouse-gas, coal-ash and other environmental rules, including compliance costs and potential recovery through rates.
- FERC decisions on ATC’s allowed return on equity and any resulting changes to MGE Energy’s ATC earnings and distributions.
- Operating performance and capital spending after Saratoga’s completion, alongside the impact of higher depreciation, O&M and technology costs.