MGE Energy, Inc. — 2021 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2021. MGE Energy is a Wisconsin utility holding company; its wholly owned subsidiary Madison Gas and Electric (MGE) provides regulated electric and natural gas service, primarily in the Madison, Wisconsin area. The filing presents results for both MGE Energy and MGE; figures below are identified where the distinction matters.
Financial performance and position
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| MGE Energy operating revenue | $606.6 million | $538.6 million | +12.6% |
| Operating income | $117.3 million | $110.0 million | +6.6% |
| Net income | $105.8 million | $92.4 million | +14.4% |
| Diluted EPS | $2.92 | $2.60 | +12.3% |
| Operating cash flow | $137.5 million | $172.4 million | Down $34.9 million |
| Capital expenditures | $153.2 million | $203.1 million | Down $50.0 million |
| Cash and cash equivalents, year-end | $17.4 million | $44.7 million | Down $27.3 million |
| Long-term debt, including current portion | $619.1 million | $524.1 million | Up $95.0 million |
Electric revenue rose 6.8% to $420.3 million; electric margin, a non-GAAP measure, increased to $326.3 million from $309.1 million. Gas revenue increased 28.7% to $185.6 million, largely reflecting higher gas prices passed through to customers and approved rate changes; gas margin, also non-GAAP, rose to $85.9 million from $80.6 million. Management says gas commodity costs are passed through and do not themselves increase net income.
Operating margin was approximately 19.3%, versus 20.4% in 2020; higher operating expenses offset some revenue growth. Operations and maintenance expense rose $12.9 million, including higher generation maintenance, transmission, and customer-system costs. MGE Energy’s effective income tax rate fell to 3.7% from 17.4%, primarily reflecting the return of excess deferred taxes to customers and tax credits.
MGE Energy’s operating cash flow was below capital spending, producing a roughly $19.4 million shortfall before financing and other investing items. Working-capital uses, including higher receivables, unbilled revenue, and gas inventory, contributed to the cash-flow decline. MGE issued $100 million of long-term notes in 2021 and repaid $47.0 million of short-term debt. At year-end, MGE had $93.8 million of available capacity under its $100 million revolving facilities; MGE Energy had $50 million available under its separate facility. Debt-to-capitalization covenant ratios were 37.8% for MGE Energy and 40.2% for MGE, below the 65% limit.
MGE Energy’s common equity was 62.2% of capitalization at year-end, compared with 62.9% in 2020. Its annual dividend per share increased to $1.52 from $1.45.
Material changes versus 2020
- Higher electric sales reflected warmer weather and economic recovery: retail electric sales volume increased 3.2%, and cooling degree days rose to 846 from 733.
- Gas revenue and cost of gas sold both increased substantially as average retail gas rates per therm rose 31.3%; February 2021 extreme weather contributed approximately $15 million of higher gas costs, recovered through the gas adjustment mechanism by year-end.
- Net income benefited from higher electric and gas investments and stronger utility margins, while increased operating and depreciation expenses partially offset gains.
- Capital expenditures declined as construction spending on Badger Hollow I tapered; the project entered service in November 2021. O’Brien Solar Fields also entered service in 2021.
- Long-term debt increased following the $100 million note issuance, while year-end short-term debt fell to $5.5 million from $52.5 million.
Outlook, commentary, risks, and unusual items
- Rates: The PSCW-approved 2022 settlement provides for electric rates to increase 8.81% and gas rates 2.15%. For 2023, it approved a 0.96% gas-rate increase and a limited electric rate-case reopener. The approved return on common equity is 9.8%. Environmental groups petitioned for review of the two most recent rate settlements; MGE has intervened in support of the PSCW. The revenue requirements themselves are not challenged, according to the filing.
- Capital plan: Forecast capital expenditures are $205.1 million in 2022, $238.0 million in 2023, and $217.6 million in 2024, with significant renewable and distribution investments. Forecasts depend on approvals, project timing, supply conditions, customer demand, and rate recovery. Badger Hollow II’s expected completion moved to March 2023 because of supply-chain constraints. Several proposed renewable projects remain subject to PSCW approval.
- Energy transition: MGE targets an 80% reduction in carbon emissions from electric generation by 2030, from 2005 levels, and net-zero carbon electricity by 2050. Co-owners plan to retire Columbia Unit 1 by the end of 2023 and Unit 2 by the end of 2024, subject to change. MGE announced plans to transition the Elm Road Units from coal to natural gas, with coal use expected to end by 2035. In January 2022, MGE sought approval to acquire a 25 MW interest in the West Riverside gas plant for approximately $25 million, with a possible additional 25 MW purchase later.
- Retirement and environmental matters: Columbia’s early retirement was considered probable at year-end; $159.0 million of net book value was classified as plant anticipated to be retired early. No impairment was recorded. MGE estimates its share of certain Columbia ash-compliance costs at approximately $4 million and its share of Elm Road wastewater-treatment costs at approximately $4 million; management expects environmental compliance costs to be recoverable in rates, but timing and requirements remain uncertain.
- Other unusual items: MGE recorded $2.5 million of additional expense for Columbia inventory obsolescence and employee severance reserves and expects to seek regulatory recovery. It also deferred $3.3 million of 2021 fuel costs, subject to PSCW review. A $3.2 million refund of 2020 fuel savings was returned to customers in October 2021.
- Key risks: Regulatory decisions and recovery timing, environmental and climate rules, fuel and purchased-power costs, extreme weather, generation and transmission availability, project delays and overruns, cyber incidents, and interest rates. Management reported no material COVID-19 service or employment disruption, but said future financial effects could not be estimated with certainty.
- Regulatory accounting: The auditor identified rate-regulation accounting as a critical audit matter because management must judge whether deferred costs will be recovered and customer credits refunded. At year-end, regulatory assets were $109.0 million and regulatory liabilities were $163.7 million.
Important facts for investors to verify
- Whether the 2022 rate increases and any 2023 electric rate adjustment deliver the expected revenue and cost recovery.
- Approval, cost, schedule, and in-service dates for Badger Hollow II, proposed solar and battery projects, and the West Riverside acquisition.
- Columbia retirement milestones, associated asset recovery and environmental obligations, and the economics and approvals for the Elm Road fuel transition.
- Cash generation versus the $205.1 million, $238.0 million, and $217.6 million capital-spending forecasts, and the resulting need for external financing.
- PSCW review of the $3.3 million deferred 2021 fuel costs, recovery of Columbia-related costs, and the outcome of petitions challenging recent rate settlements.
- Changes in regulatory assets and liabilities, commodity costs, and MGE’s available borrowing capacity and debt covenant headroom.