MGE Energy, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. MGE Energy is a utility holding company; its wholly owned subsidiary Madison Gas and Electric (MGE) accounts for most consolidated operations. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $135.2 | $138.2 | $402.1 | $427.9 |
| Operating income | $38.3 | $38.7 | $91.3 | $89.0 |
| Net income | $31.8 | $30.7 | $76.6 | $70.2 |
| EPS, basic and diluted | $0.88 | $0.88 | $2.16 | $2.03 |
| Dividends per share | $0.370 | $0.353 | $1.075 | $1.028 |
- For the first nine months, electric revenue declined $11.8 million and gas revenue declined $13.9 million. Lower electric fuel costs and lower gas costs largely offset those revenue declines; electric and gas margins were $239.8 million and $57.6 million, respectively, versus $243.7 million and $57.3 million a year earlier. These margins are non-GAAP measures.
- Operating and maintenance expense fell $7.5 million year over year, while depreciation and amortization rose $1.8 million. Higher AFUDC from solar construction, lower operating costs, and improved transmission-investment earnings supported net income growth.
- Q3 revenue fell 2.2%, while net income increased 3.7%. EPS was unchanged at $0.88, with higher average shares outstanding following the May stock offering. Nine-month EPS rose about 6%.
Cash flow, balance sheet, and financing
- Nine-month operating cash flow was $136.0 million, compared with $111.7 million. Capital expenditures were $139.1 million, up from $128.4 million; operating cash flow therefore fell short of capital expenditures by about $3.0 million.
- Cash, cash equivalents, and restricted cash totaled $54.1 million at September 30, versus $25.8 million at year-end 2019. Total assets were $2.20 billion; construction work in progress increased to $197.6 million from $112.5 million.
- Long-term debt was $520.4 million, with $19.7 million due within one year. MGE refinanced $19.3 million of bonds at 2.05%, replacing bonds bearing 3.45%. MGE Energy reported a 35.7% debt-to-capitalization ratio under its credit-agreement calculation, compared with 39.0% at year-end.
- MGE Energy issued 1.5 million shares in May, generating net proceeds of $79.6 million for general corporate purposes, including utility capital spending. It also paid $38.3 million in dividends in the nine-month period.
- At September 30, MGE Energy had $53.1 million cash and $50 million available under its revolving facility; MGE had $5.2 million cash and $100 million available. Neither facility had borrowings outstanding. Management said liquidity was adequate for the next 12 months, subject to the duration and severity of COVID-19.
Outlook, developments, and risks
- COVID-19: Commercial electric sales were down about 8% in Q3, while residential sales rose about 9%, reflecting remote work. Management reported no material operational disruptions but said the pandemic’s future financial and liquidity effects could not be reliably estimated. MGE had deferred COVID-related costs as regulatory assets; recovery remains subject to regulatory approval. Late-fee waivers and restrictions on residential disconnections affect collections and cash-flow timing.
- Rates: A proposed 2021 settlement, pending PSCW approval, provides for no electric rate increase and an approximately 4% gas rate increase. It includes an $18.2 million one-time return of certain excess tax benefits to electric customers and proposes escrow treatment for specified costs. A final order was expected before year-end 2020.
- Capital projects: Two Creeks solar entered commercial operation in November 2020. Badger Hollow I was rescheduled to April 2021 and Badger Hollow II to December 2022; the O’Brien solar project was expected by mid-2021. MGE reported $67.2 million of additional future minimum construction commitments at September 30, plus $3.4 million entered into in October.
- Regulatory and environmental uncertainty: Environmental rules and legal challenges could raise fossil-generation costs; management expects to seek rate recovery but cannot estimate the full impact. MGE also noted possible future effects on ATC investment earnings from pending challenges to transmission return-on-equity decisions. Legal matters in the ordinary course were not expected to have a material adverse effect.
- Management’s stated priorities include reliable service, controlling operating and fuel costs, investing in renewable generation, and reducing the proportion of coal in the generation mix. The filing provides no specific earnings guidance.
Important facts for investors to verify
- PSCW approval and final terms of the proposed 2021 rate settlement, particularly the customer tax-benefit refund and gas-rate increase.
- COVID-19 effects on sales, customer collections, bad-debt reserves, deferred regulatory assets, and recovery timing.
- Solar project completion schedules, remaining construction commitments, and capital-spending requirements.
- Environmental compliance costs and the outcome of ATC return-on-equity proceedings.
- Whether operating cash generation will keep pace with capital expenditures and dividends as investment continues.