MGE Energy, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This combined filing covers MGE Energy and its principal, wholly owned regulated utility subsidiary, Madison Gas and Electric Company (MGE). Unless specified, financial results below are for consolidated MGE Energy.
Business context
MGE Energy operates regulated electric and gas utilities, nonregulated generation subsidiaries, and transmission investments. MGE serves approximately 151,000 electric and 158,000 gas customers in south-central Wisconsin. The company’s generation portfolio remains materially coal-dependent: coal supplied 52.7% of MGE’s 2017 electric energy requirements; gas supplied 11.3%, renewables 12.4%, and purchased power 23.6%.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $563.1 million | $544.7 million | +3.4% |
| Operating income | $128.7 million | $128.2 million | +0.4% |
| Net income | $97.6 million | $75.6 million | +29.2% |
| Diluted EPS | $2.82 | $2.18 | +$0.64 |
| Operating cash flow | $133.0 million | $147.5 million | −9.8% |
| Capital expenditures | $108.1 million | $83.7 million | +$24.5 million |
Operating margin was approximately 22.9% and net margin approximately 17.3%. Net income included a $21.6 million one-time benefit from federal tax reform, a major driver of the year-over-year earnings increase; excluding that benefit, earnings were approximately $76 million, near 2016’s $75.6 million. The effective tax rate fell to 18.5% from 36.0%.
Electric revenue increased 1.2% despite a 4.3% decline in total electric sales volume; fuel-credit timing and revenue adjustments more than offset lower volume and reduced electric rates. Gas revenue rose 10.6%, reflecting higher gas commodity costs passed through under the purchased gas adjustment and higher deliveries. MGE’s attributable net income declined to $49.8 million from $51.2 million, while MGE Energy’s nonregulated segment income increased to $40.5 million from $19.1 million, largely due to the tax benefit.
At year-end, consolidated assets were $1.86 billion and shareholders’ equity was $778.2 million. Long-term debt, including the current portion, was $422.6 million; short-term debt was $4.0 million. Cash and cash equivalents were $108.0 million at MGE Energy and $6.0 million at MGE. MGE Energy reported $50 million of unused committed credit capacity; MGE had $96 million available under its $100 million facilities. Management stated liquidity was adequate for operations and capital spending over the next twelve months. The reported debt-to-capitalization covenant ratios were 35.4% for MGE Energy and 40.1% for MGE, below the 65% maximum.
MGE Energy declared $1.26 per share in 2017 dividends, versus $1.21 in 2016. Its year-end current assets of $290.6 million and current liabilities of $126.5 million imply a current ratio of approximately 2.3.
Material changes and significant items
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%. Remeasurement produced a $21.7 million reduction in income tax expense, a $20.4 million decrease in the ATC investment carrying amount, and a $130.5 million increase in regulatory liabilities, primarily reflecting tax benefits expected to be passed to regulated customers. Estimates remained provisional pending further guidance.
- Operating cash flow fell despite higher reported earnings, reflecting working-capital uses, higher taxes paid compared with 2016 (which included a $10 million IRS refund), and other timing factors.
- Capital spending increased to $108.1 million. 2018 forecast capital expenditures were $231.1 million, including approximately $108 million for the 66-MW Saratoga Wind Farm.
- MGE issued $70 million of long-term debt in 2017: $40 million at 3.76% due in 2052 and $30 million at 3.11% due in 2027. Proceeds refinanced maturing debt and supported capital requirements.
- MGE reduced its Columbia ownership from 22.0% to 20.4% in January 2017 and to 19.4% in January 2018 under an arrangement exchanging certain avoided capital costs for a proportional ownership reduction. Ownership is forecast at approximately 19% by June 2020.
Outlook, risks and contingencies
- Investment and plans: Saratoga Wind Farm construction was expected to be completed by year-end 2018, at an estimated cost of $108 million. MGE also agreed to acquire a 12.8% share of the 129-MW Forward Wind Energy Center for approximately $23 million, subject to PSCW approval and expected to close in spring 2018. MGE had authority to issue up to $150 million of new long-term debt over three years. No specific earnings guidance was provided.
- Rates and tax reform: 2017 rates included a 0.8% annual electric-rate decrease and a 1.9% gas-rate increase; authorized ROE was 9.8%. The PSCW was expected to review how tax savings and related regulatory liabilities would flow through customer rates. MGE had deferred $4.2 million of 2017 fuel savings pending review.
- Environmental compliance: MGE’s share of the Columbia Unit 2 SCR project was estimated at $19–$24 million, with service expected in 2018. Columbia’s ash pond is planned for closure by 2023, with a dry ash system planned for 2020–2021. Future costs for wastewater rules, air-emission limits, ozone nonattainment, and greenhouse-gas regulation remain uncertain; management generally expects to seek rate recovery.
- Regulatory and market exposure: Rate recovery and timing, fuel and purchased-power prices, weather, customer demand, coal supply, plant or transmission outages, counterparty performance, and interest rates could affect results. FERC proceedings concerning ATC’s authorized return on equity and formula-rate refunds could reduce future equity earnings or distributions; ATC contributed about 6.2% of 2017 net income.
- Other risks: The filing highlights pension assumptions and asset performance, cyber and information-system security, construction and implementation risks for Saratoga Wind and the multi-year Enterprise Forward systems initiative, and potential delays or cost overruns. MGE’s firm purchased-power agreement had a $42.2 million fair-value loss at year-end, offset by regulatory accounting; a downgrade below investment grade could trigger $20–$40 million of collateral requirements.
Most important facts for investors to verify
- How much of 2017 earnings growth is sustainable after excluding the one-time tax benefit, and how the provisional tax accounting is finalized.
- The PSCW’s timing and method for returning tax benefits to customers, and the resulting effects on rates and operating cash flow.
- Actual costs, schedule, financing, and regulatory approvals for Saratoga Wind and the Forward Wind acquisition.
- Columbia ownership reductions, SCR completion and final cost, and the company’s exposure to coal-related environmental requirements.
- Developments in ATC ROE and refund proceedings, and any impact on MGE Energy’s equity earnings and cash distributions.
- Whether capital spending, working-capital requirements, dividends, and debt issuance remain consistent with stated liquidity and financing capacity.