MGE Energy

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

MGE Energy is a regulated public utility holding company, primarily engaged in providing electricity and natural gas services in Wisconsin, with a growing focus on renewable energy generation.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: MGE Energy (MGEE) operates through several segments:

Regulated Electric Operations: This segment generates, purchases, and distributes electricity to around 160,000 customers in Dane County, Wisconsin, through the use of coal, natural gas, solar, and wind power.
Regulated Gas Operations: This segment distributes natural gas to approximately 170,000 customers in several south central and western Wisconsin counties.
Nonregulated Energy Operations: This segment owns and operates electric generating capacity in the state and is involved in other related activities.
Transmission Investments: This segment represents MGEE’s equity investment in American Transmission Company (ATC), a transmission utility.

MGEE provides its services under a regulatory framework and has a history of stable operations, but the company’s push into renewables introduces elements of change in its business operations.

Industry Trends:

Transition to Renewables: The industry is rapidly shifting towards renewable energy sources, driven by environmental concerns and government mandates. MGEE is responding by expanding solar and wind generation capabilities.
Energy Efficiency: Consumers are becoming more energy-conscious, leading to initiatives focused on energy conservation and smart-grid technologies, and is likely to reduce the overall energy consumption.
Regulation: The utilities sector is heavily regulated and any changes to policies could greatly affect the financial results of such companies, and MGEE is not an exception to that.
Economic Conditions: Economic conditions can greatly affect the demand of electricity and gas, and thus, will have a major impact on MGEE’s business.
Weather and Natural Events: Unfavorable weather conditions, and major natural events can disrupt energy production and delivery, thus severely impacting operations.

Margins:

MGEE’s operating margins are very predictable due to its regulated nature. However, its push into renewables will likely increase costs in the short run and has made many investors skeptical of its future profitability.
Net income margins are also low at around 11%, and in fact, the company’s current financial goals, as stated in the most recent reports, is to maintain existing margins.

Competitive Landscape:

MGEE operates in a regulated market, which limits direct competition. However, the company faces competition from alternative energy providers and technologies such as solar panel companies, and others.
MGEE competes with other utilities on price, reliability of service, and how well they can transition into new trends in the market.

What Makes MGEE Different:

Emphasis on Sustainability: MGEE is publicly committed to generating net-zero carbon electricity by 2050. This strategy has enabled it to take advantage of tax incentives, grants, and positive community relationships.
Customer Base in Wisconsin: Being regulated, MGEE has a customer base in a state known for its environmental focus, which could improve the possibility of MGEE successfully completing its energy transition.
Partnership with University of Wisconsin: MGEE co-owns the UW-Madison’s West Campus Cogeneration facility, which also acts as a research and experimentation site for new and advanced energy technologies, giving it an edge in innovations.

Financials:

Revenue: Revenues come from the sales of electricity and natural gas to customers, and as of year-end 2022, electric sales represented 71.4% of total revenue, while natural gas sales contributed 28.6%.
Profitability: MGEE aims to maintain a strong credit rating and stable financials, with the goal of creating sustainable long-term value for shareholders, but is facing pressures from the green transition. * Debt: MGEE relies heavily on debt financing to operate, which gives it exposure to interest rate risk, and is also a concern for the business long term prospects.

Recent Developments, Concerns, and Management’s Outlook:

Earnings reports: As of March 31, 2023, earnings per share were $1.49, an increase of $.14 year over year.
Revenue increase: MGE is seeing a small increase in revenue from all sources, except for purchased power, which decreased due to a change in the pricing structure.
MGEE’s executives are focused on managing costs by using new systems and technologies that enable efficient operations. MGEE is also focusing heavily on maintaining strong relationships with all its stake holders.
MGEE believes that continued investment in clean generation is aligned with their goal of a sustainable energy future, and that has enabled them to obtain new grants and incentives from the federal government.
2023 MGEE Capital Expenditure: MGE has reported a planned capital expenditure of around 242 million dollars, primarily on renewable generation projects.
Management also noted during recent earnings calls that the push for a greener grid, and the company’s investments to reach its carbon-neutral goal, may lead to increased costs in the short term. However, they also said that all new investments will not add extra expenses to the consumers, as they are seeking alternative ways to fund them.

Moat Analysis:

Source of Moat: MGEE possesses a limited economic moat stemming from being a regulated utility. This regulation provides a stable income and a defined area, where they have virtually no competition.
Rating: MGEE’s moat is rated 2 / 5, which is a narrow moat that has low durability. Even though it is regulated, the business model is highly susceptible to changes and policies regarding future energy transition. Also, increasing focus on consumers using less energy through energy saving methods could impact the business negatively in the long run. Other forms of energy, such as renewable energy, could also compete with MGEE’s offering, which is why this business cannot be considered a durable, wide-moated business.

Legitimate Risks:

Regulatory Changes: Changes to the existing regulatory framework could drastically impact the financials and business decisions of MGEE.
Transition to Renewables: There is always some uncertainty involved when the transition occurs from a traditional energy business to a renewable energy one. Also, MGEE needs to compete with alternative energy sources and companies that are far ahead in renewables.
Interest Rates: Increased interest rates could increase the cost of debt, and therefore, the expenses of MGEE.
Economic Downturn: A severe economic downturn could reduce the usage of power and gas in MGEE’s territory, hurting revenues. * Customer demand changes: As more consumers use power through local solar and other methods, it would make MGEE much more vulnerable to a decline.

Business Resilience:

Being a regulated utility, MGEE provides basic essential services, which is why its revenues are somewhat stable.
However, MGEE’s management seems ill prepared to handle changes that are taking place in the market.

Understandability:

Rating: 2 / 5. Understanding the basic business of MGEE is relatively straightforward, as it provides electricity and gas to its customers under state regulation. However, understanding the regulatory environment, capital allocation methods, and the effect of changing energy trends on long-term revenue and profitability, adds quite a bit of complexity, especially from the investor’s perspective.

Balance Sheet Health:

Rating: 4 / 5. The business is dependent on debt financing, and although its current operations are well within its limits, MGEE will need to spend billions in the future to reach its clean energy goals, which will put it at risk of overleveraging.