MGE Energy, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. MGE Energy is a Wisconsin utility holding company; its wholly owned subsidiary Madison Gas and Electric (MGE) provides regulated electric and gas service. Unless stated otherwise, financial amounts below are for MGE Energy and its consolidated subsidiaries.
Financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenue | $167.9 million | $149.9 million | +12.0% |
| Operating income | $39.1 million | $31.4 million | +24.2% |
| Net income | $34.9 million | $26.0 million | +34.2% |
| Diluted EPS | $0.97 | $0.75 | +$0.22 |
| Cash from operations | $43.9 million | $53.8 million | Down $9.9 million |
Operating margin was approximately 23.3%, versus 21.0% in Q1 2020; net margin was approximately 20.8%, versus 17.4%. MGE’s net income attributable to MGE Energy was $28.3 million, compared with $19.1 million.
- Electric margin, a non-GAAP measure, rose to $78.0 million from $72.8 million. Gas margin, also non-GAAP, rose to $29.9 million from $26.0 million.
- Electric revenue increased 8.2%; retail electric sales volume edged down 0.6%. Residential electric sales volume rose 8.5%, while commercial volume fell 3.7%.
- Gas revenue increased 18.3%, reflecting 7.0% higher retail deliveries, colder weather and higher gas costs passed through to customers. Heating degree days rose 11.4%.
- The effective income tax rate for MGE Energy was 1.3%, versus 16.1% a year earlier, primarily reflecting tax benefits and the return of certain excess deferred taxes to electric customers.
Cash, debt and liquidity
- Cash and cash equivalents were $40.2 million at March 31, 2021, down from $44.7 million at year-end. Operating cash flow of $43.9 million was more than offset by $35.8 million of investing outflows and $13.6 million of financing outflows; capital expenditures were $34.7 million.
- Short-term debt was $54.0 million; long-term debt was $518.2 million, with $4.8 million due within one year. Cash, cash equivalents and restricted cash totaled $41.5 million.
- MGE Energy had $50.0 million available under its revolving credit facility. MGE had $45.3 million available, after $54.0 million of commercial paper and $0.7 million of letters of credit. Both facilities expire in February 2024.
- Management said liquidity was adequate for operations and planned capital expenditures over the next 12 months, subject to the duration and severity of COVID-19. The credit agreements cap debt to total capitalization at 65%; reported covenant ratios were 36.6% for MGE Energy and 39.2% for MGE.
Material changes and management commentary
- Earnings increased mainly with higher electric and gas margins, investment in rate base, colder weather and increased residential electric use. Management noted that some first-quarter timing benefits from depreciation and operating costs were expected to reverse as projects were completed and costs rose later in 2021.
- Operating cash flow declined despite higher earnings, largely because unusually high February gas purchase costs exceeded amounts then collected in rates by about $13 million; the excess was deferred for future recovery.
- Dividend per share increased to $0.370 from $0.353. MGE Energy paid $13.4 million in common dividends during the quarter.
- Capital work includes Badger Hollow I and II solar projects and the O’Brien solar project. MGE’s share of estimated costs is $65 million each for Badger Hollow I and II and $32 million for O’Brien. Management expected Badger Hollow I and O’Brien to enter service in 2021 and Badger Hollow II in December 2022.
Outlook, risks and contingencies
- In May 2021, MGE requested PSCW approval for 2022 rate increases of 5.9% for electricity and 3.0% for gas; approval was pending. It also proposed a limited electric rate-case reopener and a 1.65% gas increase for 2023. These are requests, not approved rates.
- In February 2021, MGE and co-owners announced plans to retire Columbia coal units by the end of 2023 and 2024, respectively. Timing depends on regulatory review and approval of replacement energy and capacity resources.
- Proposed renewable generation projects, including solar, battery and wind investments, remained subject to PSCW approval. MGE had not determined whether to exercise an option to acquire up to 50 MW at the Riverside gas plant.
- MGE Energy expected to issue up to $100 million of long-term debt in 2021 for authorized capital expenditures and general corporate purposes.
- Environmental compliance, changing rules and legal challenges could affect generation costs and capital requirements. The filing estimates MGE’s share of certain Columbia and Elm Road compliance projects at approximately $4 million each; recovery of costs in future rates is management’s expectation, not assured in the filing.
- Environmental groups challenged the PSCW process for approving MGE’s 2021 rate settlement. The approved revenue requirement was not challenged, and the requested relief was unclear. Other legal matters were described as ordinary-course and not expected to have a material adverse effect.
- Potential lower authorized returns on equity for ATC could reduce MGE Energy’s future equity earnings and distributions. Commodity, interest-rate, pension-asset, counterparty, regulatory and COVID-19-related risks remain relevant. No derivative counterparties had defaulted as of quarter-end.
Investor facts to verify
- PSCW decisions on MGE’s requested 2022–2023 rates and on proposed replacement resources for Columbia.
- Actual project costs, schedules and approvals for Badger Hollow, O’Brien and other proposed renewable investments.
- Recovery timing for deferred gas and electric fuel costs, including the $3.2 million of 2020 fuel savings and the $0.5 million of 2021 fuel savings deferred at March 31.
- Capital spending, financing and liquidity as the planned projects advance; first-quarter operating cash flow was lower year over year.
- Developments in ATC return-on-equity proceedings and environmental requirements that could affect costs or future earnings.