MGE Energy, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. This combined, unaudited filing covers the quarter and six months ended June 30, 2020. 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 area. MGE accounts for most of MGE Energy’s operations. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $117.0 | $122.1 | $266.9 | $289.7 |
| Operating income | $21.5 | $19.8 | $53.0 | $50.3 |
| Net income, MGE Energy | $18.8 | $15.5 | $44.8 | $39.6 |
| EPS, MGE Energy | $0.53 | $0.45 | $1.28 | $1.14 |
| Net income attributable to MGE | $10.6 | $8.3 | $29.7 | $24.9 |
Q2 revenue fell about 4% year over year, while MGE Energy net income rose about 21%. For the first half, revenue declined about 8% and net income increased about 13%. Lower fuel and gas costs and reduced operating and maintenance expense supported earnings despite lower utility revenue.
- Utility margins: MGE’s non-GAAP electric margin was $74.1 million in Q2, down $1.4 million; gas margin was $16.8 million, up $0.6 million. For the first half, electric margin was $147.0 million, down $1.1 million, and gas margin was $42.8 million, down $0.2 million.
- Cash flow: MGE Energy generated $85.5 million of operating cash in the first half, versus $85.9 million a year earlier; capital expenditures were $85.2 million, versus $79.1 million. Cash, cash equivalents and restricted cash ended June at $73.9 million, compared with $25.8 million at year-end 2019.
- Debt and capital: Balance-sheet long-term debt was $521.5 million, plus $19.7 million due within one year. MGE refinanced $19.3 million of bonds at 2.05%, replacing bonds bearing 3.45%; the new bonds are subject to tender in April 2023. MGE Energy’s capitalization was 63.8% common equity and 36.2% long-term debt, including current maturities.
- Liquidity: At June 30, MGE Energy reported $51.6 million cash and $50 million available under its revolving facility; MGE reported $18.0 million cash and $100 million available. No amounts were outstanding under the facilities. Management said liquidity should support operations and capital spending over the next 12 months, subject to the pandemic’s duration and severity.
- Dividends and equity: MGE Energy declared $0.353 per share for Q2 and $0.705 for the first half, up from $0.338 and $0.675, respectively. A May offering of 1.5 million shares generated $79.6 million net proceeds, intended for general corporate purposes, including capital expenditures.
Material changes and management commentary
- COVID-19 reduced commercial electric sales by about 10% in Q2 and retail electric sales by 4%; residential electric sales rose about 20%, partly offsetting the decline. Warmer Q2 weather also supported electric demand. First-half retail gas deliveries fell 11.6%, primarily reflecting milder first-quarter weather.
- Management cited lower operating and maintenance costs, higher earnings from transmission investment ATC, and construction-related AFUDC equity earnings as contributors to improved earnings. First-half O&M expense fell $5.3 million; depreciation and amortization increased $1.4 million.
- Three jointly owned solar projects are under construction. MGE’s share of estimated costs is $65 million per project. Two Creeks was expected to finish by year-end 2020; Badger Hollow I is now expected in April 2021 and Badger Hollow II in December 2022. Management did not expect significant cost increases from the delays.
- Management expects future 2020 sales to be negatively affected by COVID-19 but said it cannot reliably estimate the full impact. MGE continued operating without material service or employment disruptions and may defer discretionary spending if needed.
Outlook, risks and contingencies
- Rates: MGE’s proposed 2021 rate-case settlement, still under negotiation, would provide no electric rate increase and an approximately 4% gas increase for infrastructure and technology improvements. MGE expects no change to its 2020 authorized ROE or capital structure for 2021. The proposal is not a final approved rate order.
- COVID-19 regulatory and credit effects: Wisconsin’s PSCW temporarily restricted service disconnections, customer credit terms and late fees. Residential disconnection restrictions were scheduled to remain through September 1, 2020; MGE elected to continue waiving late fees, expected no later than December 31. MGE had deferred $1.8 million of pandemic-related expenditures and costs by June 30. Recovery is expected to be addressed in future rate proceedings, but timing is uncertain; disallowance could require expense recognition. The filing also reports a $1.6 million regulatory asset for incremental COVID-19 costs.
- Environmental and regulatory exposure: Potential requirements involving greenhouse gases, air and water quality, coal ash and other environmental rules could increase costs at fossil-fueled facilities. Management said the impact and timing remain uncertain and expects to seek recovery through rates. The filing states that Columbia and the Elm Road Units represented about 43% of electric generating capacity.
- ATC and legal matters: Further changes to ATC’s authorized ROE could affect MGE Energy’s equity earnings and distributions. FERC’s May 2020 decision set a 10.02% base ROE for specified periods; challenges and rehearing requests remain relevant. MGE’s share of a possible refund relating to a separate 2015 complaint was approximately $2.4 million. Other ordinary-course legal matters were not expected to have a material adverse effect.
- Other risks: Utility results are sensitive to weather, customer demand, commodity prices, regulation, interest rates, pension asset returns and COVID-19-related economic disruption. MGE’s purchased power agreement had a $20.4 million fair-value loss position; a downgrade below investment grade could require $20 million to $40 million collateral, though none was required at June 30. Credit agreements require a debt-to-capitalization ratio no higher than 65%; reported covenant ratios at June 30 were 36.3% for MGE Energy and 39.4% for MGE.
Important facts for investors to verify
- Whether MGE finalizes and obtains PSCW approval for its proposed 2021 rate settlement and requested cost escrow treatment.
- How COVID-19 affects customer demand, receivable collections, bad debt expense, liquidity and recovery of deferred costs.
- Whether the Badger Hollow project schedules, estimated costs and related capital requirements change further.
- Developments in ATC ROE proceedings and any resulting effects on MGE Energy earnings or potential refunds.
- Environmental rulemaking, litigation and future compliance costs for coal-fired generation, including the timing and extent of recovery through customer rates.