MGE Energy, Inc. and Madison Gas and Electric Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. MGE Energy is the holding company; its wholly owned subsidiary, Madison Gas and Electric (MGE), conducts the principal regulated utility operations. Unless noted, financial amounts below are in millions of dollars.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| MGE Energy operating revenue | $157.6 | $156.8 |
| MGE Energy operating income | $26.2 | $31.8 |
| MGE Energy net income | $20.0 | $19.3 |
| MGE Energy diluted EPS | $0.58 | $0.56 |
| MGE net income attributable to MGE | $12.5 | $12.8 |
| MGE Energy operating cash flow | $47.0 | $41.3 |
| MGE Energy capital expenditures | $37.6 | $16.1 |
MGE Energy’s effective tax rate fell to 24.2% from 36.7%, primarily reflecting the federal corporate tax rate reduction. The filing does not provide a consolidated operating margin percentage; operating income was $26.2 million on revenue of $157.6 million. Management reports non-GAAP electric margin of $65.5 million, down $5.3 million, and gas margin of $23.1 million, up $0.5 million.
At March 31, MGE Energy had $101.2 million of cash and cash equivalents ($106.2 million including restricted cash and margin receivables), $248.7 million of current assets, and $106.2 million of current liabilities. Long-term debt was $397.1 million, with $24.5 million due within one year and $3.0 million of short-term debt. Capitalization was 65.0% common equity, 34.8% long-term debt, and 0.2% short-term debt. The company states that available cash, operating cash flow, credit facilities, and capital-market access are adequate for operations and capital spending over the next 12 months. Cash-flow coverage of capital expenditures was positive, but operating cash flow was below capital expenditures.
Changes versus the prior comparable period
- MGE Energy net income rose $0.7 million and EPS increased $0.02, despite operating income declining $5.6 million. Lower income tax expense and higher other income helped offset weaker operating income.
- Electric margin fell $5.3 million. Drivers included $3.8 million of revenue reductions subject to refund, higher fuel costs associated primarily with a scheduled plant outage, and other items; increased sales volume partly offset these pressures. Retail electric revenue decreased 5.0%, while retail sales volume increased 0.7%.
- Gas margin increased $0.5 million as retail gas deliveries grew 14.7%, supported by colder weather and customer growth. Heating degree days were 14.6% higher year over year.
- Operating cash flow increased, mainly because pension contributions were $5.8 million lower. Investing cash outflow increased substantially as capital expenditures rose, principally due to the Saratoga wind project.
- Cash dividends per MGE Energy share increased to $0.323 from $0.308. MGE Energy reported $11.2 million of common dividends paid.
Outlook, commentary, risks and unusual items
- Investment and generation: Management emphasizes utility reliability, cost control, renewable investment, and reducing coal’s share of the generation mix. The PSCW-authorized 66 MW Saratoga, Iowa wind farm is expected to be completed by year-end 2018, at an estimated cost of $108 million; $23.3 million had been spent by March 31. MGE had regulatory authority to issue up to $150 million of new long-term debt over three years for authorized utility purposes.
- Tax reform and customer refunds: MGE recorded $3.3 million of regulatory liability for 2018 income-tax over-collections and reduced revenue accordingly. A PSCW preliminary decision contemplated a July 2018 bill credit and monthly credits beginning in August; a final order was expected in May. The tax-law remeasurement also resulted in a $130.5 million regulatory liability, with customer-return timing subject to PSCW determination.
- Subsequent transaction: In April 2018, MGE and two other utilities purchased the 129 MW Forward Wind Energy Center for approximately $174 million in aggregate; MGE’s 12.8% share was approximately $23 million. It replaced an existing power purchase agreement for the facility’s output.
- Regulatory and environmental exposure: The timing and cost of potential air, water, coal-ash, and greenhouse-gas requirements remain uncertain. Management expects compliance costs to be recoverable in future rates, but recovery may lag expenditures. A substantially implemented Clean Power Plan could materially affect MGE; the EPA had proposed repeal and was considering future action.
- Transmission investment: FERC proceedings concerning ATC/MISO allowed returns on equity could reduce future equity earnings and distributions. MGE Energy derived approximately 8.9% of Q1 2018 net income from its ATC investment. A separate ATC formula-rate refund was pending FERC approval and expected in mid-2018.
- Contracts and contingencies: MGE’s purchased power agreement had a $41.3 million fair-value loss recorded with a regulatory offset; it could require $20 million to $40 million of collateral if MGE’s debt rating fell below investment grade. No collateral was required at quarter-end. Management said ordinary-course legal matters were not expected to have a material adverse effect; accrued legal amounts were not material.
- Guidance: The filing gives no specific earnings or EPS guidance. Results remain sensitive to weather, customer demand, regulation, energy prices, interest rates, pension-asset performance, environmental rules, and credit conditions.
Important facts for investors to verify
- Whether the PSCW’s final tax-refund order and subsequent customer credits match the preliminary decision, and how the $130.5 million tax-related regulatory liability will be returned.
- Saratoga construction progress, final project cost, financing needs, and the financial effects of the Forward Wind purchase.
- Whether electric margin pressures—especially scheduled outages, refund-related revenue reductions, and loss of industrial sales volume—persist in later quarters.
- Outcomes and timing of FERC proceedings affecting ATC returns and refunds, and any resulting changes to MGE Energy’s equity earnings.
- Developments in environmental regulation and associated capital costs, including whether management’s assumed future rate recovery is achieved.