MGE Energy, Inc. 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The combined filing covers MGE Energy, Inc. and its wholly owned utility subsidiary, Madison Gas and Electric Company (MGE); figures below are for MGE Energy consolidated unless noted. MGE operates regulated electric and gas utilities in south-central Wisconsin, alongside nonregulated generation and transmission investments.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Operating revenue | $538.6 million | $568.9 million |
| Operating income | $110.0 million | $110.9 million |
| Net income | $92.4 million | $86.9 million |
| Basic and diluted EPS | $2.60 | $2.51 |
| Operating cash flow | $172.4 million | $130.5 million |
| Capital expenditures | $203.1 million | $164.0 million |
| Cash and cash equivalents at year-end | $44.7 million | $23.5 million |
| Total assets | $2,253.7 million | $2,081.7 million |
Revenue declined about 5.3%, while net income increased about 6.4% and EPS rose about 3.6%. Operating margin, calculated as operating income divided by revenue, was approximately 20.4%, versus 19.5% in 2019. Electric margin, a company-defined non-GAAP measure, was $309.1 million, down $5.7 million; gas margin was $80.6 million, up $0.5 million.
Operating cash flow less capital expenditures was negative $30.7 million, compared with negative $33.6 million in 2019. MGE Energy paid $51.7 million in common dividends, or $1.45 per share, up from $47.8 million and $1.38 per share. May 2020’s public offering of 1.5 million shares raised net proceeds of $79.6 million.
At year-end, MGE Energy reported $519.3 million of long-term debt on the balance sheet, including current maturities, and $52.5 million of short-term debt. Its selected-data capitalization table reports $524.1 million of long-term debt, including current maturities and debt adjustments. Credit facilities totaled $50 million for MGE Energy and $100 million for MGE; MGE had $52.5 million of commercial paper outstanding and $46.8 million of available capacity after letters of credit. MGE Energy’s current assets exceeded current liabilities by $18.6 million.
Material changes and drivers
- COVID-19 shifted demand: 2020 commercial electric sales fell about 7.2%, while residential electric sales rose 5.9%. Retail gas deliveries fell 9.5%, with milder first- and fourth-quarter weather contributing.
- Lower electric revenues and a reduction in electric margin were partly offset by lower generation fuel costs, increased residential usage, reduced operating and maintenance expense, renewable-project AFUDC, and growth in rate base.
- Gas revenue fell 9.8%, largely reflecting lower gas costs passed through to customers and lower demand; gas margin nevertheless edged higher.
- Capital expenditures rose $39.1 million, primarily due to Two Creeks and Badger Hollow solar construction. Two Creeks entered service in November 2020.
- Cash from operations increased by $41.9 million. Financing included the equity offering, $52.5 million of net short-term borrowing, and refinancing of $19.3 million of industrial development bonds at a lower rate.
Outlook, risks, and contingencies
- The 2021 PSCW-approved rate settlement provides for no electric rate increase and an approximately 4% gas rate increase. The electric outcome reflects lower fuel and purchased-power costs and a one-time $18.2 million customer return of certain excess deferred taxes. Authorized return on common equity is 9.8% for the 2021 test period.
- Management forecasts capital expenditures of $202.0 million in 2021, $175.2 million in 2022, and $208.9 million in 2023. Plans include renewable generation, distribution investment, and approximately $50 million for the Enterprise Forward technology program. Forecasts depend on approvals, project timing, costs, and rate recovery.
- In February 2021, MGE and the other Columbia coal-plant owners announced intended retirements of Unit 1 by the end of 2023 and Unit 2 by the end of 2024, subject to regulatory review and approval of replacement resources. The company is evaluating replacement generation, including a proposed Paris Solar-Battery Park; MGE’s expected share of that project’s cost is about $43 million.
- Management said utility service continued without material operational disruption during the pandemic, but reported lower sales, increased bad-debt exposure, waived late fees through April 1, 2021, and deferred COVID-related costs. MGE recorded $3.8 million of incremental COVID-related costs as a regulatory asset; recovery is subject to future regulatory proceedings.
- Key risks include regulatory decisions on cost recovery and rate proceedings, changing environmental and emissions rules, commodity and purchased-power costs, weather and local economic conditions, cyber and system reliability, project execution, pension assumptions, and access to capital. A petition filed by environmental groups in January 2021 challenges PSCW approval of the 2021 rate settlement; MGE intervened in support of the PSCW.
- Environmental matters include compliance costs for the Elm Road units, Columbia ash-pond closure requirements, and uncertainty over future greenhouse-gas rules. Management generally expects eligible compliance costs to be recoverable in rates, but timing and approval are not assured. MGE estimated its share of certain Elm Road compliance costs at approximately $4 million.
- Auditors issued unqualified opinions on the financial statements; MGE Energy’s internal control over financial reporting was reported effective. The auditor identified rate-regulation accounting as a critical audit matter, citing significant judgment in assessing recovery of regulatory assets and refunds of regulatory liabilities.
Investor verification priorities
- Confirm the durability of earnings growth given lower commercial demand, rate changes, weather, and the recovery of COVID-related costs.
- Review the assumptions, approvals, financing, and expected rate treatment underlying the 2021–2023 capital plan and Columbia replacement resources.
- Track PSCW and court developments affecting the 2021 rate settlement, deferred fuel savings, and regulatory assets and liabilities.
- Assess liquidity and leverage against the elevated investment program, including short-term borrowing, debt maturities, and funding needs beyond 2023.
- Monitor Columbia retirement timing and environmental compliance obligations, including ash-pond closure and any additional emissions requirements.