MGE Energy, Inc. — Q3 2023 Form 10-Q
Business context and period. MGE Energy is a Wisconsin utility holding company whose principal subsidiary, Madison Gas and Electric (MGE), provides regulated electric and gas service. This combined, unaudited filing covers the three and nine months ended September 30, 2023; comparisons are with 2022. Unless noted, amounts below are MGE Energy consolidated and in millions of dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $160.5 | $163.4 | $525.8 | $524.7 |
| Operating income | $43.8 | $42.5 | $122.2 | $109.8 |
| Net income | $37.9 | $33.7 | $97.6 | $89.9 |
| Diluted EPS | $1.05 | $0.93 | $2.70 | $2.49 |
| Cash from operating activities | — | $194.0 | $144.3 | |
| Capital expenditures | — | $150.3 | $133.4 |
- Revenue mix and change: Q3 electric revenue rose to $139.1 million from $133.1 million, while gas revenue declined to $21.4 million from $30.3 million, primarily reflecting lower gas commodity costs passed through to customers. For the first nine months, electric revenue increased 6.4% and gas revenue decreased 12.8%; total revenue was nearly unchanged.
- Profitability: Net income increased 12.3% in Q3 and 8.6% year to date. The company cited electric investment and, year to date, lower fuel costs and depreciation timing as contributors. Higher operating and maintenance and depreciation expenses partly offset gains.
- Cash flow and liquidity: Operating cash flow rose year over year, aided by lower fuel and gas payments and higher customer collections. Investing outflows were $156.5 million and financing outflows $39.3 million for the nine months. At September 30, cash and cash equivalents were $11.3 million, current assets $216.4 million, and current liabilities $122.8 million.
- Debt and capitalization: Balance-sheet long-term debt was $690.0 million, with $5.1 million due within one year and $22.0 million of short-term debt. Long-term debt increased from $585.2 million at year-end 2022; short-term debt decreased from $70.5 million. MGE’s August 2023 note agreement provides for $40 million at 5.61% for 11 years, funded September 13, and $30 million at 5.91% for 30 years, expected to fund December 1. Proceeds support repayment of maturing debt, capital spending, and other obligations.
- Dividends: MGE Energy declared $0.428 per share for Q3 versus $0.408 in 2022; nine-month dividends were $1.243 versus $1.183 per share.
Material changes and operating developments
- Approved 2023 electric rate increases contributed $32.6 million to nine-month electric revenue; electric retail sales volume declined about 1%. Warmer-than-normal first-quarter weather reduced electric and gas demand. Gas retail deliveries fell about 11% year to date.
- Operating cash flow improved by $49.8 million, while capital expenditures increased $16.9 million. The company attributed the higher spending principally to its West Riverside interest and Red Barn wind project.
- MGE’s reported nine-month net income attributable to MGE was $76.8 million, up from $68.5 million. MGE’s consolidated net income was $93.2 million, including $16.4 million attributable to noncontrolling interests in generation subsidiaries.
- Construction work in progress rose to $168.5 million from $105.7 million at December 31, 2022. MGE reported costs incurred of $58.9 million for Badger Hollow II, $34.5 million for Paris, and $21.9 million for Darien; estimated costs for these projects exceeded previously approved PSCW certificate-of-authority levels.
Outlook, risks and contingencies
- Rates: MGE’s proposed 2024/2025 rate case remained pending. The filing lists proposed increases of 3.75% electric and 2.56% gas for 2024, and 3.41% electric and 1.66% gas for 2025. MGE said an updated 2024 fuel-cost forecast would reduce the rates ultimately approved; final outcomes were uncertain. A $9.7 million request for recovery of deferred uncollectible costs is also subject to PSCW review.
- Capital plan and transition: Forecast capital expenditures total $212 million for 2023 and range from $214 million to $257 million annually for 2024–2028. MGE targets an 80% reduction in electric-generation carbon emissions by 2030 from 2005 levels and net-zero carbon electricity by 2050. It plans to retire Columbia Units 1 and 2 by June 2026, subject to operational and regulatory factors, and expects to transition Elm Road away from coal by 2032.
- Project and regulatory exposure: Solar procurement and supply-chain disruptions may increase costs or delay projects. Cost recovery depends on regulatory approval. Proposed or evolving environmental requirements could require additional investment, particularly for Elm Road; the filing states impacts are not yet certain. MGE reported no impairment for Columbia’s $133.0 million net book value at September 30, 2023, while noting that a future disallowance of recovery could require an impairment.
- Other contingencies: Environmental groups challenged the customer fixed charge in prior rate decisions; the circuit court affirmed the settlement decision and an appeal was pending. ATC’s authorized return on equity remains subject to litigation and regulatory proceedings; a reduction could lower MGE Energy’s equity earnings and distributions. MGE stated ordinary-course legal matters were not expected to have a material adverse effect.
- Management said it expects adequate liquidity for operations and capital expenditures over the next 12 months, using operating cash flow, cash, credit facilities, and access to debt and equity markets. This is forward-looking and subject to the risks described in the filing.
Important facts for investors to verify
- PSCW’s final decision on the pending 2024/2025 rate case, including the updated fuel forecast and recovery of deferred costs.
- Actual construction costs, schedules, and rate recovery for Badger Hollow II, Paris, Darien, and other renewable projects, including any effects of import restrictions and supply disruptions.
- Progress and regulatory requirements for Columbia retirement and the proposed Elm Road fuel transition, including whether any costs become unrecoverable.
- Funding of the $30 million Series B notes, future borrowing needs, and the relationship between debt financing and the substantial capital plan.
- Developments in ATC ROE proceedings and any effect on investment earnings, as well as the outcome of the fixed-customer-charge appeal.