General
MGE Energy is an investor-owned public utility holding company operating through
subsidiaries in five business segments:
?Regulated electric utility operations, conducted through MGE,
?Regulated gas utility operations, conducted through MGE,
?Nonregulated energy operations, conducted through MGE Power and its
subsidiaries,
?Transmission investments, representing our equity investment in ATC and ATC
Holdco, and
?All other, which includes corporate operations and services.
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 and distributes
electricity to approximately 155,000 customers in Dane County, Wisconsin,
including the city of Madison, and purchases and distributes natural gas to
approximately 163,000 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 campus of the University of Wisconsin in Madison. 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 meets this challenge by investing in more efficient
generation projects, including renewable energy sources. MGE continues to
examine and pursue opportunities to reduce the proportion that coal generation
represents in its generation mix, including the reduction in its ownership of
Columbia (a coal-fired generating facility) and its growing ownership of
renewable generation sources. MGE will continue to focus on growing earnings
while controlling operating and fuel costs. MGE maintains safe and efficient
operations in addition to providing customer value. We believe it is critical to
maintain a strong credit standing consistent with financial strength in MGE as
well as the parent company in order to accomplish these goals.
We earn our 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:
?Weather, and its impact on customer sales,
?Economic conditions, including current business activity and employment and
their impact on customer demand,
?Regulation and regulatory issues, and their impact on the timing and recovery
of costs,
?Energy commodity prices, including natural gas prices,
?Equity price risk pertaining to pension related assets,
?Credit market conditions, including interest rates and our debt credit rating,
?Environmental laws and regulations, including adopted and pending environmental
rule changes,
?Governmental efforts to address the COVID-19 pandemic, including restrictions
on activity, increased employee health and welfare costs, and precautions for
dealing with members of the public, and
?Other factors listed in "Item 1A. Risk Factors" in our 2019 Annual Report on
Form 10-K.
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During the three months ended June 30, 2020, MGE Energy's earnings were $18.8
million or $0.53 per share compared to $15.5 million or $0.45 per share during
the same period in the prior year. MGE's earnings during the three months ended
June 30, 2020, were $10.6 million compared to $8.3 million during the same
period in the prior year.
During the six months ended June 30, 2020, MGE Energy's earnings were $44.8
million or $1.28 per share compared to $39.6 million or $1.14 per share during
the same period in the prior year. MGE's earnings during the six months ended
June 30, 2020, were $29.7 million compared to $24.9 million during the same
period in the prior year.
MGE Energy's net income was derived from our business segments as follows:
Three Months Ended Six Months Ended
(In millions) June 30, June 30,
Business Segment: 2020 2019 2020 2019
Electric Utility $ 10.2 $ 7.9 $ 21.7 $ 17.2
Gas Utility 1.0 0.9 9.0 8.7
Nonregulated Energy 5.2 5.1 10.3 10.1
Transmission Investments 2.3 1.6 3.9 3.3
All Other 0.1 - (0.1) 0.3
Net Income $ 18.8 $ 15.5 $ 44.8 $ 39.6Our net income during the three and six months ended June 30, 2020, compared to
the same period in the prior year primarily reflects the effects of the
following factors:
Electric Utility
Electric net income increased primarily due to AFUDC equity earned from the
construction of Two Creeks and Badger Hollow I and II and savings in operating
and maintenance costs. An increase in assets included in rate base also
contributed to increased earnings for 2020. A reduction of retail sales driven
by the impacts of COVID-19 and associated governmental regulations reduced
electric earnings in 2020. Commercial retail sales decreased approximately 10%
in the second quarter of 2020 compared to the same period in the prior year.
This decrease was partially mitigated by an increase in residential sales of
approximately 20%. As businesses shifted their workforce to a remote work
environment, residential sales increased. The impact from COVID-19 was also
mitigated by warmer weather in the second quarter of 2020. Cooling degree days
(a measure for determining the impact of weather during the cooling season)
increased from 118 days in 2019 to 213 days in 2020.
Gas Utility
Gas net income increased primarily due to savings in operating and maintenance
costs and customer growth. An increase in assets included in rate base also
contributed to increased earnings for 2020. Colder than normal weather in the
first quarter of 2019 and milder weather in the first quarter of 2020 partially
offset this increase. Heating degree days (a measure for determining the impact
of weather during the heating season) decreased by 12.3% compared to 2019.
The following developments affected the first six months of 2020:
2019/2020 Rate Change Settlement: In December 2018, the PSCW approved a
settlement agreement between MGE and intervening parties in the then-pending
rate case. The settlement decreased electric rates by 2.24%, or $9.2 million, in
2019. MGE maintained this rate level for 2020, with the exception that MGE's
electric rates were adjusted by the 2020 Fuel Cost Plan. The decrease in
electric rates reflects the ongoing impacts of the Tax Act. Lower fuel costs and
an increase in rate base from renewable generation assets further impacted the
rate change. In 2020, electric rates decreased 0.84%, or $3.4 million, as
approved by the PSCW in December 2019 in the 2020 Fuel Cost Plan. The settlement
agreement increased gas rates by 1.06%, or $1.7 million, in 2019 and 1.46%, or
$2.4 million, in 2020. The increase covers infrastructure costs. Gas rates also
reflect the impacts of the Tax Act.
Pension and Other Postretirement Benefit Costs PSCW Deferral: As a result of
lower investment returns in the fourth quarter of 2018, pension and
postretirement benefit costs increased in 2019. In August 2019, the PSCW
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approved MGE's request to defer the difference between estimated pension and
other postretirement costs included in the 2019 and 2020 rate settlement and
actual costs incurred. In the second quarter of 2019, upon receiving the PSCW
decision, deferral of pension and other postretirement costs were recorded. No
deferral of pension and other postretirement costs were recorded in the first
quarter of 2019. During 2019, MGE deferred approximately $6.2 million of pension
and other postretirement costs. MGE expects to over-collect benefit costs in
2020 rates by approximately $1.2 million to $1.5 million. This amount will
reduce the regulatory asset that we expect to be factored into future rate
proceedings. During the three and six months ended June 30, 2020, MGE
over-collected approximately $0.2 million and $0.6 million, respectively, of
pension and other postretirement costs, which reduced the amount deferred in
2019. During the three and six months ended June 30, 2019, MGE deferred
approximately $3 million of pension and postretirement costs.
Utility Solar: Three jointly-owned solar generation projects are under
construction, as shown in the following table. Incurred costs are reflected in
"Construction work in progress" on the consolidated balance sheets. MGE has
received specific approval to recover 100% AFUDC on each project. After tax, MGE
recognized $1.2 million, $0.7 million, and less than $0.1 million of AFUDC
equity on Two Creeks and Badger Hollow I and II, respectively, during the six
months ended June 30, 2020.
Costs
Share of Incurred as Estimated
Share of Estimated of June 30, Completion
Project Generation Costs 2020 Date
$44.8
Two Creeks 50 MW $65 million million* End of 2020
$38.5
Badger Hollow I 50 MW $65 million million* April 2021
December
Badger Hollow II 50 MW $65 million $4.5 million* 2022
*Excluding AFUDC
Equity Issuance: In May 2020, MGE Energy issued 1.5 million shares of common
stock with net proceeds of $79.6 million in an underwritten offering. The
proceeds will be used for general corporate purposes including capital
expenditures such as Two Creeks, Badger Hollow I and II, RER (Renewable Energy
Rider) solar projects, and other capital projects.
In the near term, several items may affect us, including:
2021 Rate Change Settlement: In June 2020, MGE filed with the PSCW a letter of
intent to negotiate and enter into a settlement agreement for the pending 2021
rate case. As currently discussed, the proposed settlement would include a zero
percent increase for electric rates and would increase gas rates by
approximately 4% for 2021. The gas increase covers infrastructure costs and
technology improvements. The proposal also seeks escrow accounting treatment, a
mechanism to defer (over or under) actual costs from amounts included in the
rate estimate, for pension and other postretirement costs, bad debt expense and
customer payment credit card fees. Escrow accounting treatment would allow MGE
to defer any difference between estimated costs in rates and actual costs
incurred in its next rate filing. Any difference, if allowed, would be recorded
as a regulatory asset or regulatory liability. MGE currently expects no change
in the 2020 authorized return on common equity and capital structure for 2021.
Pension and Other Postretirement Benefit Costs: Costs for pension and other
postretirement benefits are affected by actual investment returns on the assets
held for those benefits and by the discount rate, which is sensitive to interest
rates, used to calculate those benefits. The value of employee benefit plan
assets has declined by approximately 2% during the six months ended June 30,
2020. The first half of 2020 decline in asset values, if not offset during the
remainder of 2020, could affect the value of the pension and postretirement
benefit obligations and may affect benefit costs in future years. These costs
are expected to be factored into future rate actions.
Tax Reform: Pursuant to the Tax Act, deferred income tax balances as of December
31, 2017, were remeasured to reflect the decrease in the corporate tax rate. A
regulatory liability of approximately $131 million was recorded to reflect the
fact that changes in income taxes are generally passed through in customer rates
for the regulated utility. The amount and timing of the cash impact will depend
on the period over which certain income tax benefits are provided to customers.
Approximately $117 million of the regulatory liability is a protected benefit
that is being returned to customers using a normalization method of accounting.
IRS normalization rules limit the rate at which MGE can return the benefits to
customers. As determined in the rate settlement agreement for 2019 and
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2020, MGE has included approximately $8.3 million of the protected benefit in
base rates. The return of the remaining portion will be addressed by the PSCW in
MGE's next rate case.
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 8.6%
and 8.0% of our net income during the six months ended June 30, 2020 and 2019,
respectively, from our investment in ATC. See "Other Matters" below for
additional information concerning 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. Such legislation and
rulemaking could significantly increase the costs of owning and operating
fossil-fueled generating plants, such as Columbia and the Elm Road Units, from
which we derived approximately 43% of our electric generating capacity as of
June 30, 2020. 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 the legislation and rules, and the
scope and time of the recovery of costs in rates, which may lag the incurrence
of those costs.
EPA's Affordable Clean Energy (ACE) Rule: In July 2019, the EPA published a
final ACE rule to reduce greenhouse gas emissions from existing coal-fired EGUs.
The ACE rule directs states to submit plans to the EPA for approval that
implement standards of performance (called Best System of Emissions Reductions,
or BSER) for individual coal-fired EGUs over 25 MW. The ACE rule will apply to
Columbia and the Elm Road Units. Compliance with the ACE rule may not be
required until 2024 or later. Until the State of Wisconsin develops a plan that
is accepted by the EPA, MGE will not be able to determine the final impact of
the rule. Additionally, the ACE rule is subject to a legal challenge pending in
the United States District Court of the District of Columbia. MGE will continue
to evaluate the rule development within the state and monitor ongoing and
potential legal proceedings associated with the rule.
Future Generation - 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 being constructed by WPL at its 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. MGE has not yet determined
whether it will exercise its option in the Riverside plant. A determination will
be made based on a variety of factors during the option period.
COVID-19 Update
With the global outbreak of the Coronavirus Disease 2019 (COVID-19) and the
declaration of a pandemic by the World Health Organization on March 11, 2020,
U.S. governmental authorities have deemed electric and gas utilities to be
critical infrastructure. MGE Energy therefore has an obligation to keep
operating and maintaining our critical electric and gas infrastructure. Since
then, MGE Energy has been subject to, and is following, local, state and federal
public health and safety regulations and guidance to control the pandemic. MGE
Energy has operated continuously throughout the pandemic and suffered no
material disruptions in service nor employment.
We discuss briefly various COVID-19-related events and their effects below:
?Governmental Actions. State and local governments and regulators have taken
steps to address the pandemic and its effects, which have affected levels of
economic activity, revenues and expense.
oState and Local Governments: State and local governments issued orders and
regulations to restrict or manage business and individual activity that
continues to evolve in response to changing health metrics and safety and health
guidance. A late March 2020 statewide Stay at Home order has given way to phased
activity resumption driven by local governments and public health departments.
Actions by Public Health Madison & Dane County (PHMDC) affect Dane County, which
comprises a majority of MGE's service area. PHMDC has issued several Emergency
Orders and the Forward Dane plan (collectively, the PHMDC Directives) addressing
activity during the pandemic. The PHMDC Directives provide for scaled re-opening
of businesses and increased activity for residents based upon specific health
metrics and consist of guidance and regulations
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concerning how and when residents can interact and conduct business. In general,
the PHMDC Directives: identify "essential" and "non-essential" businesses;
regulate how those entities may conduct business safely; restrict capacity
inside businesses depending upon business type and sector; limit the size of
private and public gatherings; and require masks for residents in public and
private buildings. The PHMDC Directives are subject to modification throughout
the pandemic based upon current health metrics in the county.
oRegulatory - PSCW Orders: On March 24, 2020, the PSCW ordered changes to the
tariff provisions of all public utilities in Wisconsin in response to the
COVID-19 pandemic, including prohibitions on service disconnections or refusals,
restrictions on customer credit terms (no cash deposits and requirements to
offer deferred payment agreements), and no late payment charges. The order
resulted in increased bad debt expense and foregone revenue. This Order as it
pertains to the prohibitions on service disconnections for residential customers
remains in effect until September 1, 2020. All other restrictions were lifted in
July 2020. As permitted by regulatory action, MGE notified the PSCW on July 16,
2020, of its election to continue to waive late fees for all customer classes
and seek recovery in a future period. The end date for this waiver period has
not yet been determined but is expected to be no later than December 31, 2020.
On March 24, 2020, the PSCW issued a further order authorizing deferral of
expenditures incurred to ensure the provision of safe, reliable, and affordable
access to utility services during the COVID-19 pandemic and late payment
charges. Expenditures may include items such as bad debt expense and personal
protective equipment. Foregone revenue from late payment charges and the
potential delay in payments from customers is expected to impact the timing of
cash inflows. Subject to PSCW approval of recovery, foregone late payment
charges are expected to be recognized as revenue when it is collected from
customers, and deferred expenditures are expected to be recognized as a
regulatory asset as costs are incurred (meaning that those expenditures will
affect cash flows when paid but will not affect income until recovery is
permitted by the PSCW). Recovery of expenditures and late payment charges is
expected to be addressed in future rate proceedings. While management believes
that cost recovery is probable, the timing of collection from customers cannot
be estimated at this time. Management will continue to assess the probability of
recovery of deferred costs as the COVID-19 pandemic progresses.
?Liquidity: We remain focused on maintaining strong credit quality. Subject to
the duration and severity of the COVID-19 pandemic, we believe we have adequate
liquidity on hand to support future operations and capital expenditures over the
next twelve months. As of June 30, 2020, MGE Energy and MGE had $51.6 million
and $18.0 million, respectively, in cash and cash equivalents and had the
respective available borrowing capacities under revolving credit facilities
noted below.
Outstanding
Commercial
Aggregate Bank Paper and
Borrower Commitments Borrowings Available Capacity Expiration Date
(Dollars in millions)
MGE Energy $ 50.0 $ - $ 50.0 February 7, 2024
MGE $ 100.0 $ - $ 100.0 February 7, 2024
The credit agreements require the borrower to maintain a ratio of consolidated
debt to consolidated total capitalization not to exceed a maximum of 65%. In the
case of MGE, the ratio calculation excludes assets, liabilities, revenues, and
expenses included in MGE's financial statements as a result of the consolidation
of VIEs, such as MGE Power Elm Road and MGE Power West Campus. The ratio of
consolidated debt to consolidated total capitalization for each of MGE Energy
and MGE, as calculated under the credit agreements' covenant, was 39.0% and
43.9%, respectively, as of December 31, 2019, and 36.3% and 39.4%, respectively,
as of June 30, 2020. See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- Credit Facilities in the 2019 Annual Report on Form 10-K for more information
about our credit facilities.
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?Revenue and Expense Impacts: We expect that adverse effects of COVID-19 and
associated governmental regulations will be partially mitigated due to three
primary factors. First, MGE has a large representation of commercial customers
in essential sectors, such as government and healthcare, which we expect to
return to more normal usage sooner than customers in nonessential sectors.
Second, industrial customers comprise a small proportion of MGE's total
customers, and we expect these customers to have the largest risk of changes in
energy usage. Third, we believe residential sales will continue to increase due
to the FD Plan.
We began to see the impacts of COVID-19 and associated governmental regulations
on customer demand in late March through the second quarter and continue to see
lower retail sales. Commercial sales were down approximately 10% in the second
quarter of 2020 compared to the same period in the prior year. In the second
quarter of 2020, the reduction in revenue due to COVID-19 and associated
governmental regulations was partially offset by cost containment measures, and
we expect this trend to continue into the second half of 2020. Residential sales
increased approximately 20% in the second quarter of 2020 compared to last year.
This effect was driven by businesses shifting their workforces to a remote work
environment. We will continue to assess the degree to which our discretionary
operations and maintenance expenses and capital spending can be reduced. This
reduction could consist of deferring nonessential spending such as travel,
conferences, and other discretionary costs.
?Capital Expenditures: We have some meaningful ability to shift the timing of
expenditures for capital projects, should that become necessary. We do not
currently expect COVID-19 or associated governmental regulations to
significantly delay or disrupt the Two Creeks solar project. Badger Hollow I
solar project was expected to be completed in 2020 and is now expected to be
completed in April 2021. Badger Hollow II was expected to be completed in 2021
and is now expected to be completed in December 2022. No significant increase in
costs is expected due to the delay. We will continue to monitor other capital
project timelines as presented in the 2020-2022 capital expenditure forecast
included under Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources in the
2019 Annual Report on Form 10-K.
?Operations: To date, MGE Energy has experienced no material disruptions in
utility operations. Our administrative personnel have been working largely
remotely, and our field operations have not been materially affected. We have
seen some additional expenses associated with personal protective equipment and
enhanced efforts to protect our personnel from the virus, which have been
deferred as a regulatory asset.
As the duration of general economic disruption increases, so does the potential
of a material adverse impact on our business. For this reason, although we
expect sales for the second half of 2020 to be negatively impacted by COVID-19
and associated governmental regulations, we cannot reasonably estimate with any
degree of certainty the actual impact they may have on future results of
operations, financial position, and liquidity. See Part II, Item 1A. "Risk
Factors" "Pandemic virus or diseases, including COVID-19, could have a material
adverse effect on our business, financial condition and liquidity."
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
Results of operations include financial information prepared in accordance with
GAAP and electric and gas margins, both which are non-GAAP measures. Electric
margin (electric revenues less fuel for electric generation and purchase power
costs) and gas margin (gas revenues less cost of gas sold) are non-GAAP measures
because they exclude items used in the calculation of the most comparable GAAP
measure, operating income. These exclusions consist of nonregulated operating
revenues, other operations and maintenance expense, depreciation and
amortization expense, and other general taxes expense. Thus, electric and gas
margin are not measures determined in accordance with GAAP.
Management believes that electric and gas margins provide a meaningful basis for
evaluating and managing utility
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operations since fuel for electric generation, purchase power costs, and cost of
gas sold are passed through without mark-up to customers in current rates. As a
result, management uses electric and gas margins internally when assessing the
operating performance of our segments. The presentation of utility electric and
gas margins herein is intended to provide supplemental information for investors
regarding operating performance. These electric and gas margins may not be
comparable to how other entities calculate utility electric and gas margin or
similar measures. Furthermore, these measures are not intended to replace
operating income as determined in accordance with GAAP as an indicator of
operating performance.
Three Months Ended June 30, 2020 and 2019
The following table provides a calculation of electric and gas margins (both
non-GAAP measures), along with a reconciliation to the most comparable GAAP
measure, operating income:
Three Months Ended June 30,
(In millions) 2020 2019 $ Change
Electric revenues $ 93.7 $ 96.9 $ (3.2)
Fuel for electric generation (8.7) (10.4) 1.7
Purchased power (10.9) (11.0) 0.1
Total Electric Margins 74.1 75.5 (1.4)
Gas revenues 23.1 25.1 (2.0)
Cost of gas sold (6.3) (8.9) 2.6
Total Gas Margins 16.8 16.2 0.6
Other operating revenues 0.2 0.2 -
Other operations and maintenance (46.2) (49.0) 2.8
Depreciation and amortization (18.4) (18.1) (0.3)
Other general taxes (5.0) (5.0) -
Operating Income $ 21.5 $ 19.8 $ 1.7Operating income during the three months ended June 30, 2020, compared to the
same period in the prior year primarily reflects the effects of the following
factors:
?Electric revenues and fuel costs
oA $3.2 million decrease in electric revenue driven by lower commercial sales as
a result of the COVID-19 pandemic and associated governmental regulations,
partially offset by increased residential sales and favorable weather
conditions. Commercial retail sales decreased by 10.3%, and residential sales
increased by 19.8%, when compared to the prior year.
oA $1.7 million decrease in fuel for electric generation driven by lower
generation and market costs and a decrease in customer demand.
oA $0.1 million decrease in purchased power costs driven by lower costs in the
market. Average cost per MWH decreased 2%.
?Gas revenues and cost of gas sold
oA $2.0 million decrease in gas revenue driven by lower rates from the
adjustment of purchased gas.
oA $2.6 million decrease in cost of gas sold driven by lower cost per therm of
gas. Average cost per therm decreased 26%.
?A $2.8 million decrease in other operations and maintenance. See consolidated
operations and maintenance expenses section below.
?A $0.3 million increase in depreciation and amortization expense.
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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 Three Months Ended June 30, Three Months Ended June 30,
cooling degree days) 2020 2019 % Change 2020 2019 % Change
Residential $ 34,874 $ 30,749 13.4 % 207,328 173,125 19.8 %
Commercial 47,388 52,762 (10.2)% 399,577 445,437 (10.3)%
Industrial 2,763 3,322 (16.8)% 38,431 44,314 (13.3)%
Other-retail/municipal 8,050 8,946 (10.0)% 84,491 97,004 (12.9)%
Total retail 93,075 95,779 (2.8)% 729,827 759,880 (4.0)%
Sales to the market 568 790 (28.1)% 19,554 21,614 (9.5)%
Other revenues 104 294 (64.6)% - - - %
Total $ 93,747 $ 96,863 (3.2)% 749,381 781,494 (4.1)%
Cooling degree days
(normal 181) 213 118 80.5 %
Electric margin, a non-GAAP measure, decreased $1.4 million during the three
months ended June 30, 2020, compared to the same period in 2019, due to the
following:
(In millions)
Decrease in commercial, industrial and other volume $ (2.5)
Customer fixed and demand charges (1.8)
Revenue subject to refund, net (0.9)
Rate changes (0.5)
Other (0.4)
Increase in residential volume 3.7
Decreased fuel costs 1.0
Total $ (1.4)
?Commercial, industrial, and other retail volume. During the three months ended
June 30, 2020, there was a 10.3% reduction in Commercial sales volumes compared
to the same period in the prior year driven by impacts from the COVID-19
pandemic and associated governmental regulations.
?Customer fixed and demand charges. During the three months ended June 30, 2020,
fixed and demand charges decreased $1.8 million primarily attributable to the
decrease in demand charges for commercial customers. The COVID-19 pandemic and
associated governmental regulations impacted commercial business operations
which led to reduced sales.
?Revenue subject to refund. For cost recovery mechanisms, any over-collection of
revenues resulting from the amount of costs authorized to be collected from
customers in rates exceeding actual costs is recorded as a reduction of revenue
in the period incurred, as the over-collection is expected to be refunded to
customers in a subsequent period.
?Rate changes. Rates charged to retail customers during the three months ended
June 30, 2020, were $0.5 million lower than those charged during the same period
in the prior year.
In December 2019, the PSCW approved the 2020 Fuel Cost Plan, which authorized
MGE to decrease 2020 rates for electric retail customers by 0.84%.
?Residential volume. During the three months ended June 30, 2020, there was a
19.8% increase in residential sales driven by favorable weather conditions as
well as the COVID-19 pandemic and associated governmental regulations. As
businesses shifted their workforce to a remote work environment, residential
sales increased.
?Fuel costs. Fuel costs decreased during the three months ended June 30, 2020,
primarily as a result of lower costs to generate and purchase electricity in the
market and lower customer demand.
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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:
Revenues Therms Delivered
(In thousands, except
HDD and average rate Three Months Ended June 30, Three Months Ended June 30,
per therm of retail
customer) 2020 2019 % Change 2020 2019 % Change
Residential $ 15,405 $ 16,000 (3.7)% 15,055 14,804 1.7 %
Commercial/Industrial 6,438 7,883 (18.3)% 13,513 14,723 (8.2)%
Total retail 21,843 23,883 (8.5)% 28,568 29,527 (3.2)%
Gas transportation 1,232 1,094 12.6 % 38,910 16,144 141.0 %
Other revenues 4 93 (95.7)% - - - %
Total $ 23,079 $ 25,070 (7.9)% 67,478 45,671 47.7 %
Heating degree days
(normal 816) 915 873 4.8 %
Average rate per
therm of
retail customer $ 0.765 $ 0.809 (5.4)%
Gas margin, a non-GAAP measure, increased $0.6 million during the three months
ended June 30, 2020, compared to the same period in 2019, due to the following:
(In millions)
Rate changes $ 0.3
Revenue subject to refund, net 0.2
Other 0.2
Decrease in volume (0.1)
Total $ 0.6
?Rate changes. In December 2018, the PSCW authorized MGE to increase 2020 rates
for retail gas customers by 1.46%.
?Revenue subject to refund. For cost recovery mechanisms, any over-collection of
revenues resulting from the amount of costs authorized to be collected from
customers in rates exceeding actual costs is recorded as a reduction of revenue
in the period incurred, as the over-collection is expected to be refunded to
customers in a subsequent period.
Consolidated operations and maintenance expenses
During the three months ended June 30, 2020, operations and maintenance expenses
decreased $2.8 million, compared to the same period in the prior year. The
following contributed to the net change:
(In millions)
Decreased electric production expenses $ (2.0)
Decreased transmission costs (0.7)
Decreased administrative and general costs (0.6)
Decreased other costs (0.4)
Increased electric distribution expenses 0.5
Increased gas distribution expenses 0.4
Total $ (2.8)
?Decreased electric production costs are primarily related to decreased
operations and maintenance costs at the Elm Road Units, Columbia, and Forward
Wind facility. Scheduled maintenance outages have been delayed for Columbia from
spring to fall of 2020.
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Consolidated depreciation expense
Electric depreciation expense increased $0.2 million and gas depreciation
expense increased $0.1 million during the three months ended June 30, 2020,
compared to the same period in the prior year.
Electric and Gas Other Income
Electric other income increased $0.8 million during the three months ended June
30, 2020, compared to the same period in the prior year, primarily related to
the AFUDC Equity from the construction of Two Creeks and Badger Hollow I and II.
Gas other income decreased $0.3 million during the three months ended June 30,
2020, compared to the same period in the prior year.
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 June 30, 2020 and 2019, net income at
the nonregulated energy operations segment was $5.2 million and $5.1 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. In the near term, it is expected that ATC
Holdco will be pursuing transmission development opportunities that typically
have long development and investment lead times before becoming operational.
During the three months ended June 30, 2020 and 2019, other income at the
transmission investment segment was $3.1 million and $2.3 million, respectively.
In May 2020, the FERC issued an opinion further refining the methodology for
setting the ROE that electric utilities are authorized to earn. 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 2020, the effective electric tax rate decreased as a result of higher AFUDC
equity from Badger Hollow I and II and Two Creeks and a tax credit generated by
the Saratoga Wind Farm. 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. 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:
Three Months Ended
June 30,
(In millions) 2020 2019
MGE Power Elm Road $ 4.0 $ 3.8
MGE Power West Campus 1.8 1.8
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Six Months Ended June 30, 2020 and 2019
The following table provides a calculation of electric and gas margins
(non-GAAP), along with a reconciliation to the most comparable GAAP measure,
operating income:
Six Months Ended June 30,
(In millions) 2020 2019 $ Change
Electric revenues $ 186.7 $ 194.3 $ (7.6)
Fuel for electric generation (18.4) (24.3) 5.9
Purchased power (21.3) (21.9) 0.6
Total Electric Margins 147.0 148.1 (1.1)
Gas revenues 79.9 95.2 (15.3)
Cost of gas sold (37.1) (52.2) 15.1
Total Gas Margins 42.8 43.0 (0.2)
Other operating revenues 0.3 0.3 -
Other operations and maintenance (90.6) (95.9) 5.3
Depreciation and amortization (36.6) (35.2) (1.4)
Other general taxes (9.9) (10.0) 0.1
Operating Income $ 53.0 $ 50.3 $ 2.7Operating income during the six months ended June 30, 2020, compared to the same
period in the prior year primarily reflects the effects of the following
factors:
?Electric revenues and fuel costs
oA $7.6 million decrease in electric revenue driven by lower commercial sales as
a result of the COVID-19 pandemic and associated governmental regulations,
partially offset by increased residential sales and favorable weather
conditions. Commercial retail sales decreased by 6.8% and residential sales
increased by 6.2%, when compared to the prior year.
oA $5.9 million decrease in fuel for electric generation driven by lower
generation and market costs and a decrease in customer demand.
oA $0.6 million decrease in purchased power costs driven by lower costs in the
market. Average cost per MWH decreased 7%.
?Gas revenues and cost of gas sold
oA $15.3 million decrease in gas revenue driven by lower customer demand
resulting from milder weather in the first quarter of 2020 and lower rates from
the adjustment of purchased gas.
oA $15.1 million decrease in cost of gas sold driven by lower cost per therm of
gas. Average cost per therm decreased 19%.
?A $5.3 million decrease in other operations and maintenance. See consolidated
operations and maintenance expenses section below.
?A $1.4 million increase in depreciation and amortization expense driven by the
timing of the commercial operation of Saratoga that took place in February 2019
as discussed in the consolidated depreciation expense section below.
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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 Six Months Ended June 30, Six Months Ended June 30,
cooling degree days) 2020 2019 % Change 2020 2019 % Change
Residential $ 68,302 $ 65,330 4.5 % 409,909 385,804 6.2 %
Commercial 95,022 102,015 (6.9)% 829,695 890,540 (6.8)%
Industrial 5,563 6,253 (11.0)% 78,849 85,423 (7.7)%
Other-retail/municipal 16,254 17,185 (5.4)% 165,536 177,740 (6.9)%
Total retail 185,141 190,783 (3.0)% 1,483,989 1,539,507 (3.6)%
Sales to the market 1,050 2,751 (61.8)% 43,500 73,138 (40.5)%
Other revenues 546 745 (26.7)% - - - %
Total $ 186,737 $ 194,279 (3.9)% 1,527,489 1,612,645 (5.3)%
Cooling degree days
(normal 181) 213 118 80.5 %
Electric margin, a non-GAAP measure, decreased $1.1 million during the six
months ended June 30, 2020, compared to the same period in 2019, due to the
following:
(In millions)
Decrease in commercial, industrial and other volume $ (3.3)
Customer fixed and demand charges (1.7)
Rate changes (1.2)
Revenue subject to refund, net (0.7)
Other (0.3)
Decreased fuel costs 3.5
Increase in residential volume 2.6
Total $ (1.1)
?Commercial, industrial, and other retail volume. During the six months ended
June 30, 2020, there was a 6.8% reduction in Commercial sales volumes compared
to the same period in the prior year driven by impacts from the COVID-19
pandemic and associated governmental regulations.
?Customer fixed and demand charges. During the six months ended June 30, 2020,
fixed and demand charges decreased $1.7 million primarily attributable to the
decrease in demand charges for commercial customers. The COVID-19 pandemic and
associated governmental regulations impacted commercial business operations
which led to reduced sales.
?Rate changes. Rates charged to retail customers during the six months ended
June 30, 2020, were $1.2 million lower than those charged during the same period
in the prior year.
In December 2019, the PSCW approved the 2020 Fuel Cost Plan, which authorized
MGE to decrease 2020 rates for electric retail customers by 0.84%.
?Revenue subject to refund. For cost recovery mechanisms, any over-collection of
revenues resulting from the amount of costs authorized to be collected from
customers in rates exceeding actual costs is recorded as a reduction of revenue
in the period incurred, as the over-collection is expected to be refunded to
customers in a subsequent period.
?Fuel costs. Fuel costs decreased during the six months ended June 30, 2020,
primarily as a result of lower costs to generate and purchase electricity in the
market and lower customer demand.
?Residential volume. During the six months ended June 30, 2020, there was a 6.2%
increase in residential sales driven by favorable weather conditions as well as
the COVID-19 pandemic and associated governmental regulations. As businesses
shifted their workforce to a remote work environment, residential sales
increased.
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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:
Revenues Therms Delivered
(In thousands, except
HDD and average rate Six Months Ended June 30, Six Months Ended June 30,
per therm of retail
customer) 2020 2019 % Change 2020 2019 % Change
Residential $ 48,892 $ 56,317 (13.2)% 61,857 69,062 (10.4)%
Commercial/Industrial 27,909 36,008 (22.5)% 53,213 61,060 (12.9)%
Total retail 76,801 92,325 (16.8)% 115,070 130,122 (11.6)%
Gas transportation 3,026 2,630 15.1 % 38,910 38,614 0.8 %
Other revenues 97 215 (54.9)% - - - %
Total $ 79,924 $ 95,170 (16.0)% 153,980 168,736 (8.7)%
Heating degree days
(normal 4,378) 4,140 4,720 (12.3)%
Average rate per
therm of
retail customer $ 0.667 $ 0.710 (6.1)%
Gas margin, a non-GAAP measure, decreased $0.2 million during the six months
ended June 30, 2020, compared to the same period in 2019, due to the following:
(In millions)
Decrease in volume $ (2.4)
Rate changes 1.2
Other 0.6
Revenue subject to refund, net 0.4
Total $ (0.2)
?Volume. During the six months ended June 30, 2020, retail gas deliveries
decreased 11.6% compared to the same period in the prior year primarily related
to less favorable weather conditions in the first quarter of 2020.
?Rate changes. In December 2018, the PSCW authorized MGE to increase 2020 rates
for retail gas customers by 1.46%.
?Revenue subject to refund. For cost recovery mechanisms, any over-collection of
revenues resulting from the amount of costs authorized to be collected from
customers in rates exceeding actual costs is recorded as a reduction of revenue
in the period incurred, as the over-collection is expected to be refunded to
customers in a subsequent period.
Consolidated operations and maintenance expenses
During the six months ended June 30, 2020, operations and maintenance expenses
decreased $5.3 million, compared to the same period in the prior year. The
following contributed to the net change:
(In millions)
Decreased administrative and general costs $ (3.4)
Decreased electric production expenses (2.2)
Decreased transmission costs (0.7)
Decreased other costs (0.3)
Increased gas distribution expenses 0.7
Increased electric distribution expenses 0.6
Total $ (5.3)
?Decreased administrative and general costs are primarily related to a decrease
in stock price and number of performance unit awards reducing the fair value
associated with the performance unit awards, which is
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remeasured quarterly. See Footnote 7 of the Notes to Consolidated Financial
Statements in this Report for additional information on performance unit awards.
Other drivers include a reduction in nonessential spending driven by the
COVID-19 pandemic and associated governmental regulations, which includes
training, travel expenses, and other discretionary spending.
?Decreased electric production expenses are primarily related to decreased
operations and maintenance costs at the Elm Road Units, Columbia, and Forward
Wind facility. Scheduled maintenance outages have been delayed for Columbia from
spring to fall of 2020.
Consolidated depreciation expense
Electric depreciation expense increased $1.1 million and gas depreciation
expense increased $0.3 million during the six months ended June 30, 2020,
compared to the same period in the prior year. MGE placed the Saratoga Wind Farm
in service in February 2019. Timing of the in-service date contributed to the
increase in electric depreciation expense.
Electric and Gas Other Income
Electric other income increased $1.6 million during the six months ended June
30, 2020, compared to the same period in the prior year, primarily related to
the AFUDC Equity from the construction of Two Creeks and Badger Hollow I and II.
Gas other income increased $0.1 million during the six months ended June 30,
2020, compared to the same period in the prior year.
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 six months ended June 30, 2020 and 2019, net income at
the nonregulated energy operations segment was $10.3 million and $10.1 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. In the near term, it is expected that ATC
Holdco will be pursuing transmission development opportunities that typically
have long development and investment lead times before becoming operational.
During the six months ended June 30, 2020 and 2019, other income at the
transmission investment segment was $5.4 million and $4.4 million, respectively.
In May 2020, the FERC issued an opinion further refining the methodology for
setting the ROE that electric utilities are authorized to earn. 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 2020, the effective electric tax rate decreased as a result of higher AFUDC
equity from Badger Hollow I and II and Two Creeks and a tax credit generated by
the Saratoga Wind Farm. 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
The 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; however, 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:
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Six Months Ended
June 30,
(In millions) 2020 2019
MGE Power Elm Road $ 7.7 $ 7.5
MGE Power West Campus 3.6 3.6
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 six months
ended June 30, 2020, 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 2019
Annual Report on Form 10-K.
Purchase Contracts - MGE Energy and MGE
See item c. within Footnote 8 of Notes to Consolidated Financial Statements in
this Report for a description of commitments as of June 30, 2020, that MGE
Energy and MGE have entered with respect to various commodity supply and
transportation contracts to meet their obligations to deliver natural gas to
customers.
Capital Expenditures - MGE Energy and MGE
Various contractual obligations contain minimum future commitments related to
capital expenditures for certain construction projects, including the Badger
Hollow II and other service area renewable solar projects. During 2020, MGE
entered into additional future minimum construction commitments of $71.4
million.
Long-term Debt - MGE Energy and MGE
MGE borrowed $19.3 million from the issuance by the City of Madison, Wisconsin
of Industrial Development Revenue Refunding Bonds in April 2020. The bonds bear
interest at 2.05% per annum for a term ending April 30, 2023, at which point
they will either be repriced and remarketed or redeemed and retired. The
proceeds of these bonds were used to refund $19.3 million of 3.45% City of
Madison, Wisconsin Industrial Development Revenue Refunding Bonds due October
2027, which had been issued to loan funds to MGE. See Footnote 6 of the Notes to
Consolidated Financial Statements in this Report for further discussion of the
bond issuance.
Liquidity and Capital Resources
Subject to the duration and severity of the COVID-19 pandemic, 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 capacity under
revolving credit facilities, and access to equity and debt capital markets. MGE
Energy expects to generate funds from both long-term debt financing, including
tax exempt, short-term debt financing, or through our Direct Stock Purchase and
Dividend Reinvestment Plan. 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 2019 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 six months
ended June 30, 2020 and 2019:
MGE Energy MGE
(In thousands) 2020 2019 2020 2019
Cash provided by (used for):
Operating activities $ 85,450 $ 85,884 $ 82,645 $ 85,286
Investing activities (88,693) (82,634) (86,107) (79,363)
Financing activities 51,321 (16,357) 18,185 (4,301)
Cash Provided by Operating Activities
MGE Energy
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 six months ended June 30, 2020,
was $85.5 million, a decrease of $0.4 million when compared to the same period
in the prior year.
MGE Energy's net income increased $5.3 million during the six months ended June
30, 2020, when compared to the same period in the prior year.
MGE Energy's federal and state taxes paid were $8.0 million during the six
months ended June 30, 2019. No payments were made during the six months ended
June 30, 2020. The CARES act extended the first and second quarter tax payments
until July 15, 2020, at which time $2.8 million was paid.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $1.8
million in cash used for operating activities during the six months ended June
30, 2020, primarily due to decreased other current liabilities and decreased
accounts payable, partially offset by decreased accounts receivable and
decreased unbilled revenues.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $14.4
million in cash provided by operating activities during the six months ended
June 30, 2019, primarily due to decreased unbilled revenues, decreased accounts
receivable, and decreased gas inventories, partially offset by decreased other
current liabilities.
An increase in pension contribution resulted in an additional $0.6 million in
cash used for operating activities for the six months ended June 30, 2020, when
compared to the same period in the prior year. Pension contributions reflect
amounts required by law and discretionary amounts.
Hosted software asset expenditures during the six months ended June 30, 2020
were $1.1 million. This amount represents a decrease of $3.0 million of cash
used when compared to the prior year.
MGE
Cash provided by operating activities during the six months ended June 30, 2020,
was $82.6 million, a decrease of $2.6 million when compared to the same period
in the prior year.
Net income increased $4.9 million during the six months ended June 30, 2020,
when compared to the same period in the prior year.
MGE's federal and state taxes paid were $7.4 million during the six months ended
June 30, 2019. No payments were made during the six months ended June 30, 2020.
The CARES act extended the first and second quarter tax payments until July 15,
2020, at which time $2.6 million was paid.
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Working capital accounts (excluding prepaid and accrued taxes) resulted in $0.1
million in cash used for operating activities during the six months ended June
30, 2020, primarily due decreased other current liabilities and decreased
accounts payable, partially offset by decreased accounts receivable and
decreased unbilled revenues.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $16.9
million in cash provided by operating activities during the six months ended
June 30, 2019, primarily due to decreased unbilled revenues, decreased accounts
receivable, and decreased gas inventories, partially offset by decreased other
current liabilities.
An increase in pension contribution resulted in an additional $0.6 million in
cash used for operating activities for the six months ended June 30, 2020, when
compared to the same period in the prior year. Pension contributions reflect
amounts required by law and discretionary amounts.
Hosted software asset expenditures during the six months ended June 30, 2020
were $1.1 million. This amount represents a decrease of $3.0 million of cash
used when compared to the prior year.
Cash Used for Investing Activities
MGE Energy
MGE Energy's cash used for investing activities increased $6.1 million during
the six months ended June 30, 2020, when compared to the same period in the
prior year.
Capital expenditures during the six months ended June 30, 2020, were $85.2
million. This amount represents an increase of $6.1 million from the
expenditures made in the same period in the prior year. This increase primarily
reflects expenditures on the construction of the Two Creeks and Badger Hollow I
and II solar construction projects. 2020 capital expenditures increased $21.8
million over the prior year related to the Two Creeks and Badger Hollow I and II
solar construction projects. Total cost of the two projects is expected to be
approximately $130 million.
MGE
MGE's cash used for investing activities increased $6.7 million during the six
months ended June 30, 2020, when compared to the same period in the prior year.
Capital expenditures during the six months ended June 30, 2020, were $85.2
million. This amount represents an increase of $6.1 million from the
expenditures made in the same period in the prior year. This increase primarily
reflects expenditures on the construction of the Two Creeks and Badger Hollow I
and II solar construction projects. 2020 capital expenditures increased $21.8
million over the prior year related to the Two Creeks and Badger Hollow I and II
solar construction projects. Total cost of the two projects is expected to be
approximately $130 million.
Cash Provided by/Used for Financing Activities
MGE Energy
Cash provided by MGE Energy's financing activities was $51.3 million during the
six months ended June 30, 2020, compared to $16.4 million of cash used for MGE
Energy's financing activities for the same period in the prior year.
During the six months ended June 30, 2020, dividends paid were $25.0 million
compared to $23.4 million in the prior year. The increase reflected a higher
dividend rate per share ($0.705 vs. $0.675).
During the six months ended June 30, 2020, MGE Energy issued common stock for
net proceeds of $79.6 million, which will used for general corporate purposes
including capital expenditures such as Two Creeks, Badger Hollow I and II,
Renewable Energy Rider solar projects, and other capital projects.
During the six months ended June 30, 2020, MGE borrowed $19.3 million of
Industrial Development Revenue Refunding Bonds which was used to refinance $19.3
million of existing Industrial Development Revenue Refunding Bonds at a lower
interest rate.
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During the six months ended June 30, 2019, net short-term debt borrowings were
$10.5 million. There were no net short-term debt borrowings during the six
months ended June 30, 2020.
MGE
During the six months ended June 30, 2020, cash provided by MGE's financing
activities was $18.2 million, compared to $4.3 million of cash used for MGE's
financing activities for the same period in the prior year.
Capital contributions made by MGE Energy to MGE were $30.0 million during the
six months ended June 30, 2020. There were no capital contributions made by MGE
Energy to MGE during the six months ended June 30, 2019.
Distributions to parent from noncontrolling interest, which represent
distributions from MGE Power Elm Road and MGE Power West Campus to MGE Energy,
were $8.5 million during the six months ended June 30, 2020, compared to $11.5
million in the prior year.
During the six months ended June 30, 2020, MGE borrowed $19.3 million of
Industrial Development Revenue Refunding Bonds which was used to refinance $19.3
million of existing Industrial Development Revenue Refunding Bonds at a lower
interest rate.
During the six months ended June 30, 2019, net short-term debt borrowings were
$10.5 million. There were no net short-term debt borrowings during the six
months ended June 30, 2020.
Capitalization Ratios
MGE Energy's capitalization ratios were as follows:
MGE Energy
June 30, 2020 December 31, 2019
Common shareholders' equity 63.8 % 61.2 %
Long-term debt(a) 36.2 % 38.8 %
(a)Includes the current portion of long-term debt.
MGE Energy's and MGE's Capital Requirements
MGE Energy's and MGE's liquidity are primarily affected by their capital
expenditure requirements. During the six months ended June 30, 2020, capital
expenditures for MGE Energy and MGE totaled $85.2 million, which included $83.7
million of utility capital expenditures. Included in the utility capital
expenditures are costs associated with the Two Creeks and Badger Hollow I and II
solar construction projects.
Currently the COVID-19 pandemic and associated governmental regulations are not
expected to significantly delay or disrupt the Two Creeks solar project. Badger
Hollow I solar project was expected to be completed in 2020 and is now expected
to be completed in April 2021. Badger Hollow II solar project was expected to be
completed in December 2021 and is now expected to be completed in December 2022.
No significant increase in costs is expected due to the delays. We will continue
to monitor other capital project timelines as presented in the 2020-2022 capital
expenditure forecast included under Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources in the 2019 Annual Report on Form 10-K.
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 borrowings are subject to default or prepayment as
a result of a downgrading of credit ratings, although a downgrading of MGE's
credit ratings could increase fees and interest charges under both
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MGE Energy's and MGE's credit agreements.
Environmental Matters
The following discussion is limited to updates or developments in environmental
matters that occurred during the six months ended June 30, 2020. Further
discussion of environmental matters is included in the 2019 Annual Report on
Form 10-K and Footnote 8.a. of Notes to Consolidated Financial Statements in
this Report.
Federal and State Environmental Compliance During the Current Pandemic
MGE was identified as an essential business under the State of Wisconsin's Safer
at Home directive. It has been operating with full staff and has continued to
prioritize its compliance with all applicable environmental regulations. MGE
continues to follow local orders, as well as state department of health and
Center for Disease Control guidance to operate in a manner to address potential
spread of COVID-19 in order for the essential utility services to operate
without interruptions. The EPA and the WDNR have both provided guidance for
regulated entities if compliance with regulations becomes unfeasible due to the
current outbreak of COVID-19. In late June 2020, the EPA announced that COVID-19
guidance sunsets on August 31, 2020. MGE has developed contingencies for
remaining in compliance during the pandemic and does not expect to rely on state
or federal noncompliance relief. However, management cannot predict with
certainty whether COVID-19 will disrupt these compliance activities. MGE will
continue to build contingencies into compliance operations and communicate with
regulators as needed during this unprecedented time.
Ozone National Ambient Air Quality Standards (NAAQS): Remand of EPA's Decision
to Give a Partial Attainment to Milwaukee County
In May 2018, the EPA issued a final rule that designated the northeast portion
of Milwaukee County as being in nonattainment with the Ozone NAAQS. All other
portions of Milwaukee County were deemed in attainment with Ozone NAAQS. The Elm
Road Units are located in Milwaukee County, outside the designated nonattainment
area. In August 2018, several environmental groups, the City of Chicago, and the
State of Illinois filed federal lawsuits challenging several of the EPA's
attainment designation decisions, including the partial Milwaukee County
designation as being too narrow and not sufficiently protective. In July 2020,
the United States District Court of the District of Columbia remanded the
partial Milwaukee County attainment designation back to EPA for further
explanation. MGE is monitoring the outcome of EPA's remand analysis and how it
may affect our Elm Road Units in Milwaukee County. At this time, MGE expects
that the 2015 Ozone NAAQS will not have a material effect on its existing plants
based on final designations.
Other Matters
ATC
2013 FERC Complaint - In 2013, several parties filed a complaint with the FERC
seeking to reduce the base return on equity (ROE) used by MISO transmission
owners, including ATC. The complaint provided for a statutory refund period of
November 2013 through February 2015. The complaint asserted that the MISO ROE
should not exceed 9.15%, that the equity components of hypothetical capital
structures should be restricted to 50%, and that the relevant incentive ROE
adders should be discontinued. At the time MISO's base ROE was 12.38% and ATC's
base ROE was 12.2%. On September 28, 2016, FERC issued an order, for the period
November 2013 through February 2015, reducing ATC's base ROE to 10.32%. In
November 2019, FERC issued an order to further reduce ATC's base ROE to 9.88%.
In May 2020, the FERC issued an opinion further refining the methodology for
setting the ROE that electric utilities are authorized to earn. This increased
the ROE from 9.88% to 10.02%. This base ROE is effective for the 2013 FERC
complaint period and for all periods following September 2016.
2015 FERC Complaint - In February 2015, several parties filed a complaint with
the FERC seeking to reduce the base ROE used by MISO transmission owners,
including ATC, to 8.67%. The complaint provided for a statutory refund period of
February 2015 through May 2016 with a refund effective date retroactive to the
complaint filing date. In June 2016, an administrative law judge issued an
initial decision for the complaint that would reduce the transmission owner's
base ROE to 9.7%. In November 2019, FERC issued an order dismissing the
complaint with the determination that the ROE was reasonable. As a result of
this order and the methodology FERC used to
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determine the applicable ROE in the 2013 FERC complaint, several parties have
requested a rehearing by FERC. If FERC denies these requests, the complainants
are likely to file an appeal with the appellate court. Any change to ATC's ROE
could result in lower equity earnings and distributions from ATC in the future.
In January 2015, FERC accepted the transmission owners' request for a 50
basis-point incentive ROE adder for participating in MISO. The adder became
effective January 6, 2015.
As of December 31, 2018, our share of the estimated refund recorded was $2.5
million, including interest. Following the November 2019 order, our share of
ATC's earnings reflects a pre-tax adjustment of $2.0 million, including
interest, related to the 2013 complaint refund period and from September 28,
2016 through December 31, 2019. As a result of the May 2020 order, our share of
ATC's earnings reflects a $0.6 million reduction of our reserve. Additionally,
our share of ATC's earnings reflects the derecognition of a possible refund
related to the 2015 complaint as ATC considers such a refund to be no longer
considered probable due to FERC's November 2019 dismissal of that complaint.
However, due to pending requests for rehearing, a loss related to the 2015
complaint remains possible. Our share of the estimated refund for the 2015
complaint is approximately $2.4 million. As of December 31, 2019, our share of
the estimated refund amount reflected a net increase in ATC's earnings with a
pre-tax adjustment of $0.6 million, inclusive of interest. We derived
approximately 8.6% and 8.0% of our net income during the six months ended June
30, 2020 and 2019, respectively, from our investment in ATC.
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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