MGE Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2021; filed August 5, 2021. The combined filing covers MGE Energy and its wholly owned utility subsidiary, Madison Gas and Electric (MGE). Unless noted, financial results below are for MGE Energy consolidated.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $130.7 million | $117.0 million | $298.6 million | $266.9 million |
| Operating income | $23.4 million | $21.5 million | $62.4 million | $53.0 million |
| Net income | $22.9 million | $18.8 million | $57.8 million | $44.8 million |
| Diluted EPS | $0.63 | $0.53 | $1.60 | $1.28 |
| Dividends per share | $0.370 | $0.353 | $0.740 | $0.705 |
- Q2 electric revenue increased 8.7% to $101.9 million; gas revenue increased 24.2% to $28.7 million. For the first half, electric and gas revenue rose 8.4% and 20.0%, respectively.
- Non-GAAP electric margin increased $6.0 million to $80.1 million in Q2 and $11.1 million to $158.1 million in the first half. Non-GAAP gas margin increased $0.4 million to $17.2 million in Q2 and $4.2 million to $47.0 million in the first half.
- First-half operating cash flow was $78.5 million, down from $85.5 million. Capital expenditures were $75.7 million, versus $85.2 million; investing cash use was $78.0 million. Cash, cash equivalents and restricted cash totaled $35.6 million at June 30, including $34.0 million of cash and cash equivalents.
- At June 30, MGE Energy reported $31.0 million of short-term debt and $556.4 million of long-term debt, plus $4.8 million due within one year. Short-term debt was $52.5 million at year-end 2020. Common shareholders’ equity was $1.007 billion. The reported capitalization mix was 63.0% equity, 35.1% long-term debt and 1.9% short-term debt.
- Management reported available revolving-credit borrowing capacity of $50.0 million for MGE Energy and $68.3 million for MGE, in addition to cash. Management said liquidity was adequate for the next 12 months, subject to pandemic duration and severity.
Changes and drivers versus the prior year
- Higher earnings reflected increased electric and gas rate base, stronger electric sales amid warmer Q2 weather and economic recovery, and colder first-quarter weather supporting gas sales. Q2 cooling degree days rose to 309 from 213; first-half retail electric sales increased 3.2% by volume.
- Gas costs and revenues both increased following the February 2021 extreme cold-weather price spike. The higher gas costs are passed through to customers; MGE expected recovery of the increased costs by year-end through its purchased gas adjustment mechanism.
- First-half operating and maintenance expense increased $5.5 million, including higher generation maintenance, transmission costs, and $2.6 million of Columbia inventory-obsolescence and employee-severance expense. MGE expects to seek regulatory recovery of the Columbia costs.
- The effective tax rate fell materially, to 2.3% for MGE Energy and negative 0.3% for MGE for the first half, mainly reflecting the return to customers of excess deferred taxes from the 2017 Tax Act. The 2021 rate settlement included an $18.2 million one-time electric customer credit not restricted by tax normalization rules.
- Operating cash flow declined despite higher net income, principally due to working-capital movements, including gas costs paid ahead of recovery. The company issued $40 million of long-term debt in June and repaid $21.5 million of short-term debt; a further $60 million debt tranche was expected to fund in August.
Outlook, risks and notable matters
- MGE requested PSCW approval for 2022 rate increases of 5.9% for electric service and 3.0% for gas service, and proposed mechanisms for potential 2023 changes. Approval was pending; management expected a final order before year-end. Proposed return on common equity was 9.8%.
- MGE and the other Columbia co-owners plan to retire Unit 1 by the end of 2023 and Unit 2 by the end of 2024, subject to regulatory and regional review and approval of replacement resources. Early retirement was considered probable; MGE’s share of the plant’s net book value was $164.9 million. No impairment was recorded at June 30, 2021.
- Renewable projects under construction included MGE’s 33% interests in Badger Hollow I and II, each representing 50 MW and an estimated $65 million share of costs. Commercial operation was expected in Q4 2021 and December 2022, respectively. Several additional renewable projects remained subject to PSCW approval.
- Environmental rules may increase fossil-generation costs. A PSCW-approved Columbia ash-water project was expected to cost MGE about $4 million; MGE’s estimated share of Elm Road units’ effluent-compliance costs was also about $4 million, subject to approval. Management said recovery of compliance costs was expected through future rates, but timing and amounts remain uncertain.
- The PSCW required an additional refund of 2020 fuel savings, plus interest, to electric customers; MGE expected the refund by the end of 2021. Environmental groups also petitioned for review of the 2021 rate-settlement approval; MGE intervened in support of the PSCW decision. Management did not expect ordinary-course legal matters to materially affect results.
- ATC return-on-equity proceedings remain a risk to MGE Energy’s equity earnings and distributions. ATC contributed approximately 5.8% of MGE Energy’s first-half 2021 net income. Other key exposures include weather, commodity prices, regulation, environmental requirements, interest rates, pension-asset returns, and COVID-19 effects.
- Management reported no material pandemic-related service or employment disruptions and no material change to planned capital spending. Disclosure controls were assessed as effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- PSCW decisions on the pending 2022/2023 rate application, Columbia retirements and replacement capacity, and recovery of Columbia-related costs.
- Timing and amount of the required fuel-savings refund, and recovery of February 2021 gas-cost under-collections.
- Funding of the remaining $60 million debt tranche, future borrowing needs and capital expenditure plans.
- Potential impairment or regulatory-recovery implications for MGE’s $164.9 million Columbia net book value, and the outcome of environmental compliance requirements.
- Developments in ATC ROE proceedings and their effect on MGE Energy’s equity earnings and distributions.