MGE Energy, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The combined filing covers MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE); figures below refer to MGE Energy unless identified otherwise. Amounts are in millions except per-share data.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior period |
|---|---|---|
| Operating revenue | $156.8 | $147.5 |
| Operating income | $32.9 | $29.5 |
| Net income | $19.3 | $17.0 |
| Basic and diluted EPS | $0.56 | $0.49 |
| Cash from operating activities | $42.3 | $43.7 |
| Capital expenditures | $16.1 | $15.6 |
| Cash and cash equivalents at March 31 | $117.7 | $96.0 at Dec. 31, 2016 |
| Long-term debt, including current portion | $395.9 | $387.1 at Dec. 31, 2016 |
- Revenue rose 6.3%; operating income increased 11.4% and net income 13.3%. Approximate operating margin was 21.0%, versus 20.0% a year earlier; net margin was 12.3%, versus 11.5%.
- Operating cash flow declined $1.4 million despite higher earnings, reflecting working-capital changes; pension contributions were $4.0 million lower than in Q1 2016. Cash flow less capital expenditures was approximately $26.2 million.
- At March 31, total current assets were $254.1 million and current liabilities $83.5 million. Equity represented 64.9% of capitalization and long-term debt 35.1%.
- Dividends declared were $0.308 per share, up from $0.295. MGE Energy reported no new shares issued under its stock plan.
Performance changes and business drivers
- Electric revenue increased $5.1 million (5.5%). Retail electric sales volume fell 1.4%, and retail rates were 2.3% lower; prior-year fuel credits and deferrals, higher wholesale market sales, and revenue adjustments contributed to the increase.
- Gas revenue increased $4.6 million (8.5%), mainly from rate and purchased-gas-adjustment changes. Retail gas deliveries declined 0.9%; the PGA passes gas-cost changes to customers and generally does not affect earnings.
- Management attributed higher electric utility earnings primarily to lower fuel costs and operating and maintenance savings. Electric utility net income rose to $8.0 million from $6.0 million; gas utility net income was $5.5 million versus $5.0 million. Nonregulated energy income eased to $4.7 million from $4.8 million.
- Depreciation and amortization increased to $13.0 million from $11.0 million, primarily reflecting new Columbia depreciation rates. MGE Energy’s effective tax rate was 36.7%, compared with 36.9%.
Debt, liquidity, outlook, and risks
- MGE issued $40 million of 3.76% senior unsecured notes due in 2052. Proceeds refinanced $30 million of notes maturing in January and support capital expenditures. Management stated that liquidity was adequate for operations and capital needs over the next 12 months; MGE Energy planned a further $30 million of long-term debt issuance in 2017.
- MGE’s 2017 authorized retail rates decreased electric rates 0.8% ($3.3 million) and increased gas rates 1.9% ($3.1 million). The authorized return on common equity is 9.8% on a 57.2% common-equity ratio. MGE had deferred $1.1 million of 2017 fuel savings, subject to PSCW review expected in 2018.
- MGE reduced its Columbia ownership from 22.0% to 20.4% in January through a partial plant-asset sale to WPL. Ownership is forecast to reach approximately 19% by June 2020 under the agreement to forego certain capital expenditures. MGE expects a further $2.3 million of Columbia assets to be sold in 2018.
- MGE notified the PSCW in February of its intent to seek approval for a 66-MW Iowa wind farm; it filed the formal application in April 2017. If approved, construction was expected to begin in early 2018, with estimated capital cost of $107 million.
- ATC return-on-equity proceedings could reduce future equity earnings and distributions. The filing says about 8.0% of Q1 2017 net income was derived from ATC. Environmental rules and litigation—including the Clean Power Plan—could affect generation costs and operations; management said impacts and timing remained uncertain and expected to seek rate recovery. Fossil-fueled plants represented approximately 43% of electric generating capacity.
- MGE’s purchased-power agreement had a $48.6 million fair-value loss at March 31, offset by regulatory accounting; actual costs are recognized when power is purchased. A downgrade below investment grade could trigger $20–$40 million of collateral requirements under the agreement; none was required or posted at quarter-end. No derivative counterparties had defaulted.
- The filing reports no material change in contractual obligations and no material adverse effect expected from ordinary-course legal matters. Management reported effective disclosure controls and no material control changes during the quarter.
Most important facts to verify
- Whether earnings growth is sustainable given lower retail electric volumes and the contribution of prior-year fuel-credit and deferral comparisons.
- PSCW review and eventual disposition of the $1.1 million of deferred 2017 fuel savings, and the timing and recovery of environmental and transmission costs.
- FERC decisions on ATC return on equity and their effect on MGE Energy’s investment earnings and distributions.
- PSCW approval, project economics, and financing needs for the proposed Saratoga wind farm, as well as execution of planned debt issuance.
- Columbia ownership-transfer milestones and the valuation and timing of planned asset sales; also monitor the purchased-power agreement’s valuation and potential collateral triggers.