MGE Energy(MGEE) - 2021 Q4 - Annual Report

PART I Business MGE Energy operates as a regulated utility in Wisconsin, focusing on electricity and natural gas, with a strategic shift towards renewable energy and significant carbon reduction goals Business Segments MGE Energy's operations are primarily concentrated in its regulated electric and gas utility segments, alongside nonregulated energy, transmission, and corporate functions - The company's primary business segments are: * Regulated electric utility operations (MGE) * Regulated gas utility operations (MGE) * Nonregulated energy operations (MGE Power Elm Road, MGE Power West Campus) * Transmission investments (American Transmission Company LLC) * All other corporate and financing functions[27] Electric Utility Operations MGE's electric utility serves 159,000 customers, accounted for 69.4% of regulated revenues in 2021, and is transitioning to renewables and natural gas for an 80% carbon reduction by 2030 - MGE supplied electric service to approximately 159,000 customers as of December 31, 2021, with electric operations accounting for 69.4% of MGE's total regulated revenues for the year[25][28] Electric Energy Sources (in MWh) | Fuel Source | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Coal | 1,797,017 | 1,566,204 | 1,751,224 | | Natural gas | 405,696 | 502,387 | 501,093 | | Renewable sources | 581,374 | 485,965 | 470,716 | | Fuel oil | 884 | 472 | 695 | | Purchased power - other | 726,008 | 789,058 | 762,894 | | Total fuel sources | 3,510,979 | 3,344,086 | 3,486,622 | - MGE has set aggressive carbon reduction goals, targeting an 80% reduction by 2030 (from 2005 levels) and achieving net-zero carbon electricity by 2050, a strategy aligned with IPCC recommendations[36][37] - Key steps to decarbonization include: * Retiring Coal: The Columbia coal-fired plant (Units 1 & 2) will be retired by the end of 2023 and 2024, respectively * Transitioning to Gas: The Elm Road coal units will transition to natural gas as the primary fuel source, with coal use eliminated by 2035 * Investing in Renewables: Since 2015, MGE has been developing new wind and solar projects expected to increase its owned renewable capacity by more than nine times by 2024[38][41] Gas Utility Operations MGE's gas utility serves 169,000 customers, representing 30.6% of regulated revenues, and ensures supply reliability through pipeline interconnections and storage - As of December 31, 2021, MGE supplied natural gas to approximately 169,000 customers, with gas operations accounting for 30.6% of MGE's total regulated revenues in 2021[53] - MGE has interconnections with ANR Pipeline Company and Northern Natural Gas Company, providing access to gas from Canada and the mid-continent and Gulf Coast regions of the U.S[55] - The company utilizes gas storage, injecting up to 5.9 million Dth during summer months for withdrawal during the winter heating season to manage costs and ensure supply reliability[57] Nonregulated Energy Operations Nonregulated subsidiaries own and lease generation assets like Elm Road Units and WCCF to MGE, supporting the regulated utility's electricity supply - Nonregulated subsidiaries own the Elm Road Units and the West Campus Cogeneration Facility (WCCF), which are leased to MGE to support its electricity generation capacity[58][60] Transmission Investments MGE Energy, through MGE Transco, held a 3.6% ownership interest in American Transmission Company LLC (ATC) as of December 31, 2021 - As of December 31, 2021, MGE Energy, through its subsidiary MGE Transco, held a 3.6% ownership interest in American Transmission Company LLC (ATC)[61] Environmental The company faces extensive environmental regulations impacting costs, actively addressing climate change through carbon reduction goals and transitioning its generation portfolio - MGE is subject to numerous local, state, and federal environmental regulations affecting air quality, water quality, and solid waste disposal, which can materially affect capital and operating costs[63] - The company is managing compliance with several key EPA regulations, including the Effluent Limitations Guidelines (ELG) for wastewater, Cooling Water Intake Rules (Section 316(b)), and the Coal Combustion Residuals (CCR) Rule for coal ash[66][69][89] - MGE is actively addressing global climate change by setting voluntary GHG emission reduction targets, including an 80% CO2 reduction by 2030 and net-zero carbon electricity by 2050[80][81] Human Capital MGE Energy prioritizes workforce development, diversity, and inclusion, with 706 employees as of December 31, 2021, and 323 covered by collective bargaining agreements - The company emphasizes career development, diversity, and inclusion to manage an aging workforce and recent retirements of key employees[94][95] Employee Union Representation (as of Dec 31, 2021) | Union | Employees Represented | Agreement Expiration | | :--- | :--- | :--- | | IBEW Local 2304 | 229 | April 30, 2023 | | OPEIU Local 39 | 90 | May 31, 2023 | | USW Local 2006, Unit 6 | 4 | October 31, 2023 | Risk Factors The company faces significant regulatory, operational, and financial risks, including impacts from government regulation, weather, cyber-attacks, and market volatility Pandemic and Regulatory Risks The company faces material risks from pandemics and extensive government regulation, impacting costs, rates, and environmental compliance, particularly regarding climate change - The COVID-19 pandemic poses risks including reduced electricity and gas demand, delays in customer payments, regulatory delays, and volatility in capital markets[103][106] - The business is subject to extensive state (PSCW) and federal (FERC) regulation, which affects rates, cost recovery, and the ability to attract capital[105][107] - Changing environmental laws, especially concerning climate change and greenhouse gases, could significantly increase capital expenditures and operating costs[110][114] - Recovery of fuel and purchased power costs is subject to regulatory rules that may not allow for full recovery if costs fall outside a pre-determined tolerance band[117] Operating Risks Operational risks include weather impacts, reduced sales from self-generation, supply disruptions, cyber-attacks, IT system failures, and capital project completion challenges - Weather affects customer demand for electricity and gas, with extreme temperatures increasing demand while storms can damage equipment and increase costs[122] - Advancements in customer self-generation (e.g., solar) and energy efficiency could reduce electricity sales and affect the timing of cost recovery[123][124] - Cyber-attacks targeting control systems or customer data could disrupt operations, result in lost revenue, and lead to significant repair expenses and legal claims[135][136] - Major capital projects, such as renewable generation facilities, are subject to completion risks including cost overruns, delays, and the potential inability to recover excess costs in rates[141][142] - An aging workforce and failure to attract and retain qualified employees could lead to operating challenges, loss of knowledge, and increased costs[147] Financial Risks Financial risks include commodity price volatility, interest rate impacts on benefit plans, counterparty credit risk, dividend dependency on subsidiaries, and capital market disruptions - The company faces commodity price risk for natural gas, electricity, coal, and oil, which it manages through derivatives and physical contracts[148] - Changes in interest rates and capital market performance affect the costs and funding status of defined benefit pension plans, potentially requiring increased contributions[149] - As a holding company, MGE Energy is dependent on dividends from its subsidiaries to pay its own common stock dividend, and these subsidiary dividends are subject to regulatory and contractual restrictions[152][153] - A downgrade in credit ratings could increase borrowing costs and require additional collateral to be posted with counterparties[154] Properties The company's properties include 832 MW of diverse generation capacity, extensive electric and gas distribution networks, and assets subject to mortgage liens Net Summer Rated Capacity by Fuel Type (MW) as of Dec 31, 2021 | Fuel Type | Net Summer Rated Capacity (MW) | | :--- | :--- | | Low-sulfur Coal (Columbia) | 216 | | Coal (Elm Road Units) | 105 | | Natural Gas/Oil | 241 | | Wind | 23 | | Solar | 68 | | Total | 832 | - The Columbia coal-fired facility, which accounted for 26% of MGE's net summer capacity, is planned for retirement by the end of 2024[164][165] - The Elm Road Units, accounting for 13% of net summer capacity, are planned to transition from coal to natural gas[166] - As of December 31, 2021, MGE owned 846 miles of overhead and 1,298 miles of underground electric distribution lines, along with 3,013 miles of gas distribution mains[169] Legal Proceedings The company is involved in various ordinary course legal proceedings, including environmental matters, not expected to materially impact financial results - MGE Energy and its subsidiaries are involved in various legal proceedings handled in the ordinary course of business and do not expect them to have a material adverse effect[173][174] PART II Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities MGE Energy's common stock trades on Nasdaq, with its five-year total return lagging behind key indices, while MGE's stock is wholly owned by MGE Energy - MGE Energy common stock (MGEE) is traded on Nasdaq, and as of January 31, 2022, there were approximately 39,406 shareholders of record[177] - All outstanding shares of Madison Gas and Electric Company (MGE) common stock are held by MGE Energy; there is no public market for MGE stock[178] Cumulative Five-Year Total Return Comparison ($1,000 Investment) | | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | MGEE | $1,000 | $985 | $957 | $1,283 | $1,164 | $1,396 | | Russell 2000 | $1,000 | $1,146 | $1,020 | $1,281 | $1,536 | $1,764 | | EEI Index | $1,000 | $1,117 | $1,158 | $1,457 | $1,440 | $1,686 | Management's Discussion and Analysis of Financial Condition and Results of Operations MGE Energy's 2021 net income increased due to higher sales and new investments, supported by a strategic shift to renewables and substantial forecasted capital expenditures Executive Overview MGE Energy's 2021 net income increased to $105.8 million, driven by electric utility growth from new investments and higher sales, aligning with its 80% carbon reduction goal by 2030 MGE Energy Net Income by Business Segment (In millions) | Business Segment | 2021 | 2020 | | :--- | :--- | :--- | | Electric Utility | $63.9 | $50.5 | | Gas Utility | $15.5 | $14.2 | | Nonregulated Energy | $21.4 | $20.8 | | Transmission Investments | $6.9 | $7.4 | | All Others | $(1.9) | $(0.5) | | Net Income | $105.8 | $92.4 | - Earnings growth in 2021 was driven by returns on new electric investments (customer information system, Badger Hollow I) and higher electric retail sales due to warmer weather (846 cooling degree days in 2021 vs. 733 in 2020) and economic recovery from the COVID-19 pandemic[195][196] - The company is focused on achieving 80% carbon reduction by 2030 through initiatives like retiring the Columbia coal plant, transitioning the Elm Road units to natural gas, and growing its renewable generation portfolio[191][211] Results of Operations In 2021, operating income increased to $117.3 million, driven by higher electric and gas margins, partially offset by increased operations and maintenance expenses Operating Income and Margins (In millions) | | 2021 | 2020 | $ Change | | :--- | :--- | :--- | :--- | | Total Electric Margins (non-GAAP) | $326.3 | $309.1 | $17.2 | | Total Gas Margins (non-GAAP) | $85.9 | $80.6 | $5.3 | | Other operations and maintenance | $(199.3) | $(186.4) | $(12.9) | | Depreciation and amortization | $(77.0) | $(74.2) | $(2.8) | | Operating Income | $117.3 | $110.0 | $7.3 | - The $17.2 million increase in electric margin was driven by higher sales volumes to commercial and industrial customers (+$4.3M) due to economic recovery, and residential customers (+$1.5M) due to weather[222][223] - The $5.3 million increase in gas margin was primarily due to a 4.0% rate increase authorized by the PSCW for 2021[226][227] - Operations and maintenance expenses rose by $12.9 million, mainly from increased electric production maintenance (+$6.4M), higher transmission costs (+$4.1M), and increased customer account costs (+$2.4M) associated with the new information system[228][233] Liquidity and Capital Resources The company maintains adequate liquidity, with 2021 operating cash flow at $137.5 million, and forecasts $660.7 million in capital expenditures for 2022-2024, primarily for renewables Summary of Cash Flows - MGE Energy (In thousands) | | 2021 | 2020 | | :--- | :--- | :--- | | Cash Provided by Operating Activities | $137,527 | $172,443 | | Cash Used for Investing Activities | $(156,975) | $(210,412) | | Cash Provided by (Used for) Financing Activities | $(8,756) | $59,194 | Forecasted Capital Expenditures (In thousands) | Category | 2022 | 2023 | 2024 | | :--- | :--- | :--- | :--- | | Electric renewables | $101,900 | $113,500 | $95,500 | | Electric production | $14,100 | $42,000 | $33,800 | | Electric distribution | $49,300 | $46,300 | $51,600 | | Gas distribution | $32,800 | $28,100 | $29,900 | | Nonregulated | $7,000 | $8,100 | $6,800 | | MGE Energy total | $205,100 | $238,000 | $217,600 | - Significant planned renewable projects include Red Barn Wind (9.16MW), Badger Hollow II Solar (50MW), Paris Solar/Battery (20MW/11MW), Darien Solar/Battery (25MW/7.5MW), and Koshkonong Solar/Battery (30MW/16.5MW)[255] MGE Energy Capitalization Ratios | | 2021 | 2020 | | :--- | :--- | :--- | | Common shareholders' equity | 62.2% | 62.9% | | Long-term debt | 37.5% | 33.7% | | Short-term debt | 0.3% | 3.4% | Quantitative and Qualitative Disclosures About Market Risk MGE Energy manages market risks from commodity prices, interest rates, and equity returns through regulatory mechanisms, limited variable-rate debt, and credit policies - Commodity Price Risk: Exposure to natural gas, electricity, coal, and oil prices is largely mitigated by PSCW-approved recovery mechanisms, including the electric fuel rules (with a +/- 1% cost tolerance band) and the purchased gas adjustment (PGA) clause[316][317][318] - Interest Rate Risk: The company has exposure on short-term borrowings, where a hypothetical 1% change in 2021 average interest rates would have changed interest expense and net income by an estimated $0.1 million[323] - Equity Price Risk: Market performance of pension plan assets affects future benefit costs, where a 1% reduction in the expected rate of return on plan assets would increase annual pension and postretirement costs by approximately $4.7 million before taxes, though this is partly mitigated by rate recovery[324] - Credit Risk: The company is exposed to counterparty nonperformance in its merchant energy business and from retail customers, managed through credit policies, limits, and collateral arrangements, with no single customer constituting more than 10% of total operating revenues in 2021[325][328] Financial Statements and Supplementary Data This section provides MGE Energy's consolidated financial statements for 2021, including income statements, balance sheets, cash flows, and detailed notes on accounting policies and disclosures Consolidated Financial Statements MGE Energy reported $606.6 million in operating revenues and $105.8 million in net income for 2021, with total assets at $2.37 billion and $137.5 million in operating cash flow MGE Energy, Inc. Consolidated Statement of Income Highlights (In thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $606,584 | $538,633 | $568,855 | | Operating Income | $117,294 | $109,997 | $110,910 | | Net Income | $105,761 | $92,418 | $86,874 | | Diluted Earnings Per Share | $2.92 | $2.60 | $2.51 | MGE Energy, Inc. Consolidated Balance Sheet Highlights (In thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $199,371 | $209,519 | | Total Property, Plant, and Equipment | $1,878,774 | $1,769,385 | | Total Assets | $2,371,906 | $2,253,651 | | Total Current Liabilities | $117,847 | $190,926 | | Long-term debt | $614,211 | $519,303 | | Total Common Shareholders' Equity | $1,027,468 | $976,000 | | Total Liabilities and Capitalization | $2,371,906 | $2,253,651 | Notes to Consolidated Financial Statements The notes detail accounting policies, including VIE consolidation, regulatory assets and liabilities ($109.0M and $163.7M), rate case specifics, and commitments for commodity purchases - VIE Consolidation: MGE consolidates MGE Power Elm Road and MGE Power West Campus as Variable Interest Entities (VIEs) because it is the primary beneficiary through long-term lease agreements, despite not owning them directly[386][431] - Regulatory Accounting: As of Dec 31, 2021, the company recorded $109.0 million in regulatory assets (costs to be recovered from customers in the future) and $163.7 million in regulatory liabilities (amounts to be returned to customers)[345][456] - Rate Cases: The PSCW approved a settlement for 2022 rates, including an 8.81% increase for electric and 2.15% for gas, with an authorized return on common equity of 9.8% on a 55.6% common equity capital structure[476] - Commitments: As of Dec 31, 2021, the company had future minimum purchase commitments for commodities and services, including $20.7 million for coal and $23.3 million for natural gas transportation and storage in 2022[571] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of December 31, 2021, with no material changes during the quarter - As of December 31, 2021, the principal executive and financial officers concluded that the company's disclosure controls and procedures were effective[636] - No changes in internal controls over financial reporting occurred during the quarter ended December 31, 2021, that materially affected, or are reasonably likely to materially affect, internal controls[637] PART III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, and corporate governance, including the Code of Ethics, is incorporated by reference from the 2022 Proxy Statement - Information on directors and corporate governance is incorporated by reference from the definitive proxy statement to be filed before April 30, 2022[641] - The company has adopted a Code of Ethics for all directors and employees, including senior financial officers[643] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of December 31, 2021, 473,546 securities remained available for issuance under shareholder-approved equity compensation plans, excluding stock options Equity Compensation Plan Information as of December 31, 2021 | Plan category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted-average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by shareholders | — | $— | 473,546 | | Total | — | $— | 473,546 | Principal Accounting Fees and Services In 2021, the company paid $2,184,546 in fees to its independent accounting firm for audit, tax, and advisory services, all pre-approved by the Audit Committee Independent Registered Public Accounting Firm Fees | Fee Category | 2021 | 2020 | | :--- | :--- | :--- | | Audit fees | $1,124,568 | $1,018,659 | | Audit-related fees | $316,700 | $175,125 | | Tax fees | $35,478 | $76,339 | | All other fees | $607,800 | $843,475 | PART IV Exhibits and Financial Statement Schedules This section provides an index of all financial statements, schedules, and exhibits filed with the Form 10-K, including corporate documents and certifications - This section provides an index of all financial statements, schedules (such as Condensed Parent Company Financials and Valuation Accounts), and exhibits filed as part of the annual report[653][654][655]