MGE Energy, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The combined filing covers MGE Energy, Inc. and its wholly owned regulated utility subsidiary, Madison Gas and Electric Company (MGE). MGE accounts for most of MGE Energy’s operations. Figures below are for MGE Energy unless otherwise noted.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $568.9 million | $559.8 million | Up 1.6% |
| Operating income | $110.9 million | $114.2 million | Down 2.9% |
| Net income | $86.9 million | $84.2 million | Up 3.2% |
| Basic and diluted EPS | $2.51 | $2.43 | Up 3.3% |
| Operating cash flow | $130.5 million | $153.0 million | Down $22.6 million |
| Capital expenditures | $164.0 million | $212.2 million | Down $48.2 million |
| Dividends declared per share | $1.38 | $1.32 | Up 4.5% |
- Electric revenue was $409.0 million and gas revenue was $159.9 million. Electric and gas margins, management-defined non-GAAP measures, were $314.8 million and $80.1 million, respectively, versus $293.9 million and $72.8 million in 2018.
- Operating expenses rose to $457.9 million from $445.6 million. Other operations and maintenance increased $15.5 million, substantially reflecting Enterprise Forward technology costs; depreciation and amortization rose $15.2 million, including accelerated depreciation for specified electric assets. These increases outweighed improved electric and gas margins.
- Net income increased despite lower operating income, with lower income tax expense contributing to the comparison. The effective tax rate was 18.6%, versus 24.6% in 2018; wind-generation tax credits and amortization of excess deferred taxes were factors.
- Total assets were $2.08 billion, versus $1.99 billion. Common equity was $855.7 million. Long-term debt, including current maturities, was $543.4 million; capitalization including short-term debt was $1.40 billion. No short-term debt was outstanding at year-end.
- Cash and cash equivalents were $23.5 million, down from $83.1 million; cash, cash equivalents, and restricted cash totaled $25.8 million. Current assets were $181.6 million and current liabilities were $128.8 million. Management said resources were adequate for operations and capital spending over the next 12 months.
- MGE issued $50 million of long-term unsecured debt in November. MGE Energy had a $50 million revolving credit facility and MGE had $100 million of revolving facilities, both with no year-end borrowings and expiration in February 2024. Debt-to-capitalization covenant ratios were 39.0% for MGE Energy and 43.9% for MGE, against a 65% maximum.
Material changes versus 2018
- Electric margin rose $20.9 million, primarily from revenue amounts subject to refund, lower fuel and purchased-power costs, partly offset by lower rates and reduced sales volume. Total retail electric sales volume fell 2.3%; cooling degree days declined 17.5%.
- Gas margin rose $7.3 million, reflecting customer growth, colder weather, rate changes, and lower gas costs. Retail gas deliveries increased 3.8%.
- Cash from operations fell, partly because working capital used cash in 2019, including lower accounts payable and customer credits. Investing cash outflow declined as Saratoga construction spending eased.
- The Saratoga 66-MW wind farm entered service in February 2019. MGE’s ownership share of Columbia declined from 19.4% to 19.1% in January 2019, with a further small adjustment scheduled for June 2020.
Outlook, risks, and notable items
- Rates: PSCW-approved 2020 electric rates decreased 0.84%, or about $3.4 million, under the fuel-cost plan. The rate settlement provided a 1.46%, or $2.4 million, gas-rate increase in 2020 for infrastructure costs. The authorized return on common equity was 9.8%.
- Capital plan: Forecast capital expenditures are $226.4 million in 2020, $224.0 million in 2021, and $136.8 million in 2022. Major projects include Two Creeks and Badger Hollow I solar, expected online by the end of 2020, and Badger Hollow II, expected by the end of 2021. Forecasts depend on regulatory approvals, project costs, customer demand, and rate recovery.
- Energy transition: MGE targets renewables at 25% of retail electric sales by 2025 and 30% by 2030, a 40% reduction in CO2 emissions from 2005 levels by 2030, and net-zero carbon electricity by 2050. These are goals, not guaranteed outcomes; execution, cost, technology, permits, and customer participation are key dependencies.
- Environmental and legal uncertainty: Proposed wastewater rules, air-emissions requirements, coal-ash standards, and the Affordable Clean Energy rule could affect fossil-fuel plant costs and operations. MGE stated that the eventual impacts are uncertain and expects to seek rate recovery. Environmental proceedings include Columbia Clean Air Act matters; significant additional costs under its consent decree were not expected. Other legal matters were described as ordinary-course and not expected to have a material adverse effect.
- Regulatory balances and contingencies: At year-end, regulatory assets were $145.7 million and regulatory liabilities were $174.2 million, both dependent on future regulatory recovery or customer refunds. MGE deferred about $6.2 million of 2019 pension and postretirement costs for potential future rate treatment. The 2019 fuel-savings review remained pending; $1.5 million had been deferred. MGE refunded $9.5 million of 2018 fuel savings and $3.2 million of 2018 tax overcollections in 2019.
- Other exposures: MGE’s purchased-power agreement had a $25.4 million fair-value loss at year-end, subject to regulatory deferral; no collateral was then required. Commodity, interest-rate, pension-asset, weather, counterparty, cyber, construction, and regulatory risks could affect results. The filing identifies the Enterprise Forward customer and financial systems program as complex and potentially costly.
- Accounting and audit: PwC gave an unqualified opinion on MGE Energy’s and MGE’s financial statements. PwC identified accounting for rate regulation as a critical audit matter because management’s assessments of future cost recovery and customer refunds involve significant judgment. Management reported effective internal control over financial reporting.
Investor facts to verify
- Whether planned solar projects meet budget and completion schedules, and whether associated costs receive expected regulatory recovery.
- How final environmental rules, litigation, and PSCW decisions affect Columbia, Elm Road, future compliance spending, and customer rates.
- Whether operating cash flow can support the projected capital program, dividends, and debt service as cash balances have declined.
- How Enterprise Forward spending and implementation affect operating costs, capitalized assets, and customer service.
- Whether the pension deferral, regulatory balances, and pending fuel-cost review result in recovery or refunds consistent with management’s assumptions.