MGE Energy, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The combined filing covers the quarter and nine months ended September 30, 2021. MGE Energy is a Wisconsin utility holding company; its principal subsidiary, Madison Gas and Electric (MGE), provides regulated electric and natural gas service. Unless identified as MGE, financial figures below are for MGE Energy on a consolidated basis. Dollar amounts are in millions except per-share data.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $145.9 | $135.2 | $444.5 | $402.1 |
| Operating income | $37.6 | $38.3 | $100.0 | $91.3 |
| Net income | $34.9 | $31.8 | $92.7 | $76.6 |
| Diluted EPS | $0.97 | $0.88 | $2.56 | $2.16 |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $141.3 | $136.0 |
- For the first nine months, electric revenue rose 6.9% to $324.6 million and gas revenue rose 21.7% to $119.9 million. Higher gas revenue largely reflected higher commodity costs passed through to customers; it is not by itself evidence of higher gas profitability.
- Management’s non-GAAP utility margins were $94.6 million electric and $15.2 million gas in Q3, versus $92.7 million and $14.8 million. For nine months, electric margin was $252.6 million and gas margin $62.2 million, up from $239.8 million and $57.6 million.
- Nine-month operating cash flow increased $5.3 million year over year. Capital expenditures were $114.1 million, down $24.9 million; investing cash outflow was $118.3 million. Cash and cash equivalents were $70.5 million at September 30, versus $44.7 million at year-end 2020.
- At September 30, total assets were $2.37 billion, long-term debt was $615.3 million and debt due within one year was $4.9 million; short-term debt was zero, compared with $52.5 million at year-end. Capitalization was 62.4% common equity and 37.6% long-term debt, compared with 62.9%, 33.7% and 3.4% short-term debt, respectively, at year-end.
- MGE issued $100 million of long-term notes in 2021: $60 million at 2.48% for 10 years and $40 million at 2.63% for 12 years. Cash dividends paid by MGE Energy were $40.8 million for the nine months; dividends declared were $1.128 per share, versus $1.075 in 2020.
- Management reported $50.0 million of available revolving-credit capacity for MGE Energy and $99.3 million for MGE, in addition to cash. Management stated it expected adequate liquidity for operations and capital expenditures over the next 12 months.
Changes versus prior comparable period
- Nine-month net income increased $16.1 million and diluted EPS increased from $2.16 to $2.56. The effective tax rate fell to 4.2% for MGE Energy from 17.3%, principally reflecting the 2021 return of certain electric excess deferred tax benefits to customers. This tax-related effect materially supported earnings growth.
- Q3 operating income declined $0.7 million despite higher revenue, as fuel for electric generation, gas costs, and operations and maintenance increased. Nine-month operating income rose $8.8 million; the electric and gas margin gains more than offset higher operating and depreciation costs.
- Retail electric sales rose 2.8% for the nine months, with recovery in commercial activity and favorable weather contributing. Gas deliveries rose 1.2%; colder first-quarter weather contributed to gas demand. Higher natural-gas costs following extreme February weather were expected to be recovered through the purchased gas adjustment mechanism.
- Nine-month operations and maintenance expense increased $8.1 million, including higher generation maintenance, transmission costs and costs associated with the customer information system. Columbia inventory obsolescence and employee severance reserves added $2.6 million; MGE said it anticipated seeking regulatory recovery.
Outlook, regulation and risks
- Rates: A proposed settlement for 2022 would increase electric rates 5.16% and gas rates 2.15%; the proposal also includes a 0.96% gas increase for 2023 and a limited electric rate-case reopener. PSCW approval was pending, with a final order expected before year-end 2021. The proposed return on common equity is 9.8%.
- Capital program and generation: Forecast 2021 capital expenditures are $171.5 million, increasing to $203.3 million in 2022, $210.5 million in 2023 and $199.1 million in 2024. About $200 million of 2021–2024 forecast spending is associated with replacing Columbia generation; actual spending depends on approvals and other assumptions.
- Columbia: Co-owners intend to retire Unit 1 by the end of 2023 and Unit 2 by the end of 2024, subject to regulatory and regional review and approval of replacement resources. MGE’s ownership share of the plant’s net book value was $161.6 million. Early retirement was considered probable, but no impairment was recorded; recovery of the remaining value remains dependent on regulatory treatment.
- Renewables and subsequent development: Badger Hollow I was expected to enter service in Q4 2021; Badger Hollow II was expected in December 2022. MGE was seeking approval for additional solar, wind and battery projects, so their completion and costs were not assured. On November 3, 2021, MGE announced plans to transition the Elm Road plant away from coal as a primary fuel by 2030 and eliminate coal use by 2035; plans and costs are subject to PSCW approval.
- Environmental and regulatory exposure: Environmental rules and proceedings could affect fossil-fuel plant costs and operating plans. Management generally expected compliance costs to be recoverable in rates, but timing, scope and recovery are uncertain. Columbia ash-pond work was estimated to cost MGE about $4 million; Elm Road water-rule compliance was also estimated at about $4 million for MGE’s share, subject to approval.
- Other uncertainties: A challenge to the PSCW’s 2021 rate-settlement process was stayed pending the 2022 rate case; the approved revenue requirement was not challenged. Pending FERC proceedings could reduce ATC’s return on equity and future MGE Energy earnings or distributions. Commodity prices, weather, interest rates, pension asset values, COVID-19 impacts and the pace of regulatory cost recovery are additional risks.
- The new customer information and billing system went live in September 2021 and materially affected internal control over financial reporting; management said related controls would continue to be evaluated. Management concluded disclosure controls were effective at September 30, 2021.
Investor facts to verify
- Whether the proposed 2022–2023 rate settlement received PSCW approval and whether final rates and authorized returns differed from the proposal.
- Actual performance of the 2021–2024 capital program, renewable project approvals and timing, and replacement plans for Columbia’s retiring units.
- Regulatory recovery and impairment treatment for Columbia’s $161.6 million net book value, and the outcome of Columbia and Elm Road environmental compliance matters.
- Whether February 2021 gas-cost under-collections and other deferred amounts were recovered as expected, and the effects of the $3.2 million 2020 electric fuel-savings refund.
- Developments in ATC return-on-equity proceedings and any resulting change to MGE Energy’s equity earnings or distributions.
- Whether the new customer information system’s controls remain effective and whether implementation costs or operating issues affect results.