MGE Energy, Inc. — 2022 Form 10-K
Business context and period. Annual report for the fiscal year ended December 31, 2022 (not a standalone Q4 report). MGE Energy is a holding company whose principal subsidiary, Madison Gas and Electric (MGE), operates regulated electric and gas utilities in Wisconsin. The filing presents financial statements for both MGE Energy and MGE; figures below are consolidated MGE Energy unless noted.
Financial performance and position
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Operating revenue | $714.5 million | $606.6 million | +17.8% |
| Operating income | $137.7 million | $117.3 million | +17.4% |
| Net income | $111.0 million | $105.8 million | +4.9% |
| Diluted EPS | $3.07 | $2.92 | +5.1% |
| Operating cash flow | $153.7 million | $137.5 million | +$16.2 million |
| Capital expenditures | $175.0 million | $153.2 million | +$21.9 million |
| Cash and cash equivalents | $11.6 million | $17.4 million | -$5.8 million |
| Long-term debt, including current portion | $639.6 million | $619.1 million | +$20.5 million |
| Commercial paper outstanding | $70.5 million | $5.5 million | +$65.0 million |
Operating margin was approximately 19.3%, broadly flat year over year; net margin was approximately 15.5%, down from 17.4%. Cash flow less capital expenditures was negative $21.3 million, compared with negative $15.6 million in 2021. At year-end, current assets were $243.5 million and current liabilities $225.1 million (current ratio approximately 1.08). MGE reported $28.8 million of available capacity under its credit facilities at year-end; MGE Energy’s separate $50 million revolving facility was unused. In January 2023, MGE increased its aggregate bank commitments by $30 million.
MGE Energy’s 2022 dividend was $1.59 per share, up from $1.52. Total assets were $2.52 billion and shareholders’ equity $1.08 billion at year-end. The filing reports no standalone quarterly Q4 results.
Material changes versus 2021
- Revenue growth reflected higher approved rates and gas deliveries, not equivalent growth in underlying energy volumes. Electric revenue rose 10.7%; total electric sales volume fell 2.6%. Gas revenue rose 34.0%, with retail gas deliveries up 14.7% amid colder weather and higher commodity costs.
- 2022 electric rates increased 8.81% and gas rates 2.15%. The PSCW approved a 9.01% electric rate increase for 2023 and a 0.96% gas increase for 2023.
- Higher operating costs included a $52.9 million increase in cost of gas sold, $14.1 million more in electric fuel and purchased power combined, $10.5 million more in operations and maintenance, and $8.6 million more in depreciation and amortization.
- Net income growth was partly offset by a higher income tax provision: $26.2 million versus $4.1 million in 2021. The prior-year effective tax rate was unusually low due largely to a one-time return of excess deferred taxes to customers.
- Electric fuel costs were under-recovered by $8.8 million in 2022, up from $3.3 million deferred in 2021. Coal transportation constraints reduced Columbia generation and increased market power purchases.
Outlook, management commentary, risks and contingencies
- Investment and decarbonization: Management targets at least an 80% reduction in electric-generation carbon emissions by 2030 from 2005 levels and net-zero-carbon electricity by 2050. Columbia’s co-owners plan retirement by June 2026; timing remains subject to operational, regulatory and other factors. MGE expects coal to be a backup fuel at Elm Road by 2030 and to be fully phased out there by 2035, subject to approvals.
- Capital plan: Forecast capital expenditures total approximately $1.08 billion for 2023–2027, including substantial renewable generation, distribution investment and battery storage. The 2023 forecast is $215.2 million. Management cautions that actual costs and timing may change with approvals, supply conditions, inflation and project execution.
- Projects: Badger Hollow II and Paris experienced projected cost increases tied to commodity, labor and solar-module costs. Procurement disruptions delayed the anticipated schedules for Darien and Koshkonong. Koshkonong remained subject to PSCW approval. MGE’s approved 25 MW West Riverside natural-gas interest, at an approximately $25 million purchase price, was expected to close in March 2023; MGE may seek approval for another 25 MW.
- Fuel and regulatory exposure: Recovery of the 2022 deferred fuel costs is subject to PSCW review. Fuel, purchased power, gas commodity and transmission costs, as well as timing of rate recovery, can affect cash flows and earnings. Management expects to seek rate recovery of environmental compliance costs, but recovery and timing are not assured.
- Other contingencies: Environmental rules and litigation could require additional spending or affect fossil-fuel operations. Environmental groups challenged aspects of MGE’s approved rate decisions; the 2022/2023 settlement was affirmed by a circuit court, with an appeal pending. ATC return-on-equity proceedings could reduce future equity earnings or distributions; MGE Energy recorded an estimated $0.9 million possible loss in 2022 for potential refunds.
- Other risks: Management cites weather, supply-chain disruption and inflation, coal availability and transport, interest rates, pension asset performance, cybersecurity, and project completion and cost-recovery risks. Pension and postretirement plan assets declined approximately 18% in 2022. The Inflation Reduction Act had no material 2022 impact; implementation details remained subject to federal guidance.
- Guidance: The filing does not provide a specific 2023 earnings or EPS forecast.
Important facts for investors to verify
- Whether the PSCW permits recovery of the $8.8 million 2022 fuel under-recovery, and whether coal-transportation constraints continue.
- Actual costs, approval status and commercial-operation dates for renewable and storage projects, particularly Badger Hollow II, Paris, Darien and Koshkonong.
- Progress and approved cost recovery for Columbia’s planned 2026 retirement and Elm Road’s planned fuel transition.
- Developments in the rate-case appeal and ATC return-on-equity proceedings, including potential customer refunds or reduced investment earnings.
- Funding needs and liquidity as capital expenditures rise, including commercial-paper balances, credit availability and debt maturities.
- Assumptions underlying regulatory asset recovery: the auditor identified rate-regulation accounting as a critical audit matter. The financial statements received unqualified audit opinions, and MGE Energy reported effective internal control over financial reporting.