MGE Energy, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited. Filed August 3, 2023. The filing covers both MGE Energy and its wholly owned utility subsidiary, Madison Gas and Electric (MGE); consolidated results largely reflect MGE.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $148.0 million | $152.3 million | $365.3 million | $361.3 million |
| Operating income | $38.4 million | $25.5 million | $78.4 million | $67.3 million |
| Net income | $28.7 million | $21.8 million | $59.8 million | $56.2 million |
| Diluted EPS | $0.79 | $0.60 | $1.65 | $1.55 |
| Operating margin | 25.9% | 16.7% | 21.5% | 18.6% |
Q2 electric revenue rose 8.5% to $121.7 million, helped mainly by the approved 2023 rate increase; gas revenue fell 34.6% to $26.3 million, largely due to lower gas commodity costs and reduced deliveries. For the first half, electric revenue increased 7.5% while gas revenue declined 9.2%. Net income and EPS improved despite lower Q2 total revenue.
Management attributed stronger electric earnings chiefly to higher electric investment and lower fuel costs, partly offset by weaker retail volumes associated with warmer-than-normal weather. First-half gas earnings declined with lower deliveries. Depreciation rose as Columbia Unit 2’s depreciation schedule was accelerated to align with its planned retirement.
Cash flow, balance sheet, and financing
- First-half operating cash flow: $127.0 million, up from $111.3 million. Capital expenditures were $107.7 million, versus $66.0 million; investing cash use was $111.8 million.
- Cash: $16.5 million of cash and cash equivalents at June 30; cash, cash equivalents, and restricted cash totaled $21.3 million, including margin-account receivables.
- Debt: Long-term debt was $651.7 million, with $35.1 million due within one year; short-term debt was $42.0 million. Total of these debt categories was approximately $728.7 million. The company issued $50 million of senior unsecured notes and remarketed $19.3 million of bonds during the first half. Long-term debt fair value was $623.6 million versus a $691.1 million carrying amount, including current maturities.
- Liquidity: Current assets of $222.5 million compared with current liabilities of $159.4 million at June 30. Management said available liquidity, operating cash flow, credit facilities, and capital-market access should be adequate for operations and capital spending over the next 12 months.
- Dividends: $0.408 per share for Q2 and $0.815 per share for the first half, up from $0.388 and $0.775, respectively, in 2022.
Material developments, outlook, and risks
- MGE’s approved 2023 electric rate increase was approximately 9.01%; the 2023 gas increase was 0.96%. MGE filed a proposed 2024–2025 rate case seeking electric increases of 3.75% in 2024 and 3.41% in 2025, and gas increases of 2.56% and 1.66%, respectively. PSCW approval was pending, with a final order expected before year-end 2023.
- MGE deferred $8.8 million of 2022 electric fuel costs, proposing recovery over October 2023–September 2024, subject to regulatory review. It also deferred $1.2 million of 2023 fuel savings, subject to review in 2024.
- Capital spending reflects generation and renewable projects. Red Barn wind entered service in April 2023; Badger Hollow II was expected online in late 2023 or early 2024, while Paris and Darien were targeted for 2024. Estimated costs for Badger Hollow II, Paris, and Darien were expected to exceed previously approved certificate-of-authority levels; MGE intends to seek recovery through rate proceedings. Solar import restrictions and potential tariffs could delay projects or raise costs.
- MGE and co-owners plan to retire Columbia Units 1 and 2 by June 2026, subject to change. MGE’s share of their net book value was $139.0 million; no impairment was recorded. The Elm Road units are planned to transition from coal to natural gas, with coal expected to be backup fuel by 2030 and eliminated as an internal generation source by 2035, subject to approvals and implementation.
- MGE’s stated goals include reducing carbon emissions 80% by 2030 from 2005 levels and achieving net-zero methane emissions from its natural gas distribution system by 2035. Management forecast that over 40% of 2023–2027 capital expenditures would be for renewable generation projects.
- Environmental rules remain uncertain. Proposed federal greenhouse-gas and wastewater rules, air-emissions requirements, and future permits could affect costs and operations, particularly at Elm Road and West Riverside. Management expects to seek rate recovery, but timing and amounts are uncertain.
- ATC’s authorized return on equity remains subject to regulatory and court proceedings; a reduction could lower MGE Energy’s future equity earnings and distributions. MGE reported no material adverse effect expected from ordinary-course legal matters; environmental groups’ challenge to rate decisions continued, including an appeal of the court decision affirming the 2022/2023 settlement.
- Management cited weather, customer demand, commodity prices, interest rates, regulation, environmental requirements, and project execution as factors that could affect results. No specific earnings guidance was provided in the supplied filing text.
Investor verification priorities
- Track PSCW decisions on the proposed 2024–2025 rates and review of deferred fuel costs and savings.
- Check actual spending, schedules, and regulatory cost recovery for Badger Hollow II, Paris, Darien, and other generation projects; assess solar procurement risks.
- Monitor Columbia retirement and Elm Road fuel-transition plans, related depreciation, environmental compliance costs, and recoverability of plant balances.
- Review debt maturities, borrowing needs, capital spending, and liquidity as construction continues.
- Follow ATC ROE proceedings and their potential effect on equity earnings and cash distributions.