MGE Energy, Inc. — Q3 2019 Form 10-Q
Business context and period. This combined, unaudited filing covers the quarter and nine months ended September 30, 2019. MGE Energy is a Wisconsin utility holding company; its principal subsidiary, Madison Gas and Electric (MGE), provides regulated electric and gas service. MGE Energy also has nonregulated generation and transmission investments. Unless identified otherwise, consolidated figures below are for MGE Energy.
Financial performance and position
Amounts are in millions of dollars, except per-share data. Comparisons are with the corresponding 2018 period.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $138.2 | $137.8 | $427.9 | $419.7 |
| Operating income | $38.7 | $39.8 | $89.0 | $90.2 |
| Net income | $30.7 | $29.5 | $70.2 | $67.9 |
| Earnings per share | $0.88 | $0.85 | $2.03 | $1.96 |
| Dividends per share | $0.353 | $0.338 | $1.028 | $0.983 |
- Margins: Management’s non-GAAP electric margin was $95.6 million in Q3 versus $89.4 million, and $243.7 million year to date versus $225.7 million. Gas margin was $14.3 million versus $13.5 million in Q3, and $57.3 million versus $52.1 million year to date.
- Cash flow and investment: Nine-month operating cash flow was $111.7 million, down from $138.4 million. Capital expenditures were $128.4 million, compared with $149.0 million; financing activities provided $1.1 million, compared with $37.9 million. Cash, cash equivalents, and restricted cash totaled $63.2 million at September 30, 2019, versus $84.9 million at the start of the year.
- Liquidity and debt: Current assets were $204.4 million and current liabilities $152.1 million at September 30. Short-term debt was $54.5 million, up from $13.0 million at year-end; long-term debt was $490.2 million, excluding $4.6 million due within one year. Management stated liquidity was adequate for operations and capital expenditures over the next 12 months. MGE’s $50 million, 10-year unsecured borrowing at 2.94% was funded November 5, after quarter-end.
- Balance sheet: Total assets were $2.067 billion, compared with $1.989 billion at December 31, 2018; MGE Energy shareholders’ equity was $851.2 million, versus $816.6 million.
Material changes and drivers
- Net income and EPS increased, while operating income declined. Lower electric fuel and purchased-power costs, stronger electric and gas margins, and higher transmission investment income supported earnings. The Saratoga wind farm entered commercial operation in February 2019; its generation reduced fuel and purchased-power costs and generated tax credits.
- Operating costs rose: nine-month operations and maintenance increased $12.0 million, including technology and customer-system project costs, and depreciation and amortization increased $11.6 million, partly due to accelerated depreciation and updated depreciation rates for certain electric assets.
- Year-to-date retail electric sales volume fell 2.8%, with residential volume down 3.9%; management cited less favorable weather. Retail gas deliveries increased 4.8%, reflecting customer growth and colder weather earlier in the year.
- Capital spending included $48.2 million for the Two Creeks and Badger Hollow solar projects. MGE’s estimated share of their combined costs is approximately $130 million, with completion anticipated by the end of 2020.
Outlook, risks, and contingencies
- The approved 2019/2020 rate settlement reduced electric rates 2.24% in 2019 and holds them at that level for 2020, subject to the 2020 fuel-cost plan. Gas rates increased 1.06% in 2019 and are scheduled to increase 1.46% in 2020.
- MGE refunded $3.2 million of remaining 2018 tax-related overcollections in September 2019. Separately, the PSCW ordered a $9.5 million refund of 2018 fuel savings, plus interest, to electric customers in October 2019.
- The PSCW approved deferral of pension and postretirement costs above settlement estimates. MGE deferred approximately $4.6 million through September 30 and expects the amounts to be addressed in future rate actions starting in 2021.
- Environmental rules and litigation remain uncertain. The EPA’s Affordable Clean Energy rule may apply to the Columbia and Elm Road coal units; MGE said the final impact cannot be determined until Wisconsin’s compliance plan is developed and accepted. A court remanded aspects of the interstate pollution rule to the EPA, with no revision deadline set.
- Other exposures include possible changes to ATC’s authorized return on equity, commodity and interest-rate risk, pension investment performance, and regulatory timing for recovery of costs. Management expects environmental compliance costs to be recoverable in future rates, but timing and amounts are uncertain.
- MGE Energy committed $10 million to a nonpublic venture-capital fund, with capital-call timing uncertain. Solar construction commitments at September 30 were $20.5 million for Two Creeks and $53.2 million for Badger Hollow.
- The company adopted the new lease standard in 2019, recognizing $18.9 million of lease liabilities at September 30; management reported no material effect on net income or cash flows.
Important facts for investors to verify
- Whether electric and gas rate assumptions, fuel refunds, and future PSCW proceedings affect realized margins and cash flows as expected.
- Solar project costs, schedules, and approvals, as well as the potential cost and timing of future generation and environmental compliance requirements.
- The effect of higher short-term borrowing and the November 2019 debt funding on interest expense and liquidity.
- Progress on pension-cost recovery beginning in 2021 and the sensitivity of benefit costs to investment returns and discount rates.
- Any FERC decision changing ATC’s return on equity, which could affect MGE Energy’s transmission earnings and distributions.