MGE Energy, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the same 2021 periods. Figures are consolidated and in U.S. dollars. MGE Energy is a utility holding company; its subsidiary Madison Gas and Electric (MGE) accounts for most consolidated operations.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $163.4m | $145.9m | $524.7m | $444.5m |
| Operating income | $42.5m | $37.6m | $109.8m | $100.0m |
| Net income | $33.7m | $34.9m | $89.9m | $92.7m |
| EPS, diluted | $0.93 | $0.97 | $2.49 | $2.56 |
| Operating margin | 26.0% | 25.8% | 20.9% | 22.5% |
| Net margin | 20.6% | 23.9% | 17.1% | 20.9% |
- Revenue rose 12.0% in Q3 and 18.0% year to date, driven by higher approved electric rates, higher gas commodity costs passed through to customers, and increased gas deliveries. Gas revenue growth largely reflects pass-through costs under the purchased gas adjustment clause, rather than equivalent growth in earnings.
- Net income declined 3.4% in Q3 and 3.0% year to date despite higher operating income. The effective tax rate increased to 19.5% from 7.3% in Q3 and to 18.9% from 4.2% year to date, principally because of prior-year treatment of excess deferred taxes.
- For the first nine months, electric revenue increased $30.8m and gas revenue increased $49.4m. Gas costs also rose substantially and are generally passed through to customers. Electric fuel and purchased-power costs increased as coal transportation constraints reduced Columbia generation, requiring more market purchases.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $144.3m, versus $141.3m in 2021. Capital expenditures were $133.4m, up from $114.1m; investing cash outflow was $137.2m. Financing used $12.7m, including $42.8m of common dividends paid.
- Cash, cash equivalents and restricted cash totaled $13.2m at September 30, 2022. Current assets were $199.8m and current liabilities $194.8m, leaving working capital of approximately $5.1m.
- At September 30, interest-bearing debt included $561.6m long-term debt, $54.3m due within one year and $40.0m short-term debt. Short-term debt was $5.5m at year-end 2021; long-term debt due within one year increased from $4.9m. Management stated that available liquidity, operating cash flow and borrowing and capital-market access were expected to support operations and investment over the next 12 months.
- After quarter-end, MGE agreed to issue $75m of senior notes: $25m and $15m at 5.43%, and $35m at 5.53%, with maturities in 2032–2035. Proceeds are intended for capital expenditures and other obligations.
- MGE Energy paid dividends of $1.183 per share in the first nine months, up from $1.128 in 2021. Its reported capitalization at September 30 comprised 62.1% common equity, 35.6% long-term debt and 2.3% short-term debt.
Material changes, outlook and risks
- PSCW-approved 2022 rate changes included an 8.81% electric increase and a 2.15% gas increase. MGE proposed a 4.38% 2023 electric increase in a limited rate-case reopener; approval was pending, with a final order expected before year-end. The settlement also approved a 0.96% 2023 gas increase.
- MGE deferred $4.4m of 2022 electric fuel costs through September, following $3.3m deferred in 2021. The 2021 amount is slated for recovery through the 2023 electric rate reopener; 2022 costs remain subject to PSCW review in 2023.
- Management targets an 80% reduction in electric-generation carbon emissions by 2030 from 2005 levels and net-zero carbon electricity by 2050. Columbia’s planned retirement was moved to June 2026; MGE said the delay is not expected to affect its 2030 target. MGE also plans to transition Elm Road away from coal, with coal expected to be backup fuel by 2030 and eliminated as an internal generation source by 2035.
- Renewable projects under construction include Badger Hollow II and Paris, with estimated MGE shares of costs of $76m and $51m, respectively, excluding AFUDC. Management reported cost increases from commodity, labor and module inflation, and potential project delays tied to supply-chain and solar-import issues. Darien and Koshkonong were also delayed; PSCW approval for those projects was pending.
- Forecast capital expenditures total $171.2m in 2022, $215.1m in 2023, $218.5m in 2024 and $203.7m in 2025. These estimates depend on project timing, regulatory approvals, supply conditions and rate recovery.
- The D.C. Circuit vacated FERC orders on ATC’s authorized return on equity and remanded the matter. MGE Energy recorded an estimated $0.8m possible loss in its share of ATC earnings; a further potential refund related to an earlier complaint was estimated at $2.3m and had not been accrued.
- Other notable exposures include evolving environmental rules, coal-ash and wastewater compliance projects, solar import restrictions and tariffs, and a 23% decline in employee benefit plan asset values during the first nine months. MGE said it expects environmental compliance costs to be recoverable in future rates, but timing and amounts remain uncertain. The Inflation Reduction Act was not expected to have a material impact in 2022.
- Routine legal matters were not expected to have a material adverse effect. Environmental groups petitioned for review of the two most recent rate settlements; the stated relief was unclear, and the approved revenue requirements were not challenged. Management reported no material changes to the risk factors in its 2021 Form 10-K and no material control deficiencies.
Key facts for investors to verify
- Whether the PSCW approved the proposed 2023 electric rate reopener, including recovery of deferred fuel costs and revised Columbia depreciation.
- How fuel and purchased-power costs, gas commodity pass-throughs, and coal transportation constraints affect margins and cash flow.
- Final project costs, schedules and regulatory recovery for Badger Hollow II, Paris, and other planned generation investments.
- FERC’s resolution of the ATC ROE complaints and any resulting refunds or changes to MGE Energy’s equity earnings.
- Funding and covenant implications of MGE’s $75m post-quarter debt issuance, alongside the company’s capital spending and liquidity needs.