MGE Energy, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed jointly with wholly owned utility subsidiary Madison Gas and Electric Company (MGE). MGE accounts for most of MGE Energy’s consolidated operations. This is an annual report, not a standalone fourth-quarter report.
Business context and financial performance
MGE Energy operates regulated electric and gas utilities in Wisconsin, alongside nonregulated generation and transmission investments. The business is substantially exposed to Wisconsin regulation, weather, fuel and power costs, and capital investment requirements.
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Operating revenue | $690.4 million | $714.5 million | Down 3.4% |
| Operating income | $146.4 million | $137.7 million | Up 6.3% |
| Net income | $117.7 million | $111.0 million | Up 6.1% |
| Diluted EPS | $3.25 | $3.07 | Up 5.9% |
| Cash from operations | $237.6 million | $153.7 million | Up $83.8 million |
| Capital expenditures | $222.1 million | $175.0 million | Up $47.0 million |
| Dividends per share | $1.67 | $1.59 | Up 5.0% |
Operating margin was approximately 21.2% and net margin approximately 17.0% in 2023, compared with approximately 19.3% and 15.5%, respectively, in 2022. These are calculated from reported revenue and income.
Operating cash flow less capital expenditures was approximately $15.5 million, versus a $21.3 million shortfall in 2022. Cash, cash equivalents and restricted cash were $15.0 million at year-end. MGE Energy reported $718.8 million of long-term debt, $5.1 million due within one year, and $38.0 million of short-term debt. Its capitalization mix was 59.9% common equity, 38.1% long-term debt, and 2.0% short-term debt. MGE’s credit facilities had $91.3 million of available capacity; MGE Energy’s separate facility had $50.0 million available.
Material changes versus FY2022
- Electric revenue rose 5.3% to $489.7 million, principally reflecting the 9.01% 2023 rate increase. Retail electric sales volume declined 1.0%.
- Gas revenue fell 19.6% to $200.0 million as warmer weather reduced heating demand and lower commodity costs reduced pass-through revenue. Retail gas deliveries fell 12.5%; heating degree days fell 14.5%.
- Lower electric fuel and purchased-power costs supported results, while increased investment and rate recovery contributed to electric utility earnings growth. Depreciation and amortization increased $14.8 million, including accelerated depreciation for Columbia Unit 2.
- Operating cash flow improved primarily because of lower fuel, purchased-power and gas-cost payments, higher customer collections, and lower operating-maintenance cash payments.
- Debt increased: MGE issued $120.0 million of senior unsecured notes in 2023, including refinancing $30.0 million of maturing debt and financing capital needs. Year-end long-term debt on the balance sheet rose from $585.2 million to $718.8 million.
Outlook, management commentary, risks and unusual items
- Rates: PSCW-approved 2024 increases are 1.54% for electric and 2.44% for gas; 2025 increases are 4.17% and 1.32%, respectively. The rate order sets a 9.7% authorized ROE and provides for sharing/refunding specified earnings above that level.
- Capital program: Forecast capital expenditures are $214 million in 2024, $225 million in 2025, $232 million in 2026, $257 million in 2027, and $243 million in 2028. Renewable projects comprise a substantial share of planned electric spending. Management cautions that timing, costs, approvals, supply conditions and rate recovery could change these estimates.
- Energy transition: MGE targets at least 80% carbon reduction by 2030 from 2005 levels and net-zero carbon electricity by 2050. Co-owners plan to retire Columbia’s two coal units by June 2026, subject to operational and regulatory factors. MGE expects coal to be backup-only at Elm Road by 2030 and fully phased out there by 2032. MGE also targets net-zero methane emissions from its gas distribution system by 2035.
- Project and fuel items: Badger Hollow II entered commercial operation in December 2023. MGE reported cost increases at Badger Hollow II, Paris and Darien, driven largely by commodity, labor and solar-module costs and supply-chain disruption; it expects to seek rate recovery. MGE deferred $7.2 million of 2023 fuel savings pending PSCW review; separately, the PSCW approved recovery of $8.8 million of 2022 deferred fuel costs over October 2023–September 2024.
- Regulatory and environmental exposure: Proposed or evolving EPA rules on greenhouse gases, wastewater, air emissions and coal-ash sites may require additional investment or operating changes. Costs and recovery timing remain uncertain. MGE expects to seek rate recovery for required compliance costs, but does not assure full or timely recovery.
- Other risks and proceedings: Exposure includes weather-driven demand, commodity and purchased-power prices, fuel availability, interest rates, pension assumptions, project delays or overruns, cyber/physical events, and regulatory decisions. Environmental groups challenge aspects of PSCW rate orders relating to fixed customer charges; the requested relief is unclear. A separate challenge to ATC’s authorized return on equity could affect MGE Energy’s investment earnings and distributions.
- Unusual accounting sensitivity: Regulatory assets were $102.6 million and regulatory liabilities $177.6 million at year-end. Their recoverability/refund depends on regulatory treatment; the auditor identified rate-regulation accounting as a critical audit matter. No material cyber incident or significant long-lived-asset impairment was reported. The financial statements received an unqualified audit opinion, and management reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether rate-case assumptions and the earnings-sharing mechanism support expected utility returns and cash generation.
- PSCW treatment of the $7.2 million 2023 fuel savings, and the timing and execution of recovery of 2022 deferred fuel costs.
- Final project costs, schedules, approvals and rate recovery for Badger Hollow II, Paris, Darien, and planned renewable investments.
- Progress and required replacement capacity for Columbia’s planned 2026 retirement and the Elm Road coal-to-gas transition.
- Debt maturities, borrowing costs, available credit capacity, and the effect of continued elevated capital spending on liquidity and leverage.
- Developments in EPA rules, solar-panel import/tariff disruptions, the fixed-charge litigation, and ATC’s ROE proceedings.