MGE Energy, Inc. — Q2 2017 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2017. MGE Energy is a Wisconsin utility holding company; its principal subsidiary, Madison Gas and Electric (MGE), provides regulated electric and natural gas service. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $126.5 | $121.6 | $283.3 | $269.1 |
| Operating income | $26.6 | $28.2 | $59.5 | $57.7 |
| Net income | $15.5 | $16.2 | $34.8 | $33.2 |
| EPS | $0.45 | $0.47 | $1.01 | $0.96 |
| Operating margin | 21.0% | 23.2% | 21.0% | 21.5% |
| Net margin | 12.3% | 13.3% | 12.3% | 12.3% |
Margins are calculated from reported revenue and operating income or net income. Q2 results weakened year over year, while first-half earnings and EPS increased. The filing attributes the first-half improvement primarily to electric utility cost management and higher transmission investment income; Q2 gas utility earnings were lower, reflecting operating-cost timing and unfavorable weather. MGE’s net income attributable to MGE was $8.8 million in Q2 and $21.5 million for the first half, versus $10.1 million and $21.1 million, respectively.
- Revenue and costs: First-half electric revenue rose 3.7% and gas revenue rose 10.3%. Gas revenue gains largely reflected higher commodity-cost pass-throughs under the purchased gas adjustment, which management says do not affect net income. Retail electric volumes fell 1.6% year to date, including a 10.5% decline in industrial sales following a large customer’s relocation. Gas deliveries fell 1.9%, partly due to warmer weather.
- Cash flow: First-half operating cash flow was $67.7 million, down from $93.5 million. Capital expenditures were $42.2 million; investing cash use was $46.9 million. Financing cash use was $13.8 million. Cash ended the period at $102.9 million, up from $96.0 million at year-end.
- Debt and liquidity: Long-term debt was $390.4 million, with $4.4 million due within one year. MGE issued $40 million of 3.76% unsecured notes due 2052, refinancing $30 million of notes and supporting capital spending. MGE Energy’s disclosed capitalization was 65.1% equity and 34.9% long-term debt, including current maturities. Management stated liquidity was adequate for operations and capital needs over the next 12 months.
- Shareholder returns: First-half dividends were $0.615 per share, up from $0.590. MGE Energy reported 34.7 million weighted-average shares outstanding.
Material changes, outlook, and risks
- The PSCW authorized 2017 retail electric rates down 0.8% ($3.3 million) and gas rates up 1.9% ($3.1 million); the authorized ROE was 9.8% on a 57.2% common-equity capital structure.
- In July 2017, the PSCW ordered a further $6.0 million refund of 2015–2016 electric fuel savings, to be credited to customers in October 2017. MGE had deferred $1.8 million of 2017 fuel savings at quarter-end, subject to review in 2018.
- MGE planned to issue an additional $30 million of unsecured debt in October 2017 at 3.11%, due 2027. MGE Energy also committed $5 million to a nonpublic venture capital fund; timing of contributions is uncertain.
- MGE applied for approval to build a 66-MW Iowa wind farm, with estimated capital cost of $107 million and anticipated construction start in early 2018 if approved. MGE reduced its Columbia ownership from 22.0% to 20.4% in January 2017; management forecast approximately 19% ownership by June 2020. MGE may also acquire up to 50 MW of capacity from a gas-fired plant expected in service by early 2020.
- Key uncertainties include potential changes to environmental requirements, particularly greenhouse-gas rules that management said could materially affect MGE if implemented substantially as proposed; regulatory cost recovery timing; weather, commodity prices, interest rates, and pension asset returns. Pending FERC proceedings could reduce ATC’s authorized return on equity and future investment earnings. MGE reported no material adverse expected outcome from ordinary-course legal matters and no derivative counterparty defaults.
Important facts for investors to verify
- Whether the $6.0 million fuel refund and the review of 2017 fuel savings affect subsequent results or customer rates as expected.
- Progress, approval, capital requirements, and financing for the proposed wind farm and planned debt issuance.
- Actual operating and earnings effects of reduced Columbia ownership and any future generation-capacity decisions.
- Developments in ATC ROE proceedings and environmental regulation, including potential cost recovery and timing.
- Drivers of lower operating cash flow, particularly working-capital movements, and the sustainability of earnings growth and dividend increases.