MGE Energy, Inc. (MGEE) and Madison Gas and Electric Company (MGE) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. MGE is wholly owned by MGE Energy. Unless noted, financial figures below are MGE Energy consolidated amounts; dollars are in millions.
Business context and results
MGE Energy is a Wisconsin utility holding company. Its principal subsidiary, MGE, provides regulated electric and natural gas service in Wisconsin; other activities include nonregulated generation and an investment in American Transmission Company (ATC).
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Operating revenue | $217.3 | $208.9 |
| Operating income | $40.0 | $41.9 |
| Net income | $31.1 | $34.4 |
| Diluted EPS | $0.86 | $0.95 |
| Operating cash flow | $56.0 | $62.1 |
| Capital expenditures | $47.6 | $30.8 |
Revenue increased 4.0%, while operating income declined 4.4% and net income declined 9.7%. Operating margin was approximately 18.4%, compared with 20.0% a year earlier. Higher rates supported revenue, but did not offset the earnings effects of lower weather-related sales, higher fuel and purchased-power costs, increased depreciation and interest expense, and lower investment distribution gains. Electric retail sales fell 3.3%; gas deliveries fell 13.5%, and heating degree days declined 14.2%.
MGE reported net income of $29.6 million, including $5.5 million attributable to noncontrolling interests; net income attributable to MGE was $24.1 million, versus $27.3 million in Q1 2022.
Cash, debt and liquidity
- At March 31, 2023, MGE Energy reported cash and cash equivalents of $14.7 million and total cash, cash equivalents and restricted cash of $19.6 million. Current assets were $223.2 million and current liabilities were $146.0 million.
- Long-term debt was $652.8 million, with $35.0 million due within one year; short-term debt was $33.0 million. The company issued $50 million of senior unsecured notes and remarketed $19.3 million of bonds during the quarter. Short-term debt repayments were $37.5 million.
- Operating cash flow decreased to $56.0 million. Investing used $49.6 million, including $47.6 million of capital expenditures; financing used $4.8 million. Cash dividends paid were $14.7 million.
- Management said available resources—including operating cash flow, cash, revolving credit capacity and access to capital markets—are expected to provide adequate liquidity for operations and capital expenditures over the next 12 months. MGE expected to use some of its remaining $86 million of PSCW debt-issuance authority to refinance $30 million maturing in September 2023.
Material developments, outlook and risks
- Rates and recovery: The PSCW-approved 2023 electric rate increase was approximately 9.01%; the 2023 gas increase was 0.96%. In April 2023, MGE filed a proposed 2024–2025 rate case seeking electric increases of 3.75% in 2024 and 3.41% in 2025, and gas increases of 2.56% and 1.66%, respectively. Approval was pending; a final order was expected before year-end. MGE also proposed recovery of $8.8 million of 2022 deferred electric fuel costs over October 2023–September 2024, subject to regulatory review.
- Generation investment and transition: In March, MGE purchased a 3.4% interest in the West Riverside natural-gas facility, representing 25 MW, for approximately $25 million; it retains an option to acquire another 25 MW through May 2025. Red Barn wind entered service in April. Badger Hollow II, Paris and Darien renewable projects were under construction or development. MGE forecast more than 40% of 2023–2027 capital expenditures for renewable projects.
- Climate objectives and coal exposure: MGE targets an 80% reduction in carbon emissions by 2030 from 2005 levels. The co-owners plan to retire Columbia Units 1 and 2 by June 2026, subject to change. MGE expects coal to be a backup fuel only at the Elm Road Units by 2030 and to be fully phased out there by 2035; conversion plans and costs require PSCW approval. Columbia’s net book value was $145.2 million; no impairment was recorded at quarter-end.
- Environmental and supply uncertainty: Proposed or changing EPA requirements on power-plant wastewater, greenhouse gases, particulate matter and emissions could increase costs or require upgrades. Management expects to seek recovery of compliance costs in rates, but timing and recovery are uncertain. Solar imports may face delays or higher costs related to forced-labor rules and potential tariffs.
- Regulatory and legal matters: Environmental groups appealed aspects of the PSCW-approved 2022/2023 rate decisions, including customer fixed charges; the approved revenue requirements were not challenged. ATC’s authorized return on equity remains subject to FERC proceedings and could affect future equity earnings and distributions. MGE has not recorded a possible loss for its approximately $2.3 million share of a potential refund relating to one ATC complaint period; another possible refund was estimated at approximately $0.9 million, net of tax, in 2022.
- Other items: Depreciation increased by $3.5 million, primarily after the Columbia Unit 2 depreciation schedule was accelerated to 2029. Management reported no material changes to disclosed market risks or risk factors and concluded disclosure controls were effective.
Key facts for investors to verify
- Whether the proposed 2024–2025 rate increases and deferred fuel-cost recovery are approved, and on what terms.
- Actual costs, timing and rate recovery for generation projects, the Elm Road fuel transition, Columbia retirement and environmental compliance.
- Progress on renewable projects and exposure to solar-panel procurement delays or added costs.
- FERC decisions on ATC’s authorized return on equity and any resulting earnings, distribution or refund effects.
- Debt refinancing, capital spending and liquidity needs against the company’s stated expectation of adequate resources for the next 12 months.