MGE Energy, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. MGE Energy is a utility holding company whose principal subsidiary, Madison Gas and Electric (MGE), provides regulated electric and gas service in Wisconsin. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $122.1 | $124.3 | $289.7 | $281.9 |
| Operating income | $19.8 | $24.2 | $50.3 | $50.4 |
| Net income, MGE Energy | $15.5 | $18.4 | $39.6 | $38.4 |
| EPS, basic and diluted | $0.45 | $0.53 | $1.14 | $1.11 |
| Cash from operations | Not stated for quarter | Not stated for quarter | $85.9 | $91.6 |
- Q2 revenue fell about 1.7% and net income fell about 15%; first-half revenue increased about 2.8% and net income increased about 3.1%. Q2 results were pressured by lower electric sales and higher operating costs; first-half earnings benefited from improved utility margins and colder first-quarter weather supporting gas sales.
- Q2 electric margin, a non-GAAP measure, increased to $75.5 million from $70.8 million; gas margin increased to $16.2 million from $15.4 million. For the first half, electric margin rose to $148.1 million from $136.3 million and gas margin to $43.0 million from $38.5 million. Despite these margin gains, operating income was essentially flat for the first half as operating expenses rose.
- Q2 operating expenses increased $2.3 million year over year. Higher operations and maintenance and depreciation more than offset lower fuel and purchased-power costs. First-half depreciation and amortization rose $7.7 million and operations and maintenance rose $8.1 million.
- First-half investing cash outflow was $82.6 million, including $79.1 million of capital expenditures; financing cash outflow was $16.4 million. Cash, cash equivalents, and restricted cash were $71.8 million at June 30, versus $84.9 million at year-end 2018.
- At June 30, MGE Energy reported $69.9 million in cash and cash equivalents, $23.5 million in short-term debt, $4.6 million of long-term debt due within one year, and $491.2 million in long-term debt. Common shareholders’ equity was $832.8 million. The company stated it had adequate liquidity for operations and capital expenditures over the next 12 months.
- Capital expenditures were below the prior-year first-half level, primarily because Saratoga wind-farm construction spending was higher in 2018. The common dividend was $0.338 per share for Q2 and $0.675 per share for the first half, up from $0.323 and $0.645, respectively, in 2018.
Material changes, outlook, and risks
- Cooler weather reduced Q2 cooling demand: residential electric sales volume fell 13.5% year over year. First-half retail gas deliveries rose 5.8%, reflecting colder weather and customer growth. Saratoga Wind Farm entered service in February 2019, lowering reliance on purchased power and generating a wind-related tax credit.
- The PSCW-approved 2019–2020 rate settlement reduced electric rates 2.24% in 2019, with rates generally maintained in 2020 subject to a fuel-cost plan. Gas rates increased 1.06% in 2019 and are scheduled to increase 1.46% in 2020. The authorized return on common equity is 9.8% for both years.
- In July 2019, the PSCW directed MGE to refund $9.5 million plus accrued interest for 2018 fuel savings, with payment planned for October 2019. Also in July, the PSCW authorized deferral of up to $5.9 million in specified pension and postretirement cost differences; approximately $3 million had been deferred through June 30, with recovery expected to be addressed in future rate actions beginning in 2021.
- MGE acquired a 33% interest in the Two Creeks solar project; its estimated share of construction costs is about $65 million, with completion expected by the end of 2020. In July, it acquired a 33% interest in Badger Hollow, also estimated at about $65 million. The filing also reports further Badger Hollow construction and operating commitments entered after quarter-end.
- The EPA finalized the Affordable Clean Energy rule in July 2019, replacing the Clean Power Plan. It is expected to apply to the Columbia and Elm Road coal units; MGE said the impact remains uncertain pending Wisconsin’s plan and regulatory review. Environmental rules, potential compliance spending and cost-recovery timing remain risks. Management expects environmental compliance costs to be recoverable in rates, but timing and amounts are uncertain.
- Pending FERC proceedings could lower the return on equity used for MGE’s transmission investment in ATC, potentially reducing future equity earnings and distributions. MGE also disclosed a purchased-power agreement fair-value liability of $32.6 million, subject to regulatory deferral; a downgrade below investment grade could require $20–$40 million of collateral.
- No full-year earnings guidance is provided in the supplied filing text. Management describes priorities as reliable service, competitive prices, investment in efficient and renewable generation, cost control, and maintaining credit strength. Ordinary-course legal matters were not expected to have a material adverse effect; environmental and regulatory contingencies remain subject to uncertainty.
Most important facts for investors to verify
- Whether the $9.5 million fuel refund, pension-cost deferrals, and other regulatory balances are reflected in the expected timing of cash flows and future rates.
- Actual spending, financing needs, and completion schedules for Two Creeks, Badger Hollow, and other planned generation investments.
- How the ACE rule, other environmental requirements, and Columbia ownership reductions affect generation costs, capacity, and rate recovery.
- Developments in the ATC FERC return-on-equity proceedings and any resulting effect on transmission investment earnings.
- Whether higher operations, maintenance, depreciation, and financing costs continue to offset margin growth, and how weather affects demand and earnings.