MGE Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015; filed November 5, 2015. Financial statements are unaudited. MGE Energy is the holding company; Madison Gas and Electric Company (MGE) is its principal, wholly owned utility subsidiary. Figures below primarily refer to MGE Energy consolidated results unless noted.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $140.8 million | $135.1 million | $433.1 million | $474.1 million |
| Operating income | $46.2 million | $40.1 million | $102.1 million | $108.5 million |
| Net income | $28.4 million | $23.3 million | $60.1 million | $65.1 million |
| Diluted EPS | $0.82 | $0.67 | $1.73 | $1.88 |
| Operating margin | 32.8% | 29.7% | 23.6% | 22.9% |
Q3 revenue rose 4.2% and net income rose 21.5% year over year; for the nine-month period, revenue fell 8.7% and net income fell 7.7%. The nine-month net margin was approximately 13.9%, versus 13.7% in 2014. MGE Energy paid dividends of $0.295 per share in Q3 and $0.860 per share for the nine months, up from $0.283 and $0.826, respectively.
- Cash flow: Nine-month operating cash flow was $122.7 million, compared with $121.0 million. Capital expenditures were $52.3 million, down from $66.1 million; cash used in investing was $53.2 million. Cash used in financing was $41.0 million. Ending cash was $94.3 million, versus $65.8 million at year-end 2014.
- Balance sheet and liquidity: At September 30, total assets were $1.714 billion, current assets $241.8 million, and current liabilities $74.3 million (working capital approximately $167.5 million). Long-term debt was $392.1 million, plus $4.2 million due within one year; short-term debt was zero. Equity was $689.4 million. Management said liquidity was adequate for operations and capital needs over the next 12 months. New revolving facilities provide $50 million for MGE Energy and $100 million for MGE; neither had borrowings outstanding at quarter-end.
- Margins and operating results: Q3 electric sales volume increased 3.7%, supported partly by 30.2% more cooling degree days. Nine-month gas retail deliveries declined 26.6%, mainly reflecting milder weather than in early 2014. MGE’s nine-month net income attributable to MGE was $40.4 million, down from $45.5 million; its Q3 result increased to $21.8 million from $16.8 million.
Material changes and management commentary
- Q3 earnings improved mainly on higher electric retail demand and the 2015 gas rate-design changes, which shifted more recovery to fixed monthly charges and reduced weather sensitivity.
- Nine-month earnings declined as lower gas sales followed unusually cold 2014 weather, electric depreciation increased after Columbia environmental equipment entered service, and AFUDC income fell after project completion. Higher electric rates and improved nonregulated energy earnings partly offset these effects.
- Gas revenue fell 33.9% for the nine months, while cost of gas sold fell $49.8 million; gas commodity costs are passed through under the purchased gas adjustment clause and changes in pass-through recoveries do not, by themselves, affect net income.
- Electric rates increased 3.8% for 2015, while gas rates decreased 2.0%. MGE deferred $7.6 million of 2015 electric fuel savings for return to customers and had returned $0.7 million through September. Approximately $2.7 million of the approved 2015 fuel credit was expected to be returned by year-end; a proposed 2016 credit was approximately $5.0 million, subject to final fuel-cost audits.
- Cash contributions to pension and other postretirement plans were $12.5 million, $10.0 million higher than in the comparable 2014 period. Management attributed higher benefit costs in part to a lower discount rate.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. MGE did not plan to file a 2016 base-rate case after the PSCW approved extending transmission-cost accounting treatment through 2016.
- Environmental regulation: Management said the Clean Power Plan could materially affect MGE if it remains substantially in its finalized form; legal challenges and future implementation plans leave timing and requirements uncertain. Columbia’s SO₂ attainment status is unresolved. The revised ozone standard could affect the Elm Road units. New wastewater discharge rules may require equipment upgrades at Columbia and Elm Road, but costs were not yet estimable. Management generally expects eligible compliance costs to be recovered in future rates, although recovery timing may lag spending.
- Columbia litigation and capital needs: A consent decree requires installation of an SCR system at Columbia Unit 2 by December 31, 2018. MGE’s projected share is approximately $19–$29 million; the project was approved by the PSCW, and MGE intends to seek recovery in future rates.
- Customer and transmission risks: A large industrial customer announced in November 2015 that it intended to relocate and close its local facilities in early 2017; curtailments could affect 2016 electric revenue. A FERC complaint seeks a lower ATC/MISO transmission return on equity. ATC reflected an estimated potential refund liability in its 2015 earnings; ATC investment income represented approximately 6.4% of MGE Energy’s nine-month net income.
- Derivative and accounting items: The purchased power agreement had a $57.0 million fair-value loss at September 30, 2015, offset by regulatory accounting; the loss is recognized in purchased power expense as power is delivered. Adoption of new chattel-paper accounting added approximately $3.8 million to assets and liabilities and reduced retained earnings by $0.1 million. No derivative counterparties had defaulted, and no collateral was required under the purchased power agreement at quarter-end.
- Ordinary-course legal matters were described as not material. The filing also identifies commitments for coal, natural-gas transportation, storage, and supply contracts; management expects relevant commodity costs to be recovered in customer rates.
Most important facts for investors to verify
- Whether and how the Clean Power Plan, SO₂ and ozone designations, and wastewater rules affect plant operations, required investment, and rate recovery.
- Columbia SCR project cost, construction schedule, and recovery in rates, alongside the outcome of the related regulatory and legal processes.
- The industrial customer’s closure timing and the resulting effect on electric demand and future rate filings.
- The outcome and financial impact of the FERC/ATC return-on-equity complaint and any resulting refunds.
- Final PSCW fuel-cost audits and the amounts of customer fuel credits ultimately required for 2015 and 2016.
- Whether weather-normalized electric and gas demand, pension costs, and the improved quarterly earnings trend are sustained beyond this period.