MGE Energy, Inc. — Q1 2022 Form 10-Q
Business context and reporting period. The combined filing covers MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE), for the three months ended March 31, 2022. MGE provides regulated electric and natural gas service in Wisconsin; MGE Energy also has nonregulated generation and transmission investments. Unless indicated otherwise, amounts below are for MGE Energy on a consolidated basis.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $208.9 million | $167.9 million | +$41.0 million |
| Operating income | $41.9 million | $39.1 million | +$2.8 million |
| Net income | $34.4 million | $34.9 million | −$0.5 million |
| Diluted EPS | $0.95 | $0.97 | −$0.02 |
| Operating cash flow | $62.1 million | $43.9 million | +$18.2 million |
| Capital expenditures | $30.8 million | $34.7 million | −$4.0 million |
Revenue growth was driven primarily by higher gas revenues, which largely reflect higher gas commodity costs passed through to customers. Electric revenue rose 9.4%; gas revenue rose 46.9%. Gas retail deliveries increased 11.9%, while the average retail gas rate per therm increased 32.8%.
Electric margin, a non-GAAP measure, increased to $84.1 million from $78.0 million; gas margin increased to $34.0 million from $29.9 million. Higher rates and customer volumes contributed, while higher electric fuel costs reduced the electric margin. Operating expenses rose $38.2 million, including higher gas costs, operations and maintenance, and depreciation.
Despite higher operating income, net income declined. The income tax provision increased to $7.8 million from $0.5 million, primarily reflecting tax-related items that had reduced the prior-year tax rate. Other income also increased, partly offsetting the tax impact. MGE reported net income of $32.1 million, including $4.8 million attributable to noncontrolling interests; net income attributable to MGE was $27.3 million, versus $28.3 million a year earlier.
Operating cash flow was $62.1 million; investing cash use was $32.2 million and financing cash use was $21.2 million. Cash, cash equivalents and restricted cash ended the quarter at $27.5 million. At March 31, 2022, current assets were $194.4 million and current liabilities $98.1 million. Long-term debt was $613.1 million, with $4.9 million due within one year and no short-term debt outstanding. Common equity was 62.9% of capitalization, compared with 62.2% at year-end 2021. Dividends were $0.388 per share, up from $0.370.
Material changes and developments
- Approved 2022 rates included increases of 8.81% for electric service and 2.15% for gas service. The approved 2023 settlement includes a 0.96% gas rate increase.
- In April 2022, MGE filed a proposed 4.38% electric rate increase for 2023 through a limited rate-case reopener; PSCW approval was pending. The filing also seeks to revise Columbia Unit 2 depreciation timing.
- MGE had deferred $3.3 million of 2021 electric fuel costs, subject to regulatory review, and proposed including recovery in the 2023 electric reopener. There were no deferred 2022 fuel costs or savings as of March 31.
- Capital projects include Badger Hollow II solar, with MGE’s estimated share of costs at $65 million and commercial operation expected in the first half of 2023, and Red Barn wind, expected to enter service in December 2022.
Outlook, risks and contingencies
Management said it expects adequate liquidity for operations and capital expenditures over the next 12 months, subject to the duration and severity of COVID-19 effects. The company provided no specific earnings guidance in the supplied filing text. Its stated strategic target is an 80% reduction in carbon emissions by 2030 from 2005 levels. Co-owners plan to retire Columbia Units 1 and 2 by the ends of 2023 and 2024, respectively; MGE also plans to transition the Elm Road Units away from coal, with a full transition expected by 2035. Retirement and transition timing remains subject to operational, regulatory and other factors.
Risks include uncertain environmental rules and potential effects on fossil-fueled generation, commodity prices, weather, regulatory cost recovery, interest rates, pension asset returns, and project costs and schedules. An EPA proposal issued in April 2022 could tighten NOx requirements and affect fossil-fueled assets if finalized. Solar procurement may be delayed or become more costly due to U.S. import restrictions and a solar tariff investigation. MGE said it could not yet determine the impact.
MGE’s share of Columbia’s remaining net book value was $156.7 million; no impairment was recorded at March 31, 2022. Management expects environmental compliance costs to be recovered in future rates, but timing and scope remain uncertain. Environmental groups have petitioned for review of the PSCW’s two recent rate settlements; the requested relief was unclear, and MGE intervened to support the approvals. Pending FERC challenges to ATC’s authorized return on equity could reduce future equity earnings and distributions. Management reported no material accrued legal matters and no counterparty defaults.
Important facts for investors to verify
- PSCW decisions and timing for the proposed 2023 electric rate reopener and recovery of deferred 2021 fuel costs.
- Whether gas cost pass-throughs, rate changes and volumes sustain margins as commodity prices and weather change.
- Final Columbia retirement approvals, related asset recovery and environmental compliance costs.
- Potential effects of proposed EPA rules and solar supply or tariff disruptions on generation plans, project costs and schedules.
- ATC ROE proceedings and any resulting change to MGE Energy’s equity earnings or distributions.