MGE Energy, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. MGE Energy is a utility holding company; its wholly owned subsidiary Madison Gas and Electric (MGE) accounts for most consolidated operations. Unless noted, financial figures below are MGE Energy consolidated and in millions of dollars.
Financial results and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Operating revenue | $170.1 | $210.2; down 19.1% |
| Operating income | $31.9 | $44.0 |
| Net income | $18.3 | $27.7 |
| EPS, basic and diluted | $0.53 | $0.80 |
| Operating margin | 18.7% | 20.9% |
| Net cash from operations | $34.6 | $58.4 |
| Capital expenditures | $11.5 | $21.8 |
| Cash and cash equivalents, March 31 | $70.7 | $65.8 at December 31, 2014 |
| Long-term debt | $394.2, plus $4.2 due within one year; no short-term debt | $395.3 long-term, plus $4.2 current and $7.0 short-term at year-end |
| Current assets / current liabilities | $235.9 / $71.7 | $254.0 / $90.0 at year-end |
| Common dividend per share | $0.283 | $0.272 |
Operating cash flow fell $23.7 million year over year, primarily reflecting approximately $10.0 million of additional pension contributions; 2014 had no required or discretionary contributions. MGE Energy reported $150 million of aggregate credit lines, including MGE, and MGE had an additional $100 million facility; no borrowings were outstanding under the lines at quarter-end. Management said liquidity was adequate for operations and capital needs over the next 12 months.
Material changes and operating drivers
- Gas revenue fell 36.8% to $69.9 million, mainly because retail gas deliveries declined 20.7% as Q1 2014 had unusually cold weather; heating degree days were down 10.4%. Lower natural-gas commodity costs also reduced revenue and gas expense, with PGA pass-throughs generally not affecting net income. Gas utility segment net income declined to $6.1 million from $11.4 million.
- Electric revenue decreased 0.6% to $98.2 million. Retail sales volume fell 1.2%, while market sales revenue fell 84.9% as excess generation sales opportunities and market prices weakened. Rate changes added revenue, partly offsetting lower volume and market sales. Electric segment net income declined to $6.1 million from $10.0 million.
- Electric fuel expense declined $2.2 million, but purchased-power expense increased $4.3 million, reflecting greater purchases as Columbia generation declined and fuel-rule adjustments. MGE deferred $2.4 million of fuel-related savings for future customer refunds.
- Lower AFUDC income and higher depreciation followed completion and placement in service of Columbia environmental equipment in 2014. Nonregulated energy segment net income rose to $5.0 million from $4.7 million; transmission investment income fell to $1.1 million from $1.5 million.
Outlook, risks, contingencies and unusual items
- Rates: PSCW authorized 2015 retail electric rates up 3.8% ($15.4 million annualized) and gas rates down 2.0% ($3.8 million annualized). Gas rate design shifted more recovery to fixed monthly charges, intended to make earnings less weather-sensitive. MGE said it does not plan a 2016 base-rate filing and expects to file a fuel-only case later in 2015.
- Environmental obligations: Columbia’s consent decree requires an SCR system for Unit 2 by December 31, 2018. MGE estimates its share at $30–$40 million and intends to seek recovery through rates. Potential costs and operating effects from pending water, air, coal-ash and greenhouse-gas requirements remain uncertain. Management expects the Clean Power Plan could materially affect MGE, but final requirements were not yet known.
- Columbia air-quality risk: Columbia was identified for a Wisconsin SO2 attainment/nonattainment designation process; the outcome could adversely affect plant operations. The filing also describes ongoing uncertainty around ozone standards, coal-ash requirements and other environmental rules.
- ATC regulatory matter: A FERC complaint seeks a lower transmission-owner return on equity. Formal proceedings were underway, with an initial decision expected by November 30, 2015. ATC’s estimated refund liability was reflected in its 2015 earnings provided to MGE; approximately 6% of MGE Energy’s Q1 net income came from ATC.
- Derivative and credit exposure: The ten-year purchased-power agreement had a $53.4 million fair-value loss, offset by regulatory accounting; this is not presented as a current earnings loss. If MGE’s debt rating falls below investment grade, the agreement could require $20–$40 million of collateral. No collateral was posted and no derivative counterparties had defaulted at quarter-end.
- Accounting change: New guidance brought chattel-paper financing onto the balance sheet from January 1, 2015, increasing assets and liabilities by approximately $4.3 million and reducing retained earnings by approximately $0.1 million.
Most important facts for investors to verify
- Whether the sharp year-over-year earnings decline is primarily weather and commodity-related, and how the new gas rate design changes seasonal results.
- Actual and forecast costs, timing and rate recovery for Columbia SCR and other environmental compliance requirements.
- Developments in Columbia County’s SO2 designation and the FERC/ATC ROE proceeding, including any effect on operations or investment income.
- Cash-flow and pension contribution requirements, planned capital spending, and continued access to credit facilities.
- Terms and collateral triggers in the purchased-power agreement and the continuing regulatory treatment of its fair-value loss.