United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended:
September 30, 2022
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Commission
File No.
Name of Registrant, State of Incorporation, Address
of Principal Executive Offices, and Telephone No.
IRS Employer
Identification No.
000-49965
MGE Energy, Inc.
(a Wisconsin Corporation)
133 South Blair Street
Madison, Wisconsin 53788
(608) 252-7000 | mgeenergy.com
39-2040501
000-1125
Madison Gas and Electric Company
(608) 252-7000 | mge.com
39-0444025
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days:
MGE Energy, Inc. Yes ☒ No ☐
Madison Gas and Electric Company Yes ☒ No ☐
Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit such files):
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated
Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
☒
☐
If an emerging growth company, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
MGE Energy, Inc. ☐
Madison Gas and Electric Company ☐
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act):
MGE Energy, Inc. Yes ☐ No ☒
Madison Gas and Electric Company Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $1 Par Value Per Share
MGEE
The NASDAQ Stock Market
Number of Shares Outstanding of Each Class of Common Stock as of October 31, 2022
Common stock, $1.00 par value, 36,163,370 shares outstanding.
Common stock, $1.00 par value, 17,347,894 shares outstanding (all of which are owned beneficially and of record by MGE Energy, Inc.).
1
Table of Contents
PART I. FINANCIAL INFORMATION
3
Filing Format
Forward-Looking Statements
Where to Find More Information
Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report
4
Item 1. Financial Statements.
6
Consolidated Statements of Income (unaudited)
Consolidated Statements of Cash Flows (unaudited)
7
Consolidated Balance Sheets (unaudited)
8
Consolidated Statements of Common Equity (unaudited)
9
10
11
12
Consolidated Statements of Equity (unaudited)
13
MGE Energy, Inc., and Madison Gas and Electric Company - Notes to Consolidated Financial Statements (unaudited)
14
1. Summary of Significant Accounting Policies.
2. New Accounting Standards.
15
3. Investment in ATC and ATC Holdco.
4. Taxes.
16
5. Pension and Other Postretirement Plans.
17
6. Equity and Financing Arrangements.
7. Share-Based Compensation.
18
8. Commitments and Contingencies.
9. Rate Matters.
22
10. Derivative and Hedging Instruments.
23
11. Fair Value of Financial Instruments.
25
12. Joint Plant Construction Project Ownership.
28
13. Revenue.
29
14. Segment Information.
30
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
31
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
49
Item 4. Controls and Procedures.
PART II. OTHER INFORMATION.
50
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
52
Signatures - MGE Energy, Inc.
53
Signatures - Madison Gas and Electric Company
54
2
PART I. FINANCIAL INFORMATION.
This combined Form 10-Q is being filed separately by MGE Energy, Inc. (MGE Energy) and Madison Gas and Electric Company (MGE). MGE is a wholly owned subsidiary of MGE Energy and represents a majority of its assets, liabilities, revenues, expenses, and operations. Thus, all information contained in this report relates to, and is filed by, MGE Energy. Information that is specifically identified in this report as relating solely to MGE Energy, such as its financial statements and information relating to its nonregulated business, does not relate to, and is not filed by, MGE. MGE makes no representation as to that information. The terms "we" and "our," as used in this report, refer to MGE Energy and its consolidated subsidiaries, unless otherwise indicated.
This report, and other documents filed by MGE Energy and MGE with the Securities and Exchange Commission (SEC) from time to time, contain forward-looking statements that reflect management's current assumptions and estimates regarding future performance and economic conditions—especially as they relate to economic conditions, future load growth, revenues, expenses, capital expenditures, financial resources, regulatory matters, and the scope and expense associated with future environmental regulation. These forward-looking statements are made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believe," "expect," "anticipate," "estimate," "could," "should," "intend," "will," and other similar words, and words relating to goals, targets and projections, generally identify forward-looking statements. Both MGE Energy and MGE caution investors that these forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those projected, expressed, or implied.
The factors that could cause actual results to differ materially from the forward-looking statements made by a registrant include: (a) those factors discussed in the registrants' 2021 Annual Report on Form 10-K: Item 1A. Risk Factors, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, as updated by Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in this report, and Item 8. Financial Statements and Supplementary Data – Note 16, as updated by Part I, Item 1. Financial Statements – Note 8 in this report, and (b) other factors discussed herein and in other filings made by that registrant with the SEC.
Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this report. MGE Energy and MGE undertake no obligation to release publicly any revision to these forward-looking statements to reflect events or circumstances after the date of this report, except as required by law.
We file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and other information with the SEC. The SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. MGE Energy maintains a website at mgeenergy.com, and MGE maintains a website at mge.com. Copies of the reports and other information that we file with the SEC may be obtained from our websites free of charge. Information contained on MGE Energy's and MGE's websites shall not be deemed incorporated into, or to be a part of, this report.
Abbreviations, acronyms, and definitions used in the text and notes of this report are defined below.
MGE Energy and Subsidiaries:
CWDC
Central Wisconsin Development Corporation
MAGAEL
MAGAEL, LLC
MGE
MGE Energy
MGE Power
MGE Power, LLC
MGE Power Elm Road
MGE Power Elm Road, LLC
MGE Power West Campus
MGE Power West Campus, LLC
MGE Services
MGE Services, LLC
MGE State Energy Services
MGE State Energy Services, LLC
MGE Transco
MGE Transco Investment, LLC
MGEE Transco
MGEE Transco, LLC
North Mendota
North Mendota Energy & Technology Park, LLC
Other Defined Terms:
2017 Tax Act
Tax Cut and Jobs Act of 2017
2021 Annual Report on Form 10-K
MGE Energy's and MGE's Annual Report on Form 10-K for the year ended December 31, 2021
2021 Plan
MGE Energy's 2021 Long-Term Incentive Plan
AFUDC
Allowance for Funds Used During Construction
ATC
American Transmission Company LLC
ATC Holdco
ATC Holdco, LLC
Badger Hollow I
Badger Hollow I Solar Farm
Badger Hollow II
Badger Hollow II Solar Farm
Blount
Blount Station
BTA
Best technology available
CA
Certificate of Authority
CBP
U.S. Customs and Border Protection
CCR
Coal Combustion Residual
Columbia
Columbia Energy Center
cooling degree days (CDD)
Measure of the extent to which the average daily temperature is above 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide cooling
COVID-19
Coronavirus Disease 2019
CSAPR
Cross-State Air Pollution Rule
Dth
Dekatherms, a quantity measure for natural gas
EGU
Electric generating unit
ELG
Effluent Limitations Guidelines
Elm Road Units
Elm Road Generating Station
EPA
United States Environmental Protection Agency
FERC
Federal Energy Regulatory Commission
FIP
Federal Implementation Plan
FTR
Financial Transmission Rights
GAAP
Generally Accepted Accounting Principles
GHG
Greenhouse gas
heating degree days (HDD)
Measure of the extent to which the average daily temperature is below 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide heating
IRS
Internal Revenue Service
kWh
Kilowatt-hour, a measure of electric energy produced
MISO
Midcontinent Independent System Operator (a regional transmission organization)
MW
Megawatt, a measure of electric energy generating capacity
MWh
Megawatt-hour, a measure of electric energy produced
NAAQS
National Ambient Air Quality Standards
NOx
Nitrogen oxide
PGA
Purchased Gas Adjustment clause, a regulatory mechanism used to reconcile natural gas costs recovered in rates to actual costs
PPA
Purchased Power Agreement
PSCW
Public Service Commission of Wisconsin
ROE
Return on equity
Saratoga
Saratoga Wind Farm
SCR
Selective Catalytic Reduction
SEC
Securities and Exchange Commission
SIP
State Implementation Plan
SO2
Sulfur dioxide
Stock Plan
Direct Stock Purchase and Dividend Reinvestment Plan of MGE Energy
Two Creeks
Two Creeks Solar Farm
USDOC
U.S. Department of Commerce
WCCF
West Campus Cogeneration Facility
WDNR
Wisconsin Department of Natural Resources
WEPCO
Wisconsin Electric Power Company, a subsidiary of WEC Energy Group, Inc.
West Riverside
West Riverside Energy Center in Beloit, Wisconsin
working capital
Current assets less current liabilities
WPL
Wisconsin Power and Light Company, a subsidiary of Alliant Energy Corporation
WRO
Withhold Release Order
XBRL
eXtensible Business Reporting Language
a
5
(In thousands, except per share amounts)
Three Months Ended
Nine Months Ended
September 30,
2022
2021
Operating Revenues:
Electric revenues
$
133,090
121,853
355,381
324,574
Gas revenues
30,310
24,020
169,305
119,944
Total Operating Revenues
163,400
145,873
524,686
444,518
Operating Expenses:
Fuel for electric generation
21,045
18,486
48,410
42,570
Purchased power
9,593
8,646
35,757
28,914
Cost of gas sold
14,523
8,780
100,638
57,728
Other operations and maintenance
49,194
48,494
150,714
144,563
Depreciation and amortization
21,447
18,991
63,780
55,968
Other general taxes
5,111
4,878
15,579
14,730
Total Operating Expenses
120,913
108,275
414,878
344,473
Operating Income
42,487
37,598
109,808
100,045
Other income, net
6,068
6,164
20,736
14,353
Interest expense, net
(6,652
)
(6,079
(19,686
(17,591
Income before income taxes
41,903
37,683
110,858
96,807
Income tax provision
(8,183
(2,766
(20,957
(4,106
Net Income
33,720
34,917
89,901
92,701
Earnings Per Share of Common Stock
Basic
0.93
0.97
2.49
2.56
Diluted
Dividends per share of common stock
0.408
0.388
1.183
1.128
Weighted Average Shares Outstanding
36,163
36,176
36,170
36,174
The accompanying notes are an integral part of the above unaudited consolidated financial statements.
(In thousands)
Operating Activities:
Net income
Items not affecting cash:
Deferred income taxes
18,021
1,955
Provision for doubtful receivables
1,323
1,163
Employee benefit plan cost (credit)
(6,087
(935
Equity earnings in investments
(6,626
(7,440
Other items
(2,821
(618
Changes in working capital items:
Increase in current assets
(5,992
(11,240
(Decrease) increase in current liabilities
(5,831
4,429
Dividends from investments
5,964
5,842
Cash contributions to pension and other postretirement plans
(5,095
(4,823
Other noncurrent items, net
(2,255
4,295
Cash Provided by Operating Activities
144,282
141,297
Investing Activities:
Capital expenditures
(133,409
(114,142
Capital contributions to investments
(3,938
(4,227
Other
128
Cash Used for Investing Activities
(137,219
(118,347
Financing Activities:
Cash dividends paid on common stock
(42,763
(40,774
Repayments of long-term debt
(3,655
(3,567
Issuance of long-term debt
—
100,000
Proceeds from (repayments of) short-term debt
34,500
(52,500
(745
(1,503
Cash (Used for) Provided by Financing Activities
(12,663
1,656
Change in cash, cash equivalents, and restricted cash
(5,600
24,606
Cash, cash equivalents, and restricted cash at beginning of period
18,835
47,039
Cash, cash equivalents, and restricted cash at end of period
13,235
71,645
Supplemental disclosures of cash flow information:
Significant noncash investing activities:
Accrued capital expenditures
11,218
8,213
December 31,
ASSETS
Current Assets:
Cash and cash equivalents
10,615
17,438
Accounts receivable, less reserves of $7,633 and $6,940, respectively
44,460
46,205
Other accounts receivable, less reserves of $1,069 and $1,364, respectively
13,863
16,094
Unbilled revenues
22,975
34,812
Materials and supplies, at average cost
32,208
29,863
Fuel for electric generation, at average cost
7,021
6,429
Stored natural gas, at average cost
36,167
15,668
Prepaid taxes
13,106
20,214
Regulatory assets - current
3,685
1,465
Other current assets
15,747
11,183
Total Current Assets
199,847
199,371
Other long-term receivables
574
1,155
Regulatory assets
110,807
107,547
Pension benefit asset
71,104
58,757
Other deferred assets and other
24,888
27,548
Property, Plant, and Equipment:
Property, plant, and equipment, net
1,848,053
1,828,171
Construction work in progress
106,451
50,603
Total Property, Plant, and Equipment
1,954,504
1,878,774
Investments
103,962
98,754
Total Assets
2,465,686
2,371,906
LIABILITIES AND CAPITALIZATION
Current Liabilities:
Long-term debt due within one year
54,282
4,889
Short-term debt
40,000
5,500
Accounts payable
60,227
64,149
Accrued interest and taxes
7,819
10,385
Accrued payroll related items
10,464
12,951
Regulatory liabilities - current
14,611
9,365
Derivative liabilities
2,140
Other current liabilities
7,390
8,468
Total Current Liabilities
194,793
117,847
Other Credits:
245,584
231,149
Investment tax credit - deferred
49,242
44,836
Regulatory liabilities
155,260
154,298
Accrued pension and other postretirement benefits
72,001
73,085
Finance lease liabilities
17,189
17,322
Other deferred liabilities and other
94,851
91,690
Total Other Credits
634,127
612,380
Capitalization:
Common shareholders' equity
1,075,200
1,027,468
Long-term debt
561,566
614,211
Total Capitalization
1,636,766
1,641,679
Commitments and contingencies (see Footnote 8)
Total Liabilities and Capitalization
Accumulated
Additional
Common Stock
Paid-in
Retained
Comprehensive
Shares
Value
Capital
Earnings
Income/(Loss)
Total
Three Months Ended September 30, 2021
Beginning Balance
394,686
576,452
1,007,301
Common stock dividends declared ($0.388 per share)
(14,013
Equity-based compensation plans and other
80
Ending Balance - September 30, 2021
394,766
597,356
1,028,285
Three Months Ended September 30, 2022
395,338
624,556
1,056,057
Common stock dividends declared ($0.408 per share)
(14,736
159
Ending Balance - September 30, 2022
395,497
643,540
Nine Months Ended September 30, 2021
394,408
545,429
976,000
Common stock dividends declared ($1.128 per share)
358
Nine Months Ended September 30, 2022
394,903
596,402
Common stock dividends declared ($1.183 per share)
594
48,989
48,315
150,024
143,978
5,106
15,573
120,703
108,096
414,182
343,888
42,697
37,777
110,504
100,630
4,430
3,306
12,467
6,375
(6,662
(6,089
(19,709
(17,623
40,465
34,994
103,262
89,382
(7,664
(1,993
(18,781
(1,853
32,801
33,001
84,481
87,529
Less: Net Income Attributable to Noncontrolling Interest, net of tax
(5,603
(5,627
(15,947
(16,755
Net Income Attributable to MGE
27,198
27,374
68,534
70,774
17,706
1,375
(636
864
(7,238
(11,777
(3,642
2,528
(2,806
3,559
141,786
135,451
(680
(1,449
(134,089
(115,591
Cash dividends paid to parent by MGE
(21,000
Distributions to parent from noncontrolling interest
(17,500
(10,500
(8,400
31,930
(703
51,790
7,798
6,404
7,095
58,194
4,475
6,401
Affiliate receivables
542
558
13,862
16,092
13,488
19,379
15,679
11,071
194,562
187,943
Affiliate receivable long-term
1,191
1,589
24,995
27,907
1,848,081
1,828,199
1,954,532
1,878,802
99
230
2,357,290
2,262,775
60,206
64,130
7,774
10,649
7,389
5,968
194,726
115,592
213,005
198,885
95,926
92,152
602,623
580,578
Common shareholder's equity
851,341
803,807
Noncontrolling interest
147,034
148,587
Total Equity
998,375
952,394
1,559,941
1,566,605
Non-
Controlling
Interest
Beginning balance
17,348
252,917
503,551
144,824
918,640
5,627
(3,000
530,925
147,451
948,641
562,878
145,681
978,824
5,603
(9,000
(4,250
581,076
460,151
141,196
871,612
16,755
533,542
15,947
MGE Energy, Inc., and Madison Gas and Electric Company
Notes to Consolidated Financial Statements (unaudited)
This report is a combined report of MGE Energy and MGE. References in this report to "MGE Energy" are to MGE Energy, Inc. and its subsidiaries. References in this report to "MGE" are to Madison Gas and Electric Company.
MGE Power Elm Road and MGE Power West Campus own electric generating assets and lease those assets to MGE. Both entities are variable interest entities under applicable authoritative accounting guidance. MGE is considered the primary beneficiary of these entities as a result of contractual agreements. As a result, MGE has consolidated MGE Power Elm Road and MGE Power West Campus. See Footnote 3 of Notes to Consolidated Financial Statements under Item 8, Financial Statements and Supplementary Data, of MGE Energy's and MGE's 2021 Annual Report on Form 10-K (the 2021 Annual Report on Form 10-K).
The accompanying consolidated financial statements as of September 30, 2022, and during the three and nine months ended, are unaudited but include all adjustments that MGE Energy and MGE management consider necessary for a fair statement of their respective financial statements. All adjustments are of a normal, recurring nature except as otherwise disclosed. The year-end consolidated balance sheet information was derived from the audited balance sheet appearing in the 2021 Annual Report on Form 10-K but does not include all disclosures required by accounting principles generally accepted in the United States of America. These notes should be read in conjunction with the financial statements and the notes on pages 61 through 115 of the 2021 Annual Report on Form 10-K.
The following table presents the components of total cash, cash equivalents, and restricted cash on the consolidated balance sheets.
Restricted cash
651
847
Receivable - margin account
1,969
550
Cash, cash equivalents, and restricted cash
Cash Equivalents
All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.
Restricted Cash
MGE has certain cash accounts that are restricted to uses other than current operations and designated for a specific purpose. MGE's restricted cash accounts include cash held by trustees for certain employee benefits and cash deposits held by third parties. These are included in "Other current assets" on the consolidated balance sheets.
Receivable – Margin Account
Cash amounts held by counterparties as margin collateral for certain financial transactions are recorded as Receivable – margin account in "Other current assets" on the consolidated balance sheets. The costs being hedged are fuel for electric generation, purchased power, and cost of gas sold.
Columbia.
An asset that will be retired in the near future and substantially in advance of its previously expected retirement date is subject to abandonment accounting. In the second quarter of 2021, the operator of Columbia received approval from MISO to retire Columbia Units 1 and 2. The co-owners initially intended to retire Unit 1 by the end of 2023 and Unit 2 by the end of 2024. In June 2022, the target retirement date for both Units was updated to June 2026 after consideration by the owners of supply chain disruptions impacting the completion dates of current and planned renewable generation projects and the impact of those delays upon energy supply availability, reliability and cost. The postponement is not expected to affect MGE's goal to achieve 80% carbon reduction by 2030. Final timing and retirement dates are subject to change depending on operational, regulatory, and other factors. As of September 30, 2022, early retirement of Columbia was probable.
The net book value of our ownership share of this generating unit was $150.9 million as of September 30, 2022. This amount was classified as plant to be retired within "Property, plant, and equipment, net" on the consolidated balance sheets. Assets for Columbia Unit 1 and Unit 2 are currently included in rate base, and MGE continues to depreciate them on a straight-line basis using the composite depreciation rates approved by the PSCW that included retirement dates of 2029 for Unit 1 and 2038 for Unit 2. MGE is currently seeking approval from the PSCW in its 2023 electric rate case limited reopener to revise the depreciation schedule for Columbia Unit 2 to 2029 to align with Unit 1. See Footnote 9 for further details on MGE's rate proceedings.
If it becomes probable that regulators will disallow full recovery or a return on the remaining net book value of a generating unit that is either abandoned or probable of being abandoned, an impairment loss would be required. An impairment loss would be recorded to the extent that the remaining net book value of the generating unit exceeds the present value of the amount expected to be recovered from ratepayers. No impairment was recorded as of September 30, 2022.
MGE Energy and MGE reviewed FASB authoritative guidance recently issued, none of which are expected to have a material impact on their consolidated results of operations, financial condition, or cash flows.
ATC owns and operates electric transmission facilities primarily in Wisconsin. MGE received an interest in ATC when it, like other Wisconsin electric utilities, contributed its electric transmission facilities to ATC as required by Wisconsin law. That interest is presently held by MGE Transco, a subsidiary of MGE Energy. ATC Holdco was formed by several members of ATC, including MGE Energy, to pursue electric transmission development and investments outside of Wisconsin. The ownership interest in ATC Holdco is held by MGEE Transco, a subsidiary of MGE Energy.
MGE Transco and MGEE Transco have accounted for their investments in ATC and ATC Holdco, respectively, under the equity method of accounting. Equity earnings from investments are recorded as "Other income" on the consolidated statements of income of MGE Energy. MGE Transco recorded the following amounts related to its investment in ATC:
Equity earnings from investment in ATC
1,473
2,500
6,543
7,333
Dividends received from ATC
2,005
1,942
Capital contributions to ATC
536
2,319
ATC Holdco was formed in December 2016. ATC Holdco's transmission development activities have been suspended for the near term.
In October 2022, MGE Transco made a $0.4 million capital contribution to ATC.
ATC's summarized financial data is as follows:
Operating revenues
169,779
186,785
552,383
561,379
Operating expenses
(97,629
(91,340
(288,376
(278,828
272
123
1,020
1,164
(34,794
(28,674
(92,293
(86,337
Earnings before members' income taxes
37,628
66,894
172,734
197,378
MGE receives transmission and other related services from ATC. During the three and nine months ended September 30, 2022, MGE recorded $7.9 million and $23.6 million, respectively, for transmission services compared to $8.0 million and $24.0 million for comparable periods in 2021. MGE also provides a variety of operational, maintenance, and project management work for ATC, which is reimbursed by ATC. As of September 30, 2022, and December 31, 2021, MGE had a receivable due from ATC of $4.6 million and $7.0 million, respectively. The receivable is primarily related to transmission interconnection activities at Badger Hollow and Paris solar generation sites. MGE will be reimbursed for these costs after the new generation assets are placed into service.
Effective Tax Rate.
The consolidated income tax provision differs from the amount computed by applying the statutory federal income tax rate to income before income taxes, as follows:
Three Months Ended September 30,
Statutory federal income tax rate
21.0
%
State income taxes, net of federal benefit
6.2
Amortized investment tax credits
(0.6
(1.2
(0.7
(1.3
Credit for electricity from wind energy
(4.9
(4.8
(5.2
AFUDC equity, net
(0.4
(1.1
Amortization of utility excess deferred tax - tax reform(a)
(1.7
(12.4
(1.8
(13.5
Other, net, individually insignificant
(0.1
(0.2
(0.3
Effective income tax rate
19.5
7.3
18.9
5.7
Nine Months Ended September 30,
(1.4
(1.5
(5.3
(6.0
(5.7
(6.6
(1.0
(0.5
(14.5
(1.9
(15.9
4.2
18.2
2.1
MGE maintains qualified and nonqualified pension plans, health care, and life insurance benefits and defined contribution 401(k) benefit plans for its employees and retirees.
The components of net periodic benefit cost, other than the service cost component, are recorded in "Other income, net" on the consolidated statements of income. The service cost component is recorded in "Other operations and maintenance" on the consolidated statements of income. MGE has regulatory treatment and recognizes regulatory assets or liabilities for timing differences between when net periodic benefit costs are recovered and when costs are recognized.
The following table presents the components of net periodic benefit costs recognized.
Pension Benefits
Components of net periodic benefit cost:
Service cost
1,266
1,432
3,798
4,296
Interest cost
2,791
2,280
8,371
6,840
Expected return on assets
(7,848
(7,372
(23,543
(22,115
Amortization of:
Prior service credit
(5
(31
(15
(93
Actuarial loss
604
1,662
1,812
4,985
Net periodic benefit (credit) cost
(3,192
(2,029
(9,577
Postretirement Benefits
323
362
970
1,086
485
387
1,455
1,161
(842
(819
(2,524
(2,457
Transition obligation
(74
(379
(223
(1,138
37
109
370
(70
(325
(211
(976
As approved by the PSCW, MGE is allowed to defer differences between actual employee benefit plan costs and costs reflected in current rates. The deferred costs may be recovered or refunded in MGE's next rate filing. During the three and nine months ended September 30, 2022, MGE recovered $0.2 million and $0.8 million of pension and other postretirement costs, respectively, compared to approximately $0.3 million and $3.9 million for the comparable periods in 2021. The recovery of these costs reduced the amount previously deferred and has not been reflected in the table above.
During the three and nine months ended September 30, 2022, MGE deferred and recorded as a regulatory liability $0.3 million and $1.1 million, respectively, of savings from employee benefit plan costs compared to $2.8 million and $5.4 million for the comparable periods in 2021. During the three and nine months ended September 30, 2022, MGE refunded in rates $1.0 million and $3.1 million, respectively, of savings from 2021 employee benefit plan costs. The deferred savings has not been reflected in the table above.
MGE Energy sells shares of its common stock through its Direct Stock Purchase and Dividend Reinvestment Plan (the Stock Plan). Those shares may be newly issued shares or shares that are purchased in the open market by an independent agent for participants in the Stock Plan. Sales of newly issued shares under the Stock Plan are covered by a shelf registration statement that MGE Energy filed with the SEC.
During the three and nine months ended September 30, 2022 and 2021, MGE Energy issued no new shares of common stock under the Stock Plan.
As of September 30, 2022, 10,331 shares were included in the calculation of diluted earnings per share related to nonvested equity awards. See Footnote 7 for additional information on share-based compensation awards.
On November 1, 2022, MGE entered into a private placement Note Purchase Agreement in which it committed to issue $25 million of new long-term debt (Series A), carrying an interest rate of 5.43% per annum over its 10-year life, $15 million of new long-term debt (Series B), carrying an interest rate of 5.43% per annum over its 10-year life, and $35 million of new long-term debt (Series C), carrying an interest rate of 5.53% per annum over its 12-year life. Funding will occur on December 1, 2022 for Series A and on February 28, 2023 for Series B and Series C. The proceeds of the debt financing will be used to assist with capital expenditures and other corporate obligations. The covenants of this debt are substantially consistent with MGE's existing unsecured long-term debt.
During the three and nine months ended September 30, 2022, MGE recorded $0.6 million in compensation benefit and $0.1 million in compensation expense, respectively, related to share-based compensation awards under the 2006 Performance Unit Plan, the 2020 Performance Unit Plan, the 2013 Director Incentive Plan, and the 2021 Long-Term Incentive Plan (2021 Plan) compared to $0.3 million and $1.6 million in compensation expense for the comparable periods in 2021.
In January 2022, cash payments of $1.8 million were distributed related to awards that were granted in 2019 under the 2013 Director Incentive Plan, and in 2017 under the 2006 Performance Unit Plan.
In February 2022, MGE issued 10,395 performance units and 15,931 restricted stock units under the 2021 Plan to eligible employees and non-employee directors.
MGE recognizes stock-based compensation expense on a straight-line basis over the requisite service period. Awards classified as equity awards are measured based on their grant-date fair value. Awards classified as liability awards are recorded at fair value each reporting period. The performance units can be paid out in either cash, shares of common stock or a combination of cash and stock and are classified as a liability award. The restricted stock units will be paid out in shares of common stock, and therefore are classified as equity awards.
In February 2021, MGE and the other co-owners of Columbia announced plans to retire that facility. The co-owners intend to retire Unit 1 and Unit 2 by June 2026. Final timing and retirement dates are subject to change depending on operational, regulatory, and other factors. Effects of environmental compliance requirements discussed below will depend upon the final retirement dates approved and compliance requirement dates.
MGE Energy and MGE are subject to frequently changing local, state, and federal regulations concerning air quality, water quality, land use, threatened and endangered species, hazardous materials handling, and solid waste disposal. These regulations affect the manner in which operations are conducted, the costs of operations, as well as capital and operating expenditures. Several of these environmental rules are subject to legal challenges, reconsideration and/or other uncertainties. Regulatory initiatives, proposed rules, and court challenges to adopted rules could have a material
effect on capital expenditures and operating costs. Management believes compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects.
These initiatives, proposed rules, and court challenges include:
In July 2021, the PSCW approved a Certificate of Authority (CA) application filed by MGE and the other owners of Columbia. The CA application commits to close Columbia's wet pond system (as described in further detail in the CCR section below). By committing to close the wet pond system, Columbia will be in compliance with ELG requirements.
The Elm Road Units must satisfy the ELG rule's requirements no later than December 2023, as determined by the permitting authority. In December 2021, the PSCW approved a CA application for installation of additional wastewater treatment equipment to comply with the ELG Rule. MGE's share of the costs to comply with the rule is estimated to be approximately $4 million. Construction began in March 2022 and will extend into 2023.
Blount's WPDES permit assumes that the plant meets BTA standards for the duration of the permit, which expires in 2023. Before the next permit renewal, MGE is required to complete an entrainment study and recommend a BTA along with alternative technologies considered. MGE completed the entrainment study in 2021 and submitted the results to the WDNR. The WDNR will make the final BTA determination and include any BTA requirements in Blount's next permit renewal, which is expected to be completed by the end of 2022 and effective in 2023. Management believes that the BTA determination at Blount will not be material for MGE.
Columbia's river intakes are subject to this rule. Columbia's operator received a permit in 2019 requiring studies of intake structures to be submitted to the WDNR by November 2023 to help determine BTA. BTA improvements may not be required given that the owners are planning to retire both units by June of 2026. MGE will continue to work with Columbia's operator to evaluate all regulatory requirements applicable to the planned retirements.
MGE does not expect this rule to have a material effect on its existing plants.
In October 2021, as part of the Biden administration's Unified Agenda, the EPA announced its intention to issue a new rule to reduce greenhouse gas emissions from existing fossil fuel-fired EGUs. In June 2022, the U.S. Supreme Court held that the Clean Air Act does not authorize the EPA to regulate GHG emissions using generation shifting (e.g., shifting from coal to natural gas and/or renewable generation sources). MGE will continue to evaluate greenhouse gas rule developments, including any new EPA actions towards rule development, and any further court decisions on the EPA's authority to regulate greenhouse gases.
19
The Elm Road Units are located in Milwaukee County, Wisconsin, a nonattainment area. In October 2022, the EPA reclassified Milwaukee County from "marginal" to "moderate" nonattainment under the 2015 ozone NAAQS. The Wisconsin Department of Natural Resources (WDNR) must develop a State Implementation Plan (SIP) for the area, and this reclassification will result in more stringent SIP requirements for both constructing new development and modifying or expanding existing plants in the area. The deadline for moderate classified areas to meet attainment standards is August 2024. MGE will continue to monitor the WDNR's SIP development and the extent to which the requirements will impact the Elm Road Units. At this time, the operator of the Elm Road Units does not expect that the 2015 Ozone NAAQS will have a material effect on its existing plants based on final designations.
The EPA's CSAPR and its progeny are a suite of interstate air pollution transport rules designed to reduce ozone and fine particulate (PM2.5) ambient air levels in areas that the EPA has determined as being significantly impacted by pollution from upwind states. This is accomplished in the CSAPR through a reduction in SO2 and NOx from qualifying fossil-fuel fired power plants in upwind "contributing" states. NOx and SO2 contribute to fine particulate pollution and NOx contributes to ozone formation in downwind areas. Reductions are generally achieved through a cap-and-trade system. Individual plants can meet their caps through reducing emissions and/or buying allowances on the market.
In April 2022, the EPA published a proposed Federal Implementation Plan (FIP) to address state obligations under the Clean Air Act "good neighbor" provisions for the 2015 Ozone NAAQS. This proposed rule impacts 26 states, including Wisconsin, and is designed to both revise the current NOx CSAPR ozone season cap-and-trade obligations for fossil-fuel generated power plants and add NOx limitations for certain industries in specified states. For Wisconsin, the proposed rule includes revisions to the current obligations for fossil-fuel power generation as well as the new limitations for certain industries.
If finalized, the proposed rule would be effective beginning with the 2023 ozone season and start with emissions budgets that can be achieved with what the EPA has defined as immediately available measures, including consistently operating emissions controls already installed at power plants. In 2026, additional obligations would go into effect, including potential daily emissions limits and technology upgrades to coal-fired power plants without existing emission controls. Wisconsin would need to submit a SIP to meet its obligations or accept the EPA's proposed FIP.
MGE has met its current CSAPR obligations through a combination of reduced emissions through pollution control (e.g., SCR installation at Columbia), and owned, received, and purchased allowances. MGE expects the rule, if finalized as written, to impact our fossil-fueled generation assets. However, we will not know the impact of this rule with any certainty until it is finalized. We will continue to monitor rule developments.
The CCR rule regulates as a solid waste coal ash from burning coal for the purpose of generating electricity and defines what ash use activities would be considered generally exempt beneficial reuse of coal ash. The CCR rule also regulates landfills, ash ponds, and other surface impoundments used for coal combustion residuals by regulating their design, location, monitoring, and operation. The CCR rule requires owners or operators of coal-fired power plants to stop transporting CCR and non-CCR wastewater to unlined surface impoundments. In addition, regulated entities must initiate impoundment closure as soon as feasible and in no event later than April 2021, unless the EPA grants an extension. A site-specific extension to initiate closure of the primary ash pond at Columbia by December 31, 2022 was requested. The EPA has not formally approved the extension.
20
In July 2021, the PSCW approved a CA application filed by MGE and the other owners of Columbia to install technology required to cease bottom ash transport water discharges rather than extend the longevity of the ash ponds. Construction of the coal combustion residuals system that will replace the unlined surface impoundment is undergoing final testing. Construction is expected to be completed by the end of 2022. MGE's share of the costs of the project is expected to be approximately $4 million.
Review of the Elm Road Units has indicated that the costs to comply with the CCR rule are not expected to be significant.
MGE is involved in various legal matters that are being defended and handled in the normal course of business. MGE accrues for costs that are probable of being incurred and subject to reasonable estimation. The accrued amount for these matters is not material to the financial statements. MGE does not expect the resolution of these matters to have a material adverse effect on its consolidated results of operations, financial condition, or cash flows.
Certain environmental groups filed petitions against the PSCW regarding MGE's two most recent rate settlements. MGE has intervened in the petitions in cooperation with the PSCW. See Footnote 9.a. for more information regarding this matter.
MGE Energy and MGE have entered into various commodity supply, transportation, and storage contracts to meet their obligations to deliver electricity and natural gas to customers. Management expects to recover these costs in future customer rates. The following table shows future commitments related to purchase contracts as of September 30, 2022:
2023
2024
2025
2026
Thereafter
Coal(a)
11,461
26,323
18,216
9,043
2,922
Natural gas
Transportation and storage(b)
9,069
31,660
18,265
14,449
Supply(c)
24,959
25,682
Renewable energy(d)
5,847
3,108
2,025
2,040
2,056
28,529
51,336
86,773
51,901
42,743
23,243
42,978
21
Rate increase
Return on Common Equity
Common Equity Component of Regulatory Capital Structure
Effective Date
Approved 2021 settlement(a)
Electric
—%
9.8%
55.8%
1/1/2021
Gas
4.00%
Approved 2022/2023 settlement(b)
8.81%
55.6%
1/1/2022
2.15%
0.96%
1/1/2023
Proposed limited 2023 reopener(c)
4.38%
Sierra Club and Vote Solar have filed petitions with the Dane County Circuit Court seeking review of the PSCW decision approving MGE's two most recent rate settlements (2021 and 2022/2023). The PSCW is named as the responding party; MGE is not named as a party. The petitions challenge the process the PSCW used to approve the portion of the settlements relating to electric rates and the electric customer fixed charge that does not vary with usage. The requested relief is unclear. The revenue requirement approved by the PSCW in the settlements have not been challenged. The PSCW is expected to vigorously defend its approval of the rate case settlements. MGE has intervened in the proceedings to further defend the PSCW's decision.
Fuel rules require Wisconsin utilities to defer electric fuel-related costs that fall outside a symmetrical cost tolerance band around the amount approved for a utility in its annual fuel proceedings. Any over- or under-recovery of the actual costs is determined in the following year and is then reflected in future billings to electric retail customers. The fuel rules bandwidth is set at plus or minus 1%. The electric fuel-related costs are subject to an excess revenues test. Excess revenues are defined as revenues in the year in question that provide MGE with a greater return on common equity than authorized by the PSCW in MGE's latest rate order. The recovery of under-collected electric fuel-related costs would be reduced by the amount that exceeds the excess revenue test. These costs are subject to the PSCW's annual review of fuel costs completed in the year following the deferral. The following table summarized deferred electric fuel-related costs:
Fuel Costs (in millions)
Refund or Recovery Period
2019 deferred fuel savings
$(1.5)(a)
January 2021 through December 2021
2020 deferred fuel savings
$(3.2)(a)
October 2021
2021 deferred fuel costs
3.3(a)
January 2023 through December 2023(b)
2022 deferred fuel costs
$4.4
(c)
As part of its regular operations, MGE enters into contracts, including options, swaps, futures, forwards, and other contractual commitments, to manage its exposure to commodity prices. To the extent that these contracts are derivatives, MGE assesses whether or not the normal purchases or normal sales exclusion applies. For contracts to which this exclusion cannot be applied, the derivatives are recognized in the consolidated balance sheets at fair value. MGE's financial commodity derivative activities are conducted in accordance with its electric and gas risk management program, which is approved by the PSCW and limits the volume MGE can hedge with specific risk management strategies. The maximum length of time over which cash flows related to energy commodities can be hedged is four years. If the derivative qualifies for regulatory deferral, the derivatives are marked to fair value and are offset with a corresponding regulatory asset or liability depending on whether the derivative is in a net loss or net gain position, respectively. The deferred gain or loss is recognized in earnings in the delivery month applicable to the instrument. Gains and losses related to hedges qualifying for regulatory treatment are recoverable in gas rates through the PGA or in electric rates as a component of the fuel rules mechanism.
The gross notional volume of open derivatives is as follows:
December 31, 2021
Commodity derivative contracts
293,200
278,000
8,235,000
5,735,000
FTRs
3,015
2,127
250
MGE purchases and sells exchange-traded and over-the-counter options, swaps, and future contracts. These arrangements are primarily entered into to help stabilize the price risk associated with gas or power purchases. These transactions are employed by both MGE's gas and electric segments. Additionally, as a result of the firm transmission agreements that MGE holds on electricity transmission paths in the MISO market, MGE holds financial transmission rights (FTRs). An FTR is a financial instrument that entitles the holder to a stream of revenues or charges based on the differences in hourly day-ahead energy prices between two points on the transmission grid. The fair values of these instruments are offset with a corresponding regulatory asset/liability depending on whether they are in a net loss/gain position. Depending on the nature of the instrument, the gain or loss associated with these transactions will be reflected as cost of gas sold, fuel for electric generation, or purchased power expense in the delivery month applicable to the instrument. As of September 30, 2022, and December 31, 2021, the fair value of exchange traded derivatives and FTRs exceeded their cost basis by $5.2 million and $2.8 million, respectively.
MGE was a party to a purchased power agreement that provided MGE with firm capacity and energy during a base term from June 1, 2012, through May 31, 2022. The agreement was accounted for as a derivative contract and was recognized at its fair value on the consolidated balance sheets. However,
the derivative qualified for regulatory deferral and was recognized with a corresponding regulatory asset or liability depending on whether the fair value was in a loss or gain position. The actual cost was recognized in purchased power expense in the month of purchase.
The following table summarizes the fair value of the derivative instruments on the consolidated balance sheets. All derivative instruments in this table are presented on a gross basis and are calculated prior to the netting of instruments with the same counterparty under a master netting agreement as well as the netting of collateral. For financial statement purposes, instruments are netted with the same counterparty under a master netting agreement as well as the netting of collateral.
Derivative
Assets
Liabilities
Balance Sheet Location
Commodity derivative contracts(a)
8,793
4,533
932
81
Other deferred charges
102
Commodity derivative contracts(b)
2,959
811
420
38
227
N/A
Derivative liability (current)
The following tables show the effect of netting arrangements for recognized derivative assets and liabilities that are subject to a master netting arrangement or similar arrangement on the consolidated balance sheets.
Offsetting of Derivative Assets
Gross Amounts
Gross Amounts Offset in Balance Sheets
Collateral Posted Against Derivative Positions
Net Amount Presented in Balance Sheets
9,725
(4,614
3,379
(849
(1,254
1,276
Offsetting of Derivative Liabilities
4,614
849
24
The following tables summarize the unrealized and realized gains/losses related to the derivative instruments on the consolidated balance sheets and the consolidated statements of income.
Current and Long-Term Regulatory Asset (Liability)
Other Current Assets
Three Months Ended September 30:
Balance as of July 1,
(8,484
(161
2,581
520
Unrealized gain
(4,385
(18,677
Realized gain (loss) reclassified to a deferred account
1,122
(1,122
65
(65
Realized gain reclassified to income statement
6,534
1,916
2,356
311
Balance as of September 30,
(5,213
633
(13,675
766
Nine Months Ended September 30:
Balance as of January 1,
(617
770
13,989
1,162
(21,706
(30,314
3,952
(3,952
(351
351
Realized gain (loss) reclassified to income statement
13,158
3,815
3,001
(747
Realized Losses (Gains)
Fuel for Electric Generation/ Purchased Power
Cost of Gas Sold
(8,698
36
(1,586
212
(132
(949
(14,343
(800
(2,107
1,055
812
(443
(2,642
(759
MGE's commodity derivative contracts, FTRs, and PPA are subject to regulatory deferral. These derivatives are marked to fair value and are offset with a corresponding regulatory asset or liability. Realized gains and losses are deferred on the consolidated balance sheets and are recognized in earnings in the delivery month applicable to the instrument. As a result of the treatment described above, there are no unrealized gains or losses that flow through earnings.
Certain counterparties extend MGE a credit limit. If MGE exceeds these limits, the counterparties may require collateral to be posted. As of September 30, 2022, and December 31, 2021, no counterparties were in a net liability position.
Nonperformance of counterparties to the non-exchange traded derivatives could expose MGE to credit loss. However, MGE enters into transactions only with companies that meet or exceed strict credit guidelines, and it monitors these counterparties on an ongoing basis to mitigate nonperformance risk in its portfolio. As of September 30, 2022, no counterparties had defaulted.
Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The accounting standard clarifies that
fair value should be based on the assumptions market participants would use when pricing the asset or liability including assumptions about risk. The standard also establishes a three-level fair value hierarchy based upon the observability of the assumptions used and requires the use of observable market data when available. The levels are:
Level 1 - Pricing inputs are quoted prices within active markets for identical assets or liabilities.
Level 2 - Pricing inputs are quoted prices within active markets for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations that are correlated with or otherwise verifiable by observable market data.
Level 3 - Pricing inputs are unobservable and reflect management's best estimate of what market participants would use in pricing the asset or liability.
The carrying amount of cash, cash equivalents, and outstanding commercial paper approximates fair market value due to the short maturity of those investments and obligations. The estimated fair market value of long-term debt is based on quoted market prices for similar financial instruments. Since long-term debt is not traded in an active market, it is classified as Level 2. The estimated fair market value of financial instruments are as follows:
Carrying Amount
Fair Value
Long-term debt(a)
619,794
549,585
623,449
729,914
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis.
Fair Value as of September 30, 2022
Level 1
Level 2
Level 3
Assets:
Derivatives, net(b)
9,827
5,446
4,381
Exchange-traded investments
1,504
11,331
6,950
Liabilities:
4,087
527
Deferred compensation
3,782
Total Liabilities
8,396
9,926
5,545
26
Fair Value as of December 31, 2021
Derivatives, net(c)
3,606
1,170
2,436
1,296
4,902
2,466
Derivatives, net
2,989
731
2,258
3,653
6,642
3,836
1,400
Investments include exchange-traded investment securities valued using quoted prices on active exchanges and are therefore classified as Level 1.
The deferred compensation plan allows participants to defer certain cash compensation into a notional investment account. These amounts are included within other deferred liabilities in the consolidated balance sheets. The notional investments earn interest based upon the semiannual rate of U.S. Treasury Bills having a 26-week maturity increased by 1% compounded monthly with a minimum annual rate of 7%, compounded monthly. The notional investments are based upon observable market data, however, since the deferred compensation obligations themselves are not exchanged in an active market, they are classified as Level 2.
Derivatives include exchange-traded derivative contracts, over-the-counter transactions, a purchased power agreement, and FTRs. Most exchange-traded derivative contracts are valued based on unadjusted quoted prices in active markets and are therefore classified as Level 1. A small number of exchange-traded derivative contracts are valued using quoted market pricing in markets with insufficient volumes and are therefore considered unobservable and classified as Level 3. Transactions done with an over-the-counter party are on inactive markets and are therefore classified as Level 3. These transactions are valued based on quoted prices from markets with similar exchange-traded transactions. FTRs are priced based upon monthly auction results for identical or similar instruments in a closed market with limited data available and are therefore classified as Level 3.
The purchased power agreement, with a term ended May 2022, (see Footnote 10) was valued using an internal pricing model and therefore was classified as Level 3. See the 2021 Annual Report on Form 10-K for details on the internal pricing model and significant unobservable inputs.
27
The following table summarizes the changes in Level 3 commodity derivative assets and liabilities measured at fair value on a recurring basis.
8,959
(4,533)
178
(14,055)
Realized and unrealized gains (losses):
Included in regulatory liability
(5,105)
8,122
3,675
17,644
Included in other comprehensive income
Included in earnings
6,609
2,476
13,607
2,686
Included in current assets
(73)
45
175
Purchases
108
6,638
11,911
18,899
Sales
Issuances
Settlements
(6,644)
(9,114)
(25,562)
(21,760)
3,854
3,589
Total gains (losses) included in earnings attributed to the change in unrealized gains (losses) related to assets and liabilities held as of September 30,(d)
The following table presents total realized and unrealized gains (losses) included in income for Level 3 assets and liabilities measured at fair value on a recurring basis(d).
Purchased power expense
6,644
13,805
3,113
Cost of gas sold expense
(35)
(198)
(427)
MGE currently has ongoing jointly-owned solar generation construction projects, as shown in the following table. Incurred costs are reflected in "Construction work in progress" on the consolidated balance sheets.
Ownership
Share of
Costs incurredas of September 30,
Estimated Date ofCommercial
Project
Generation
Estimated Costs(a)
2022(a)
Operation
Red Barn(b)
10%
9.16 MW
$18 million
$0.6 million
Early 2023
Badger Hollow II(c)
33%
50 MW
$76 million(e)
$46.8 million(f)
First Half of 2023
Paris(d)
31 MW
$51 million(e)
$21.8 million
2023(g)
MGE received specific approval to recover 100% AFUDC on Badger Hollow II and Paris. During the three and nine months ended September 30, 2022, MGE recognized $1.1 million and $2.1 million, respectively, after
tax, in AFUDC for these projects compared to $0.2 million and $0.4 million for the comparable period in 2021.
Revenues disaggregated by revenue source were as follows:
Residential
45,154
44,398
123,183
117,229
Commercial
65,468
60,996
177,877
161,270
Industrial
3,912
3,380
10,535
9,469
Other-retail/municipal
10,010
9,478
28,215
26,340
Total retail
124,544
118,252
339,810
314,308
Sales to the market
7,858
3,071
13,938
8,854
474
316
1,167
948
Total electric revenues
132,876
121,639
354,915
324,110
17,167
14,643
97,498
72,286
Commercial/Industrial
11,490
8,069
66,913
42,972
28,657
22,712
164,411
115,258
Gas transportation
1,588
1,256
4,804
4,589
90
97
Total gas revenues
Non-regulated energy revenues
214
466
464
Total Operating Revenue
MGE Energy operates in the following business segments: electric utility, gas utility, nonregulated energy, transmission investment, and all other. See the 2021 Annual Report on Form 10-K for additional discussion of each of these segments.
(In thousands)MGE Energy
Non-Regulated Energy
Transmission Investment
All Others
Consolidation/Elimination
Consolidated Total
Interdepartmental revenues
12,465
10,405
(22,894
Total operating revenues
132,900
42,775
10,619
Equity in earnings of investments
1,499
Net income (loss)
27,619
(394
5,576
1,091
(172
89
6,689
10,224
(17,002
121,728
30,709
10,438
2,532
27,833
(218
5,386
1,842
74
76
26,645
31,073
(57,794
354,991
195,950
31,539
6,626
55,248
12,782
16,451
4,821
599
14,377
30,595
(45,288
324,426
134,321
31,059
7,440
59,979
11,615
15,935
5,413
(241
(In thousands)MGE
Net income (loss) attributable to MGE
Net income attributable to MGE
General
MGE Energy is an investor-owned public utility holding company operating through subsidiaries in five business segments:
Our principal subsidiary is MGE, which generates and distributes electric energy, distributes natural gas, and represents a majority portion of our assets, liabilities, revenues, and expenses. MGE generates, purchases, and distributes electricity to approximately 159,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 169,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.
Our nonregulated energy operations own interests in electric generating capacity that is leased to MGE. The ownership/leasing structure was adopted under applicable state regulatory guidelines for MGE's participation in these generation facilities, consisting principally of a stable return on the equity investment in the new generation facilities over the term of the related leases. The nonregulated energy operations include an ownership interest in two coal-fired generating units in Oak Creek, Wisconsin and a partial ownership of a cogeneration project on the UW-Madison campus. A third party operates the units in Oak Creek, and MGE operates the cogeneration project. Due to the nature of MGE's participation in these facilities, the results of MGE Energy's nonregulated operations are also consolidated into MGE's consolidated financial position and results of operations under applicable accounting standards.
Executive Overview
Our primary focus today and for the foreseeable future is our core utility customers at MGE as well as creating long-term value for our shareholders. MGE continues to face the challenge of providing its customers with reliable power at competitive prices. MGE works on meeting this challenge by investing in more efficient generation projects, including renewable energy sources. As we work toward achieving 80% carbon reduction by 2030 (from 2005 levels), MGE continues to examine and pursue opportunities to reduce the proportion that coal generation represents in its generation mix, as evidenced by its most recent announcements of the retirement of Columbia (a coal generation plant), the planned change in the Elm Road Units fuel source from coal to natural gas, and its growing ownership of renewable generation sources. MGE will continue to focus on growing earnings while controlling operating and fuel costs. MGE's goal is to provide safe and efficient operations in addition to providing customer value. We believe it is critical to maintain a strong credit rating consistent with financial strength in MGE in order to accomplish these goals.
We principally earn revenue and generate cash from operations by providing electric and natural gas utility services, including electric power generation and electric power and gas distribution. The earnings and cash flows from the utility business are sensitive to various external factors, including:
During the three months ended September 30, 2022, MGE Energy's earnings were $33.7 million or $0.93 per share compared to $34.9 million or $0.97 per share during the same period in the prior year. MGE's earnings during the three months ended September 30, 2022, were $27.2 million compared to $27.4 million during the same period in the prior year.
During the nine months ended September 30, 2022, MGE Energy's earnings were $89.9 million or $2.49 per share compared to $92.7 million or $2.56 per share during the same period in the prior year. MGE's earnings during the nine months ended September 30, 2022, were $68.5 million compared to $70.8 million during the same period in the prior year.
MGE Energy's net income was derived from our business segments as follows:
(In millions)
Business Segment:
Electric Utility
27.6
27.8
55.2
60.0
Gas Utility
(0.4)
(0.2)
12.8
11.6
Nonregulated Energy
5.6
5.4
16.5
15.9
Transmission Investments
1.1
1.8
4.8
All Other
0.1
0.6
33.7
34.9
89.9
92.7
Our net income during the three and nine months ended September 30, 2022, compared to the same periods in the prior year primarily reflects the effects of the following factors:
An increase in electric investments contributed to earnings for 2022. Timing of 2021 depreciation and other operations and maintenance costs contributed to higher earnings in 2021. Depreciation and operations and maintenance costs increased during the remainder of 2021 and into 2022 after significant capital projects were completed. The new customer information system went live in September 2021 and Badger Hollow I was completed in November 2021. MGE received approval to recover 100% AFUDC during construction of these projects.
An increase in gas investments contributed to increased earnings for 2022. Higher gas retail sales resulting from colder weather in the first half of 2022 contributed to higher earnings for the nine months ended September 30, 2022. Heating degree days (a measure for determining the impact of weather during the heating season) increased by approximately 7% in the first nine months of 2022 compared to the same period in the prior year.
In September 2022, our share of ATC's earnings reflected an estimated possible loss of approximately $0.8 million, inclusive of interest and net of tax, related to the August 2022 developments in the MISO transmission owners complaints on authorized return on equity. See additional information in "Other Matters" below.
The following developments affected the first nine months of 2022:
2022/2023 Rate Settlement Agreement: In December 2021, the PSCW approved a settlement agreement for MGE's 2022 rate case. The settlement agreement provides for an 8.81% increase to electric rates and a 2.15% increase to gas rates for 2022. As part of that settlement agreement, the PSCW approved a 0.96% increase in 2023 gas rates and a potential 2023 electric rate change to be addressed through a limited rate case reopener. See "Other Matters" below for additional information on the 2022/2023 rate case settlement.
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Utility Solar: Large solar generation projects were recently completed or are under construction, as shown in the following table. Incurred costs are reflected in "Property, plant, and equipment, net" for projects placed in service, or "Construction work in progress" for projects under construction on the consolidated balance sheets.
Ownership Interest
Share of Generation
Share ofEstimated Costs(a)
Costs Incurred as ofSeptember 30, 2022(a)
Estimated Date ofCommercial Operation
Red Barn
9.16MW
$76 million
$46.8 million(b)(c)
Paris
$51 million
$21.8 million(b)
2023(d)
Deferred Fuel Costs: MGE has under-recovered fuel costs through the nine months ended September 30, 2022. As of September 30, 2022, MGE had deferred $4.4 million of 2022 fuel costs. Coal transportation constraints resulted in reduced generation at Columbia, which required MGE to purchase power in the market at higher cost. We may continue to see increased fuel costs in the near term because of these coal transportation constraints. These costs will be subject to the PSCW's annual review of 2022 fuel costs, expected to be completed during 2023. See Footnote 9.b. of the Notes to Consolidated Financial Statements in this Report for further information regarding fuel cost proceedings.
In the near term, several items may affect us, including:
2021 Annual Fuel Proceeding: MGE under-recovered fuel costs in 2021. As of December 31, 2021, MGE had deferred $3.3 million of 2021 fuel costs. In August 2022, the PSCW issued a final decision in the 2021 fuel rules proceedings for MGE to include the recovery of these costs as part of the 2023 electric limited rate case reopener. There was no change to the costs to be recovered in the fuel rule proceedings from the amount MGE deferred in the previous year.
2023 Electric Limited Rate Case Reopener: In April 2022, MGE filed with the PSCW a proposed electric limited rate case reopener. The limited rate case reopener proposes a 4.38% increase to electric rates for 2023. See "Other Matters" below for additional information on the 2023 electric limited rate case reopener.
ATC Return on Equity: As discussed in "Other Matters" below, ATC's authorized ROE, which is used in calculating its rates and revenues, is the subject of a challenge before FERC. A decrease in ATC's ROE could result in lower equity earnings and distributions from ATC in the future. We derived approximately 5.1% and 5.7% of our net income during the nine months ended September 30, 2022 and 2021, respectively, from our investment in ATC.
Environmental Initiatives: There are proposed legislative rules and initiatives involving matters related to air emissions, water effluent, hazardous materials, and greenhouse gases, all of which affect generation plant capital expenditures and operating costs as well as future operational planning. Legislation and rulemaking addressing climate change and related matters could significantly affect the costs of owning and operating fossil-fueled generating plants. We would expect to seek and receive recovery of any such costs in rates. However, it is difficult to estimate the amount of such costs due to the uncertainty as to the timing and form of any legislation or rules, and the scope and time of the recovery of costs in rates, which may occur after those costs have been incurred and paid.
Future Generation – 80% carbon reduction target by 2030 (from 2005 levels): MGE has outlined initiatives to achieve our raised target.
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Elm Road Units: In November 2021, MGE announced plans to end the use of coal as a primary fuel at the Elm Road Units and transition the plant to natural gas. MGE is a minority owner of Elm Road, owning 8.33%. The approximately 1,230 MW coal-fired plant is co-owned by WEC Energy Group, whose subsidiary serves as operator, and by WPPI Energy, Inc. Transition plans and costs will be subject to PSCW approval. MGE's remaining use of coal is expected to be further reduced as the Elm Road Units transition to natural gas. By the end of 2030, MGE expects coal to be used only as a backup fuel at the Elm Road Units. This transition will help MGE meet its 2030 carbon reduction goals. By 2035, MGE expects that the Elm Road Units will be fully transitioned away from coal, which will eliminate coal as an internal generation source for MGE.
Solar Procurement Disruptions – Import Regulations: In June 2021, the U.S. Customs and Border Protection (CBP) issued a Withhold Release Order (WRO) against silica-based products made by Hoshine Silicon Industry Co. Ltd., a company located in China's Xinjiang Uyghur Autonomous Region. As a result of this WRO, CBP is holding many solar panels imported into the United States until importers can prove that the panels do not contain materials originating from this region. The Uyghur Forced Labor Protection Act, a federal law that became effective on June 21, 2022, further established that all goods mined, produced, or manufactured wholly or in part in Xinjiang or by certain defined entities are prohibited from U.S. importation. MGE is currently assessing the potential impact of these disruptions on current and future solar projects which may result in an increase in costs or delays in construction timelines. In the event that such disruptions cause costs to exceed the levels approved for specific projects, we expect to file a notification with the PSCW and expect to request recovery of any increases in MGE’s next rate proceeding.
Solar Procurement Disruptions – Solar Tariff Investigation: In March 2022, the U.S. Department of Commerce (USDOC) announced a solar tariff investigation on solar panels from four Southeast Asian countries. This investigation could result in additional tariffs on solar panels. In June 2022, the USDOC issued a 24-month exemption from tariffs for solar panel and module imports from these four countries. MGE is currently assessing the potential impact of these disruptions on current and future solar projects which may result in an increase in costs or delays in construction timelines. In the event that such disruptions cause costs to exceed the levels approved for specific projects, we expect to file a notification with the PSCW and expect to request recovery of any increases in MGE’s next rate proceeding.
COVID-19 Update: MGE Energy continues to provide safe and reliable service to our customers despite the challenges presented by the COVID-19 and its variants. We have operated continuously throughout the pandemic and suffered no material disruptions in service or employment. We continue to monitor potential disruptions or constraints in materials and supplies from key suppliers and as well as macroeconomic trends, such as inflation. We could experience increased costs and delays in our ability to perform certain maintenance and capital project activities. We cannot estimate with any degree of certainty the actual impact of COVID-19 and associated governmental regulations may have on future results of operations, financial position, and liquidity. See Item 1A. "Risk Factors" "Pandemic virus or diseases, including COVID-19, could have a material adverse effect on our business, financial condition and liquidity" in our 2021 Annual Report on Form 10-K for a description of risk.
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The following discussion is based on the business segments as discussed in Footnote 14 of the Notes to Consolidated Financial Statements in this Report.
Results of Operations
Three Months Ended September 30, 2022 and 2021
Electric sales and revenues
The following table compares MGE's electric revenues and electric kWh sales by customer class for each of the periods indicated:
Revenues
Sales (kWh)
(In thousands, except CDD)
% Change
1.7%
252,457
263,833
(4.3)%
7.3%
495,135
500,434
(1.1)%
15.7%
41,304
42,400
(2.6)%
5.6%
104,548
106,919
(2.2)%
5.3%
893,444
913,586
n.m.%
48,632
67,536
(28.0)%
50.0%
9.2%
942,076
981,122
(4.0)%
Cooling degree days (normal 500)
507
511
(0.8)%
n.m. not meaningful
Electric revenue increased $11.2 million during the three months ended September 30, 2022, compared to the same period in 2021, due to the following:
Rate changes
7.8
Revenue subject to refund, net
0.4
Decrease in residential volume
(1.6
Net decrease in commercial, industrial and other-retail/municipal volume
11.2
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Electric fuel and purchased power
$ Change
18.5
2.5
9.6
8.6
1.0
The $2.5 million increase in fuel for electric generation was due to an approximately 29% increase in the average cost offset by an approximately 12% decrease in internal generation. Coal transportation constraints resulted in reduced generation at Columbia, which required MGE to purchase power in the market at higher cost.
The $1.0 million increase in purchased power was due to an approximately 40% increase in market purchases as a result of lower internal generation.
Fuel and purchased power costs are generally offset by electric revenue and do not have a significant impact on net income. MGE expects to seek and receive recovery of fuel and purchased power costs outside the fuel rules bandwidth in customer rates. See Footnote 9 of the Notes to Consolidated Financial Statements in this Report for further information on the fuel rules bandwidth.
Gas deliveries and revenues
The following table compares MGE's gas revenues and gas therms delivered by customer class for each of the periods indicated:
Therms Delivered
(In thousands, except HDD and average
rate per therm of retail customer)
17.2%
6,166
5,987
3.0%
42.4%
9,555
8,889
7.5%
26.2%
15,721
14,876
5.7%
26.4%
15,183
15,212
(0.2)%
25.0%
30,904
30,088
2.7%
Heating degree days (normal 134)
135
170.0%
Average rate per therm of retail customer
1.823
1.527
19.4%
Gas revenue increased $6.3 million during the three months ended September 30, 2022, compared to the same period in 2021, due to the following:
3.9
Increase in volume
2.0
6.3
MGE recovers the cost of natural gas in its gas segment through the purchased gas adjustment clause (PGA). Under the PGA, MGE is able to pass through to its gas customers the cost of gas. Changes in PGA recoveries
affect revenues but do not change net income in view of the pass-through treatment of the costs. Payments for natural gas increased driving higher rates during the three months ended September 30, 2022.
The average retail rate per therm for the three months ended 2022, increased approximately 19% compared to 2021, reflecting a $5.7 million increase in natural gas commodity costs (recovered through the PGA).
.
A $5.7 million increase in cost of gas sold driven by higher cost per therm of gas. Average cost per therm increased approximately 62%. MGE recovers the cost of natural gas in its gas segment through the PGA as described under gas deliveries and revenue above.
Consolidated operations and maintenance expenses
During the three months ended September 30, 2022, operations and maintenance expenses increased $0.7 million, compared to the same period in the prior year. The following contributed to the net change:
Increased customer accounts costs
0.5
Increased electric production expenses
Increased transmission costs
0.3
Decreased other expenses
0.7
Consolidated depreciation expense
Electric depreciation expense increased $1.7 million and gas depreciation expense increased $0.7 million during the three months ended September 30, 2022, compared to the same period in the prior year. MGE placed Badger Hollow I in service in November 2021. The timing of the in-service date contributed to the increase in electric depreciation expense. The new customer information system went live in September 2021, which increased depreciation expense for both electric and gas in 2022.
Nonregulated Energy Operations - MGE Energy and MGE
The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF), which have been formed to own and lease electric generating capacity to assist MGE. During the three months ended September 30, 2022 and 2021, net income at the nonregulated energy operations segment was $5.6 million and $5.4 million, respectively.
Transmission Investment Operations - MGE Energy
The transmission investment segment holds our interest in ATC and ATC Holdco, and its income reflects our equity in the earnings of those investments. ATC Holdco was formed in December 2016 to pursue transmission development opportunities that typically have long development and investment lead times before becoming operational. ATC Holdco's transmission development activities have been suspended for the near term. During the three months ended September 30, 2022 and 2021, other income at the transmission investment segment primarily reflects ATC's operations and was $1.5 million and $2.5 million, respectively. In August 2022, the U.S. Court of Appeals for the D.C. Circuit vacated the underlying FERC orders regarding methodology for setting authorized return on equity resulting in an additional estimated possible loss. See Footnote 3 of the Notes to Consolidated Financial Statements in this Report and "Other Matters" below for additional information concerning ATC and summarized financial information regarding ATC.
Consolidated Income Taxes - MGE Energy and MGE
In 2022, the effective electric tax rate increased as a result of the return of electric excess deferred taxes related to the 2017 Tax Act not governed by IRS normalization rules in 2021. These costs were recorded as a regulatory liability in the year of remeasurement. See Footnote 4 of the Notes to Consolidated Financial Statements in this Report for the effective tax rate reconciliation.
Noncontrolling Interest, Net of Tax - MGE
Noncontrolling interest, net of tax, reflects the accounting required for MGE Energy's interest in MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF). MGE Energy owns 100% of MGE Power Elm Road and MGE Power West Campus. They are not owned by MGE. Due to the contractual agreements for these projects with MGE, the entities are considered VIEs with respect to MGE and their results are consolidated with those of MGE, the primary beneficiary of the VIEs. The following table shows MGE Energy's noncontrolling interest, net of tax, reflected on MGE's consolidated statement of income:
3.8
Nine Months Ended September 30, 2022 and 2021
5.1%
679,308
693,739
(2.1)%
10.3%
1,368,060
1,352,091
1.2%
11.3%
120,827
122,493
(1.4)%
7.1%
276,843
276,950
8.1%
2,445,038
2,445,273
57.4%
121,848
201,902
(39.6)%
Other revenues
23.1%
9.5%
2,566,886
2,647,175
(3.0)%
Cooling degree days (normal 690)
784
820
(4.4)%
Electric revenue increased $30.8 million during the nine months ended September 30, 2022, compared to the same period in 2021, due to the following:
27.7
5.1
Customer fixed and demand charges
2.2
Net increase in commercial, industrial and other-retail/municipal volume
0.2
(3.2
30.8
48.4
42.6
5.8
35.8
28.9
6.9
The $5.8 million increase in fuel for electric generation was due to an approximately 31% increase in the average cost offset by an approximately 13% decrease in internal generation. Coal transportation constraints resulted in reduced generation at Columbia, which required MGE to purchase power in the market at higher cost.
The $6.9 million increase in purchased power was due to an approximately 43% increase in market purchases as a result of lower internal generation.
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34.9%
77,091
68,791
12.1%
55.7%
73,349
64,179
14.3%
42.6%
150,440
132,970
13.1%
4.7%
58,059
55,150
(7.2)%
41.2%
208,499
188,120
10.8%
Heating degree days (normal 4,479)
4,723
4,404
7.2%
1.093
0.867
26.1%
Gas revenue increased $49.4 million during the nine months ended September 30, 2022, compared to the same period in 2021, due to the following:
38.2
9.9
1.3
49.4
MGE recovers the cost of natural gas in its gas segment through the purchased gas adjustment clause (PGA). Under the PGA, MGE is able to pass through to its gas customers the cost of gas. Changes in PGA recoveries affect revenues but do not change net income in view of the pass-through treatment of the costs. Payments for natural gas increased driving higher rates during the nine months ended September 30, 2022.
The average retail rate per therm for the nine months ended 2022, increased approximately 26% compared to 2021, reflecting a $42.9 million increase in natural gas commodity costs (recovered through the PGA).
The $42.9 million increase in cost of gas sold was driven by higher cost per therm of gas. Average cost per therm increased approximately 56%. An increase in volume of approximately 12% also contributed to the increase in cost. MGE recovers the cost of natural gas in its gas segment through the PGA as described under gas deliveries and revenue above.
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During the nine months ended September 30, 2022, operations and maintenance expenses increased $6.1 million, compared to the same period in the prior year. The following contributed to the net change:
Increased administrative and general costs
2.6
Increased electric distribution expenses
Increased other expenses
Decreased electric production expenses
Decreased customer services
6.1
Electric depreciation expense increased $5.7 million and gas depreciation expense increased $2.2 million during the nine months ended September 30, 2022, compared to the same period in the prior year. MGE placed Badger Hollow I in service in November 2021. The timing of the in-service date contributed to the increase in electric depreciation expense. The new customer information system went live in September 2021, which increased depreciation expense for both electric and gas in 2022.
Electric and gas other income
Electric other income increased $2.3 million and gas other income increased $3.7 million during the nine months ended September 30, 2022, compared to the same period in the prior year, primarily related to the collection in 2021 of the deferred pension and other postretirement other than service costs from 2019.
The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF), which have been formed to own and lease electric generating capacity to assist MGE. During the nine months ended September 30, 2022 and 2021, net income at the nonregulated energy operations segment was $16.5 million and $15.9 million, respectively.
The transmission investment segment holds our interest in ATC and ATC Holdco, and its income reflects our equity in the earnings of those investments. ATC Holdco was formed in December 2016 to pursue transmission development opportunities that typically have long development and investment lead times before becoming operational. ATC Holdco's transmission development activities have been suspended for the near term. During the nine months ended September 30, 2022 and 2021, other income at the transmission investment segment primarily reflects ATC's operations and was $6.6 million and $7.4 million, respectively. In August 2022, the U.S. Court of Appeals for the D.C. Circuit vacated the underlying FERC orders regarding methodology for setting authorized return on equity resulting in an additional estimated possible loss. See Footnote 3 of the Notes to Consolidated Financial Statements in this Report and "Other Matters" below for additional information concerning ATC and summarized financial information regarding ATC.
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10.5
11.4
Contractual Obligations and Commercial Commitments - MGE Energy and MGE
There were no material changes, other than from the normal course of business, to MGE Energy's and MGE's contractual obligations (representing cash obligations that are considered to be firm commitments) and commercial commitments (representing commitments triggered by future events) during the nine months ended September 30, 2022, except as noted below. Further discussion of the contractual obligations and commercial commitments is included in Footnote 16 of the Notes to Consolidated Financial Statements and "Contractual Obligations and Commercial Commitments for MGE Energy and MGE" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Annual Report on Form 10-K.
Purchase Contracts – MGE Energy and MGE
See Footnote 8.c. of Notes to Consolidated Financial Statements in this Report for a description of commitments as of September 30, 2022, that MGE Energy and MGE have entered with respect to various commodity supply and transportation contracts to meet their obligations to deliver electricity and natural gas to customers.
Long-term Debt – MGE Energy and MGE
In November 2022, MGE entered into a private placement Note Purchase Agreement in which it committed to issue $75 million of new long-term debt. See Footnote 6.c. of Notes to Consolidated Financial Statements in this Report for further information on long-term debt issuance.
Liquidity and Capital Resources
MGE Energy and MGE expect to have adequate liquidity to support future operations and capital expenditures over the next twelve months. Available resources include cash and cash equivalents, operating cash flows, liquid assets, borrowing working capacity under revolving credit facilities, and access to equity and debt capital markets. MGE Energy expects to generate funds from operations and both long-term and short-term debt financing. See "Credit Facilities" under Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources in the 2021 Annual Report on Form 10-K for information regarding MGE Energy's and MGE's credit facilities.
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Cash Flows
The following summarizes cash flows for MGE Energy and MGE during the nine months ended September 30, 2022 and 2021:
Cash provided by (used for):
Operating activities
Investing activities
(137,219)
(118,347)
(134,089)
(115,591)
Financing activities
(12,663)
(8,400)
MGE Energy's consolidated net cash provided by operating activities is derived mainly from the electric and gas operations of its principal subsidiary, MGE.
Cash provided by operating activities during the nine months ended September 30, 2022, was $144.3 million, an increase of $3.0 million when compared to the same period in the prior year.
MGE Energy's net income decreased $2.8 million during the nine months ended September 30, 2022, when compared to the same period in the prior year.
MGE Energy's federal and state taxes paid decreased $3.0 million during the nine months ended September 30, 2022, when compared to the prior year.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $17.7 million in cash used for operating activities during the nine months ended September 30, 2022. Working capital accounts were impacted by increased gas inventory driven by the increase in cost of gas and decreased other current liabilities, partially offset by decreased unbilled revenues.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $9.1 million in cash used for operating activities during the nine months ended September 30, 2021. Actual purchased gas costs were $6.3 million higher than the amount collected in rates primarily due to the extreme cold weather experienced in the U.S. in February 2021. These costs were deferred as a regulatory asset and recovered throughout 2021. In addition, working capital accounts were impacted by increased accounts receivable and increased inventories, partially offset by increased other current liabilities, decreased unbilled revenues, and increased accounts payable.
Hosted software asset expenditures during the nine months ended September 30, 2022, were $0.5 million. This amount represents a decrease of $2.5 million of cash used when compared to the prior year.
Cash provided by operating activities during the nine months ended September 30, 2022, was $141.8 million, an increase of $6.3 million when compared to the same period in the prior year.
Net income decreased $3.0 million during the nine months ended September 30, 2022, when compared to the same period in the prior year.
MGE's federal and state taxes paid decreased $4.2 million during the nine months ended September 30, 2022, when compared to the prior year.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $15.3 million in cash used for operating activities during the nine months ended September 30, 2022. Working capital accounts were impacted by increased gas inventory driven by the increase in cost of gas and decreased current liabilities, partially offset by decreased unbilled revenues.
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Capital Requirements and Investing Activities
MGE Energy's cash used for investing activities increased $18.9 million during the nine months ended September 30, 2022, when compared to the same period in the prior year.
Capital expenditures during the nine months ended September 30, 2022, were $133.4 million. This amount represents an increase of $19.3 million from the expenditures made in the same period in the prior year. This increase primarily reflects the increase of expenditures for Badger Hollow II and Paris.
Proceeds from the sale of investments decreased $0.8 million during the nine months ended September 30, 2022, when compared to the same period in the prior year.
MGE's cash used for investing activities increased $18.5 million during the nine months ended September 30, 2022, when compared to the same period in the prior year.
Capital Expenditures
The following table shows MGE Energy's forecasted capital expenditures for 2022 through 2025:
Forecasted
138,200
181,000
185,100
174,400
25,300
26,200
25,600
23,200
Utility plant total
163,500
207,200
210,700
197,600
Nonregulated
7,700
7,900
7,800
6,100
MGE Energy total
171,200
215,100
218,500
203,700
Forecasted capital expenditures are based upon management's assumptions with respect to future events, including the timing and amount of expenditures associated with environmental compliance initiatives, legislative and regulatory action, supply chain and market disruptions, customer demand and support for electrification and renewable energy resources, energy conservation programs, load growth, the timing of any required regulatory approvals, and the adequacy of rate recovery. Actual events may differ materially from these assumptions and result in material changes to those forecasted amounts.
MGE is targeting at least 80% carbon reduction from electric generation by 2030 (from 2005 levels) and net-zero carbon electricity by 2050. Solar, wind, and battery storage projects are a major step toward deep decarbonization and greater use of clean energy sources in pursuit of our goal. MGE continues to evaluate solar, wind, and battery
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storage projects that align with its goals as legacy fossil fuel-fired facilities are retired. The target early retirement date for Columbia is June 2026. MGE has included forecasted capital expenditures for the years 2022 through 2025 for projects to replace Columbia's generation. Additional replacement capital expenditures are expected to continue beyond 2025.
Our forecasted capital expenditures reflect the following significant renewable projects that are proposed or currently under construction:
Source
Share ofGeneration/Battery Storage
Share ofEstimatedCosts(c)
Red Barn(a)
Wind
$18 million(e)
Badger Hollow II(a)
Solar
$76 million(d)(e)
Paris(a)
Solar/Battery
$51 million(d)(e)
2023(f)
Darien(b)
25MW/7.5MW
$45 million(d)
2024(f)
Koshkonong(b)
30MW/16.5MW
$65 million(d)
2025(f)
In 2022, MGE notified the PSCW of increases in projected costs at Badger Hollow II and Paris. The main drivers were increases in the costs of key commodities, labor, and solar modules resulting from supply chain and market disruptions. See Footnote 12 of Notes to Consolidated Financial Statements in this Report for more information on these projects. Furthermore, solar procurement disruptions have also shifted construction timelines for Darien and Koshkonong. Projected completion dates of these projects are one year later than originally anticipated. MGE continues to assess the potential impact of these disruptions on current and future solar projects which may result in an increase in costs or delays in construction timelines. See further information on procurement disruptions discussed earlier under "Executive Overview."
West Riverside: In 2016, MGE entered into an agreement with WPL under which MGE may acquire up to 50 MW of capacity in a gas-fired generating plant constructed by WPL at its West Riverside Energy Center in Beloit, Wisconsin, during the five-year period following the in-service date of the plant. The plant was placed in service in May 2020. In January 2022, MGE, along with joint applicants, filed an application with the PSCW requesting approval for a sale and purchase of ownership interests in West Riverside. If approved, MGE's share of West Riverside will be 25 MW at a purchase price of approximately $25 million. The closing and actual transfer of ownership is expected to occur in March 2023. MGE also retains the option to purchase an additional 25 MW of capacity from West Riverside until May 2025. MGE currently expects to exercise this option in a future period.
Electric and Gas Distribution: In 2022 through 2025, electric and gas capital expenditures include investment in enhanced metering solutions to provide customers with more timely and detailed energy use information. Investments in advanced metering infrastructure will provide additional benefits including outage and demand response and automated meter reading capabilities. Forecasted capital expenditures in those years is approximately $24 million.
Cash Used for/Provided by Financing Activities
Cash used for MGE Energy's financing activities was $12.7 million during the nine months ended September 30, 2022, compared to cash proceeds of $1.7 million for the same period in the prior year.
During the nine months ended September 30, 2022, dividends paid were $42.8 million compared to $40.8 million in the prior year. The increase reflected a higher dividend rate per share ($1.183 vs. $1.128).
During the nine months ended September 30, 2021, MGE borrowed $100.0 million of senior unsecured notes which was used to assist with financing additional capital expenditures and other corporate obligations. There were no long-term debt borrowings during the nine months ended September 30, 2022.
During the nine months ended September 30, 2022, net short-term debt borrowings were $34.5 million, compared to $52.5 million of repayments in the same period in the prior year.
During the nine months ended September 30, 2022, cash used for MGE's financing activities was $8.4 million, compared to cash proceeds of $31.9 million for the same period in the prior year.
Cash dividends to parent (MGE Energy) were $21.0 million during the nine months ended September 30, 2022. There were no cash dividends to parent in the same period in the prior year.
Distributions to parent from noncontrolling interest, which represent distributions from MGE Power Elm Road and MGE Power West Campus to MGE Energy, were $17.5 million during the nine months ended September 30, 2022, compared to $10.5 million in the same period in the prior year.
Capitalization Ratios
MGE Energy's capitalization ratios were as follows:
62.1%
62.2%
35.6%
37.5%
2.3%
0.3%
Credit Ratings
MGE Energy's and MGE's access to the capital markets, including, in the case of MGE, the commercial paper market, and their respective financing costs in those markets, may depend on the credit ratings of the entity that is accessing the capital markets.
None of MGE Energy's or MGE's borrowing is subject to default or prepayment as a result of a downgrading of credit ratings, although a downgrading of MGE's credit ratings would increase fees and interest charges under both MGE Energy's and MGE's credit agreements.
Environmental Matters
See the discussion of environmental matters included in the 2021 Annual Report on Form 10-K, as updated by Footnote 8.a. of Notes to Consolidated Financial Statements in this Report.
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Other Matters
Rate Matters
In December 2021, the PSCW approved a settlement agreement for MGE's 2022 rate case. The settlement agreement provides for an 8.81% increase to electric rates and a 2.15% increase to gas rates for 2022. As part of that settlement agreement, the PSCW approved a 0.96% increase in 2023 gas rates and a potential 2023 electric rate change to be addressed through a limited rate case reopener.
In April 2022, MGE filed with the PSCW a limited rate reopener proposing a 4.38% increase to electric rates for 2023.
Details related to MGE's 2022/2023 approved settlement agreement and pending electric limited reopener:
(Dollars in thousands)
Authorized Average Rate Base(a)
Authorized Average CWIP(b)
Authorized Return on Common Equity(c)
Electric (2022 Test Period)
1,044,362
19,976
55.63%
Gas (2022 Test Period)
299,319
11,410
Electric (2023 Test Period)(d)
1,159,155
Gas (2023 Test Period)
312,270
8,228
See Footnote 9 of Notes to Consolidated Financial Statements in this Report for further discussion of rate proceedings.
MISO transmission owners, including ATC, are involved in two complaints filed at FERC by several parties challenging that the base ROE in effect for MISO transmission owners, including ATC, was no longer just and reasonable. Each complaint provided for a 15-month statutory refund period: November 12, 2013 through February 11, 2015 (the "First Complaint Period") and February 12, 2015 through May 11, 2016 (the "Second Complaint Period").
In May 2020, FERC issued an order further refining the methodology for setting authorized ROE. This refined methodology increased the authorized ROE from 9.88% to 10.02%. This base ROE is effective for the First Complaint Period and for all periods following September 2016. This order also dismissed the second complaint. Accordingly, no refunds were ordered for the Second Complaint Period.
As a result of the May 2020 FERC order, our share of ATC's earnings reflected a $0.6 million reduction of our reserve. Additionally, our share of ATC's earnings reflected the derecognition of a possible refund related to the Second Complaint Period as ATC considered such a refund to be no longer probable. However, due to pending requests for rehearing, a loss related to the 2015 complaint remains possible. Our share of the estimated refund for the Second Complaint Period is approximately $2.3 million. MGE has not recorded a possible loss for the Second Complaint Period.
Several petitions for review of FERC’s prior orders were filed with the U.S. Court of Appeals for the D.C. Circuit (the "Court") and an oral argument was held in November 2021. In August 2022, the Court ruled that four of the five
47
arguments made by the complaining parties were unpersuasive. However, the Court agreed that FERC’s decision to reintroduce a risk-premium model into its ROE methodology was arbitrary and capricious. The Court vacated the underlying orders for the First Complaint Period and remanded to FERC for further proceedings. In September 2022, our share of ATC's earnings reflected an estimated possible loss of approximately $0.8 million, inclusive of interest and net of tax, for a possible additional refund for the First Complaint Period and for the period following the Second Complaint Period. Although the Court agreed that FERC was correct to use the base ROE established in the first complaint to adjudicate the second, and that FERC was right to dismiss the second complaint, the second complaint was also remanded for FERC to reopen proceedings. Any reduction in ATC's ROE could result in lower equity earnings and distributions from ATC in the future.
We derived approximately 5.1% and 5.7% of our net income during the nine months ended September 30, 2022 and 2021, respectively, from our investment in ATC.
Inflation Reduction Act
In August 2022, the Inflation Reduction Act (IRA) was signed into law. Among other provisions, the IRA: extends current PTC and ITC for renewable technologies (e.g., wind and solar); restores full value of the PTC and ITC for qualifying facilities placed into service after 2021 that satisfy prevailing wage and apprenticeship requirements; creates a PTC for solar, clean hydrogen and nuclear; establishes an ITC for energy storage, microgrids, and interconnection facilities; and allows companies to monetize or sell credits to unrelated parties. In addition, the IRA created a new corporate alternative minimum tax (AMT). MGE Energy does not expect to be subject to the AMT in the near term. Implementation of IRA provisions is subject to the issuance of additional guidance by the U.S. Treasury Department. While the final impact cannot be determined at this time, the IRA is not expected to have a material impact on MGE Energy and MGE for the year ending December 31, 2022.
Adoption of Accounting Principles and Recently Issued Accounting Pronouncements
See Footnote 2 of Notes to Consolidated Financial Statements in this Report for discussion of new accounting pronouncements.
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There were no material changes to the market risks disclosed in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our 2021 Annual Report on Form 10-K, except as noted below.
Equity Price Risk - Pension-Related Assets
MGE currently funds its liabilities related to employee benefits through trust funds. These funds, which include investments in debt and equity securities, are managed by various third-party investment managers. Changes in the market value of these investments can have an impact on the future expenses related to these liabilities. The value of employee benefit plan assets has declined by approximately 23% during the nine months ended September 30, 2022.
During the third quarter of 2022, each registrant's management, including the principal executive officer and principal financial officer, evaluated its disclosure controls and procedures related to the recording, processing, summarization, and reporting of information in its periodic reports that it files with the SEC. These disclosure controls and procedures have been designed to ensure that material information relating to that registrant, including its subsidiaries, is accumulated and made known to that registrant's management, including these officers, by other employees of that registrant and its subsidiaries as appropriate to allow timely decisions regarding required disclosure, and that this information is recorded, processed, summarized, evaluated, and reported, as applicable, within the time periods specified in the SEC's rules and forms. The evaluations take into account changes in the internal and external operating environments that may impact those controls and procedures. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision making can be faulty and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Also, MGE Energy does not control or manage certain of its unconsolidated entities and thus, its access and ability to apply its procedures to those entities is more limited than is the case for its consolidated subsidiaries.
As of September 30, 2022, each registrant's principal executive officer and principal financial officer concluded that its disclosure controls and procedures were effective. Each registrant intends to strive continually to improve its disclosure controls and procedures to enhance the quality of its financial reporting.
During the quarter ended September 30, 2022, there were no changes in either registrant's internal controls over financial reporting that materially affected, or are reasonably likely to affect materially, that registrant's internal control over financial reporting.
MGE Energy and MGE
MGE Energy and its subsidiaries, including MGE, from time to time are involved in various legal proceedings that are handled and defended in the ordinary course of business. See Footnote 8.a. and 8.b. of Notes to Consolidated Financial Statements in this Report for more information.
Item 1A Risk Factors.
There were no material changes from the risk factors disclosed in Item 1A. Risk Factors in our 2021 Annual Report on Form 10-K.
Under the MGE Energy, Inc. Direct Stock Purchase and Dividend Reinvestment Plan (Stock Plan), common stock shares purchased by plan participants may be either shares issued by MGE Energy or shares purchased on the open market, as determined from time to time by MGE Energy. Shares issued by MGE Energy are covered by an existing registration statement. Shares purchased in the open market are purchased at the direction of the plan participants by MGE Energy's transfer agent's securities broker-dealer for the accounts of those plan participants. Subject to the plan's restrictions, the timing and amount of open market purchases is determined by the plan participants and the broker-dealer. MGE Energy is not involved in the open market purchases. During 2022, shares purchased under the Stock Plan have been purchased in the open market.
None.
Not applicable to MGE Energy and MGE.
Expected Issuance of Notes
On November 1, 2022, MGE entered into a private placement Note Purchase Agreement in which it committed to issue $25 million of 5.43% senior notes, Series A, due December 1, 2032, $15 million of 5.43% senior notes, Series B, due February 15, 2033, and $35 million of 5.53% senior notes, Series C, due February 15, 2035. Funding will occur on December 1, 2022 for Series A notes and on February 28, 2023 for Series B notes and Series C notes. The proceeds of the notes will be used to assist with capital expenditures and other corporate obligations.
The Series A, Series B, and Series C notes are redeemable at any time at MGE's option at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued interest to the redemption date and a make-whole premium (not less than zero) equal to the excess, if any, of the discounted present value of the remaining scheduled payments of principal and interest on the notes to be redeemed over the principal amount of the notes to be redeemed, except that no make-whole premium is due on a note that is redeemed during the 90-day period immediately preceding and ending on its maturity date. Following a change in control event, MGE must offer to prepay the notes at a price equal to 100% of the principal amount of the notes, plus accrued interest to the date of prepayment, but without any make-whole premium. The prepayment offer expires if not accepted by a holder of notes within a defined period. A change in control event is deemed to have occurred if MGE does not have an investment grade rating for its senior, unsecured, long-term indebtedness from at least two of Standard & Poor's Rating Services, Moody's Investors Service or any other nationally recognized statistical rating agency, within 90 days after an acquisition of beneficial ownership of 30% or more of the outstanding voting stock of MGE Energy, Inc. by one person, or two or more persons acting in concert.
Events of default under the Note Purchase Agreement include failures to pay principal, make-whole premium or interest on the notes; defaults in the performance of various covenants; cross-defaults to specified other indebtedness; failure to pay specified judgments; and certain bankruptcy-related events; subject to any applicable cure periods. The Note Purchase Agreement requires MGE to maintain a ratio of its consolidated indebtedness to consolidated total capitalization not to exceed a maximum of 65%. Both consolidated indebtedness and consolidated total capitalization are determined in accordance with generally accepted accounting principles, except that amounts included within MGE's indebtedness and capitalization from "variable interest entities" as a result of the application of FASB Interpretation No. 46, Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51, as modified, are excluded.
The Note Purchase Agreement also restricts MGE from issuing "Priority Debt" in an amount exceeding 20% of its consolidated assets. MGE has agreed not to use the capacity to issue Priority Debt to grant a lien to secure its principal credit facility indebtedness without simultaneously providing that the notes be equally and ratably secured with the principal credit facility indebtedness so long as such indebtedness is so secured. Priority Debt is defined as any indebtedness of MGE secured by liens other than specified liens permitted by the Note Purchase Agreement and certain unsecured indebtedness of certain subsidiaries. Principal credit facility indebtedness means the indebtedness under MGE's Amended and Restated Credit Agreements dated as of February 7, 2019, with the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, and with the lenders party thereto and US Bank National Association, as Administrative Agent, or, in each case, any replacement credit agreement, including amendments and restatements.
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Ex. No.
Exhibit Description
4.1
Note Purchase Agreement dated November 1, 2022, among MGE and the purchasers named therein, including form of 5.43% Senior Notes, Series A, due December 1, 2032; form of 5.43% Senior Notes, Series B, due February 15, 2033; and form of 5.53% Senior Notes, Series C, due February 15, 2035.
31.1
*
Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 filed by Jeffrey M. Keebler for MGE Energy, Inc.
31.2
Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 filed by Jared J. Bushek for MGE Energy, Inc.
31.3
Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 filed by Jeffrey M. Keebler for Madison Gas and Electric Company
31.4
Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 filed by Jared J. Bushek for Madison Gas and Electric Company
32.1
**
Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002) filed by Jeffrey M. Keebler for MGE Energy, Inc.
32.2
Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002) filed by Jared J. Bushek for MGE Energy, Inc.
32.3
Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002) filed by Jeffrey M. Keebler for Madison Gas and Electric Company
32.4
Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002) filed by Jared J. Bushek for Madison Gas and Electric Company
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.DEF
XBRL Taxonomy Extension Definition
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
104.1
Included in the cover page, formatted in Inline XBRL
Filed herewith.
Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MGE ENERGY, INC.
Date: November 3, 2022
/s/ Jeffrey M. Keebler
Jeffrey M. Keebler
Chairman, President and Chief Executive Officer
(Duly Authorized Officer)
/s/ Jared J. Bushek
Jared J. Bushek
Vice President - Finance, Chief Information Officer and Treasurer
(Chief Financial Officer)
/s/ Tamara J. Johnson
Tamara J. Johnson
Vice President - Accounting and Controller
(Chief Accounting Officer)
Signatures – Madison Gas and Electric Company
MADISON GAS AND ELECTRIC