MGE Energy, Inc. — Q1 2016 Form 10-Q
Business context and period. The unaudited quarter ended March 31, 2016, compared with the three months ended March 31, 2015. MGE Energy is a utility holding company; its wholly owned subsidiary Madison Gas and Electric (MGE) provides regulated electric and gas service in Wisconsin. MGE Energy also reports nonregulated generation and an investment in American Transmission Company (ATC). Unless identified otherwise, figures below are MGE Energy consolidated.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Operating revenue | $147.5 million | $170.1 million |
| Operating income | $29.5 million | $31.9 million |
| Net income | $17.0 million | $18.3 million |
| Basic and diluted EPS | $0.49 | $0.53 |
| Operating cash flow | $43.7 million | $34.6 million |
| Capital expenditures | $15.6 million | $11.5 million |
| Cash dividends paid | $10.2 million | $9.8 million |
Revenue fell about 13.3%, operating income 7.3%, and net income 6.8%. The operating margin was approximately 20.0%, versus 18.7%; net margin was approximately 11.5%, versus 10.7%. Per-share dividends declared increased to $0.295 from $0.283.
Operating cash flow improved by $9.1 million, while investing cash outflow increased to $16.5 million, mainly reflecting higher utility distribution investment. Financing cash outflow was $11.3 million. Cash at quarter-end was $97.3 million, up from $81.4 million at year-end. Current assets of $247.2 million exceeded current liabilities of $117.9 million. Total capitalization included $355.8 million of long-term debt and $34.3 million due within one year; the current portion had been $4.3 million at year-end. Management said liquidity was adequate for operations and capital expenditures over the next 12 months; neither MGE Energy nor MGE had credit-line borrowings at March 31.
Changes and operating drivers
- Gas utility earnings declined primarily because warmer weather reduced retail gas deliveries 14.5%; heating degree days were down 15.0% from the prior-year quarter. Lower commodity prices also reduced gas revenue and cost of gas sold; PGA pass-through changes affect revenue but not net income.
- Electric revenue declined 5.1%. Drivers included fuel-savings deferrals and customer bill credits, and a 2.8% decline in total retail electricity sales volume. Increased internal generation reduced purchased-power volume and expense.
- Nonregulated energy earnings decreased to $4.8 million from $5.0 million, partly because recovery of carrying costs on the Elm Road and West Campus projects ended in 2015.
- ATC equity earnings rose to $2.2 million from $1.9 million. Management said ATC generated approximately 7.8% of MGE Energy net income, compared with 6.0% a year earlier.
Outlook, risks, and unusual items
- Rates: In April 2016, after quarter-end, MGE filed for 2017 increases of 1.7% in electric rates and 3.7% in gas rates, primarily for transmission and gas-system infrastructure costs. The filing also proposed mechanisms addressing potential 2018 rate changes. These are requests, not approved increases.
- Fuel recovery: MGE returned $1.9 million of electric fuel savings to customers in Q1 and had deferred $3.6 million of 2016 monitored fuel savings at March 31, pending PSCW review. The PSCW lowered monitored 2016 fuel costs by $14.8 million.
- Environmental regulation: The Supreme Court stayed the EPA Clean Power Plan in February 2016 while legal challenges proceed. Management said that, if substantially upheld and implemented, the rule could materially affect MGE; timing and costs remain uncertain. Other air and water requirements could also entail costs, some of which management expects to seek recovery of in rates.
- Customer and ATC exposure: A large industrial customer plans to close facilities in MGE’s territory in early 2017, with possible revenue effects if operations decline sooner. FERC proceedings could lower ATC’s return on equity and reduce future equity earnings and distributions.
- Generation plans: An agreement with WPL gives MGE an option to acquire up to 50 MW of capacity at a planned gas-fired plant expected to be completed by early 2020. The agreement also contemplates a possible reduction in MGE’s Columbia ownership in exchange for foregoing certain pre-completion capital expenditures; MGE reported $4.5 million of 2016 Columbia expenditures in construction work in progress that it could forgo.
- Debt and derivatives: MGE expects to refinance a $30 million note maturing in 2017 with new long-term debt in 2016. The purchased-power agreement had a $55.9 million fair-value loss position, offset by regulatory accounting and recognized in expense when power is purchased. It could require $20 million to $40 million of collateral if MGE’s debt rating falls below investment grade; no collateral was required at quarter-end.
- Routine legal matters were described as not material, and no derivative counterparties had defaulted. Management cited weather, economic conditions, regulation, commodity prices, pension asset returns, credit markets, and environmental requirements as factors that may affect future results. No earnings guidance was provided in the supplied filing text.
Most important facts to verify
- Whether the PSCW approves the requested 2017 electric and gas rate increases and how it resolves deferred fuel balances.
- How the Clean Power Plan and other environmental rules fare in court and what compliance costs or rate recovery follow.
- Actual effects of the industrial customer’s planned closure and any resulting sales or rate-base impacts.
- Outcomes of FERC proceedings on ATC returns, and any related changes to MGE Energy’s ATC ownership and earnings.
- Funding and refinancing plans, including the 2017 $30 million maturity, upcoming debt due within one year, and any potential PPA collateral trigger.