MGE ENERGY INC

Previous wording

Regulated electric utility operations, conducted through MGE, which generate and distribute electricity to approximately 163,000 customers in Dane County, Wisconsin,

Current wording

Regulated electric utility operations, conducted through MGE, which generate and distribute electricity to approximately 167,000 customers in Dane County, Wisconsin,

Previous wording

Regulated gas utility operations, conducted through MGE, which distribute natural gas to approximately 176,000 customers in seven south-central and western Wisconsin counties,

Current wording

Regulated gas utility operations, conducted through MGE, which distribute natural gas to approximately 178,000 customers in seven south-central and western Wisconsin counties,

Previous wording

All other, which includes corporate operations and services.

Current wording

All other, which includes investing in companies and property that relate to the regulated operations and financing the regulated operations, through its wholly owned subsidiaries CWDC, MAGAEL, and North Mendota, and corporate operations and services.

Previous wording

Our primary focus is our core utility customers at MGE as well as creating long-term value for our shareholders. MGE seeks to meet its customers' expectations for reasonably priced, reliable electric and gas service provided in a reasonable manner. That responsibility is manifested in actions intended to achieve 80% carbon reduction by 2030 (from 2005 levels) and net-zero carbon by 2050, including:

Current wording

Our primary focus is our core utility customers, which are served by MGE as well as creating long-term value for our shareholders. MGE seeks to meet its customers' expectations for reasonably priced, reliable electric and gas service provided in a responsible manner. That responsibility is manifested in actions MGE has taken, and will continue to take, to achieve its goals of 80% carbon reduction by 2030 (from 2005 levels) and net-zero carbon by 2050, including:

Previous wording

We principally earn revenue and generate cash from operations by providing electric and natural gas utility services, including electric power generation and electric power and gas distribution. The earnings and cash flows from the utility business are sensitive to various external factors, including:

Current wording

We principally earn revenue and generate cash from operations by providing electric and natural gas utility services, including electric power generation and electric power and gas distribution. The earnings and cash flows from the utility business are sensitive to various external factors, including, but not limited to:

Previous wording

During the year ended December 31, 2023, MGE Energy's earnings were $117.7 million or $3.25 per share compared to $111.0 million or $3.07 per share for the same period in the prior year. MGE's earnings for the year ended December 31, 2023, were $90.5 million compared to $83.9 million for the same period in the prior year.

Current wording

During the year ended December 31, 2024, MGE Energy's earnings were $120.6 million or $3.33 per share compared to $117.7 million or $3.25 per share for the same period in the prior year. MGE's earnings for the year ended December 31, 2024, were $89.4 million compared to $90.5 million for the same period in the prior year.

Previous wording

MGE Energy's net income was derived from our business segments as follows:

Current wording

MGE Energy's net income (loss) was derived from our business segments as follows:

Previous wording

Lower gas retail sales resulting from warmer than normal weather contributed to lower gas earnings in 2023. Gas retail sales decreased approximately 13%. Heating degree days (a measure for determining the impact of weather during the heating season) decreased by approximately 15% in 2023 compared to the same period in the prior year.

Current wording

Lower gas retail sales resulting from warmer than normal weather in the first quarter of 2024 contributed to lower gas earnings in 2024. Gas retail sales decreased approximately 4% and heating degree days (a measure for determining the impact of weather during the heating season) decreased by approximately 6% in 2024 compared to the same period in the prior year.

Previous wording

In 2022, our share of ATC's earnings reflected an estimated possible loss of approximately $0.9 million inclusive of interest and net of tax, related to the August 2022 developments in the MISO transmission owners complaints on authorized return on equity. See additional information in "Other Matters" below.

Current wording

In 2024, our share of ATC's earnings reflected an increase in net income for the reduction of estimated possible loss of approximately $0.8 million inclusive of interest and net of tax, related to the October 2024 developments in the MISO transmission owners complaints on authorized return on equity. See additional information in "Other Matters" below.

Previous wording

2024/2025 Rate Proceeding: In December 2023, the PSCW approved a 1.54% increase to electric rates and 2.44% increase to gas rates for 2024. The PSCW also approved a 4.17% increase to electric rates and 1.32% increase to gas rates for 2025. See "Other Matters" below for additional information on the 2024/2025 Rate Proceeding.

Current wording

2024/2025 Rate Proceeding: In December 2023, the PSCW approved a 1.54% increase to electric rates and 2.44% increase to gas rates for 2024. The PSCW also approved a 4.17% increase to electric rates and 1.32% increase to gas rates in 2025. The PSCW approved a 2025 Fuel Cost Plan in December 2024. The plan lowered the 2025 increase in electric rates to 2.63%, reflecting lower expected fuel costs. See "Other Matters" below for additional information on the 2024/2025 rate proceeding.

Previous wording

In accordance with the 2024/2025 rate order from the PSCW, MGE will have an earnings sharing mechanism, under which, if MGE earns above the 9.7% authorized ROE: (i) the utility will retain 100.0% of earnings for the first 15 basis points above the authorized ROE; (ii) 50.0% of the next 60 basis points will be required to be refunded to customers; and (iii) 100.0% of any remaining excess earnings will be required to be refunded to customers.

Current wording

The 2024/2025 rate order includes an earnings sharing mechanism, under which, if MGE earns above the 9.7% ROE authorized in the rate order: (i) MGE will retain 100% of earnings for the first 15 basis points above the authorized ROE; (ii) 50% of the next 60 basis points will be required to be deferred and returned to customers; and (iii) 100% of any remaining excess earnings will be required to be refunded to customers. The earnings calculation excludes fuel rules adjustments.

Previous wording

Utility Solar: Large solar generation projects were recently completed or are under construction, as shown in the following table. Incurred costs are reflected in "Property, plant, and equipment, net" for projects placed in service, or "Construction work in progress" for projects under construction on the consolidated balance sheets.

Current wording

Large Scale Utility Projects: Large scale generation projects recently completed or under construction, are shown in the following table. Incurred costs are reflected in "Property, plant, and equipment, net" for projects placed in service, or "Construction work in progress" for projects under construction on the consolidated balance sheets.

Previous wording

MGE received specific approval to recover 100% AFUDC on Badger Hollow II, Paris, and Darien. After tax, MGE recognized $5.6 million, $2.2 million, and $0.6 million of AFUDC equity earnings through December 31, 2023, on Badger Hollow II, Paris, and Darien, respectively, during construction. AFUDC has been excluded from the costs incurred in the table above.

Current wording

MGE received specific approval to recover 100% AFUDC on Paris, Darien, and Koshkonong. After tax, MGE recognized $4.8 million, $2.7 million, and $0.2 million of AFUDC equity earnings through December 31, 2024, on Paris, Darien, and Koshkonong, respectively, during construction. AFUDC has been excluded from the costs incurred in the table above.

Previous wording

West Riverside. In March 2023, MGE purchased a 3.4% ownership interest in the natural gas-fired facility West Riverside from WPL, the operator of the plant, for approximately $25 million. MGE's share of the generation capacity of West Riverside is 25 MW.

Current wording

West Riverside. In June 2024, MGE purchased an additional 25 MW of capacity of West Riverside for approximately $25 million. After purchase, MGE owns 50 MW of capacity of West Riverside. West Riverside is a natural gas-fired generating plant.

Previous wording

Deferred Fuel Costs - Subject to Refund: As of December 31, 2023, MGE had deferred $7.2 million of 2023 fuel savings. These costs will be subject to the PSCW's annual review of 2023 fuel costs, expected to be completed during 2024. See Footnote 9.b. of the Notes to Consolidated Financial Statements in this Report for further information regarding fuel proceedings.

Current wording

Deferred Fuel Costs - Subject to Refund: As of December 31, 2024, MGE had deferred $3.0 million of 2024 fuel savings. These costs will be subject to the PSCW's annual review of 2024 fuel costs, expected to be completed during 2025. See Footnote 9.b. of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report for further information regarding fuel proceedings.

Previous wording

2022 Annual Fuel Proceeding: MGE under-recovered fuel costs in 2022. As of December 31, 2022, MGE had deferred $8.8 million of 2022 fuel costs. In August 2023, the PSCW issued a final decision in the 2022 fuel rules proceedings for MGE to recover these costs over a 12-Month period from October 2023 through September 2024. There was no change to the costs to be recovered in the fuel rules proceedings from the amount MGE deferred in the previous year.

Current wording

2023 Annual Fuel Proceeding: MGE had fuel savings in 2023. As of December 31, 2023, MGE had deferred $7.2 million of 2023 fuel costs. The PSCW has completed the annual review of 2023 fuel costs and approved MGE's return of these savings over a three-month period from October 2024 through December 2024. There was no change to the costs to be refunded as a result of the fuel rules proceedings from the amount MGE deferred in 2023.

Previous wording

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 6.4% and 5.9% of our net income for the years ended December 31, 2023 and 2022, respectively, from our investment in ATC.

Current wording

ATC Return on Equity: As discussed in "Other Matters" below, ATC's authorized ROE, which is used in calculating its rates and revenues, was 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. MGE Energy derived approximately 7.4% and 6.4% of net income for 2024 and 2023, respectively, from the investment in ATC.

Previous wording

During 2024, several items may affect us, including:

Current wording

During 2025, several items may affect our financial condition and results of operations, including:

Previous wording

Environmental Initiatives: There are proposed legislative rules and initiatives involving matters related to air emissions, water effluent, hazardous materials, and greenhouse gases, all of which affect generation plant capital expenditures and operating costs as well as future operational planning. Legislation and rulemaking addressing climate change and related matters could significantly affect the costs of owning and operating fossil-fueled generating plants. We would expect to seek and receive recovery of any such costs in rates. However, it is difficult to estimate the amount of such costs due to the uncertainty as to the timing and form of any legislation or rules, and the scope and time of the recovery of costs in rates, which may occur after those costs have been incurred and paid.

Current wording

Environmental Initiatives: There are proposed legislative rules and initiatives involving matters related to air emissions, water effluent, hazardous materials, and greenhouse gases, all of which affect generation plant capital expenditures and operating costs as well as future operational planning. Legislation and rulemaking addressing climate change and related matters could significantly affect the costs of owning and operating fossil-fueled generating plants. MGE would expect to seek and receive recovery of any such costs in rates. However, it is difficult to estimate the amount of such costs due to the uncertainty as to the timing and form of any legislation or rules, the timing and effects of any judicial review, and the scope and time of the recovery of costs in rates, which may occur after those costs have been incurred and paid.

Previous wording

Future Generation - 80% carbon reduction target by 2030 (from 2005 levels): MGE has outlined initiatives to achieve our raised target.

Current wording

Future Generation - 80% carbon reduction target by 2030 (from 2005 levels): MGE has outlined initiatives to achieve our target.

Previous wording

Transitioning away from coal. Columbia: MGE, along with the other plant co-owners, announced plans to retire Columbia Unit 1 and Unit 2 by June 2026. Final timing and retirement dates for Units 1 and 2 are subject to change depending on operational, regulatory, and other factors. MGE has a plan, which it continues to evaluate, to replace the generation from Columbia while maintaining electric service reliability.

Current wording

Transitioning away from coal. Columbia: MGE, along with the other plant co-owners, announced plans to retire Columbia Unit 1 and Unit 2 by the end of 2029. Final timing and retirement dates for Units 1 and 2 are subject to change depending on operational, regulatory, capacity needs, and other factors impacting one or more of the Columbia co-owners. MGE has a plan, which it continues to evaluate, to replace the generation from Columbia while maintaining electric service reliability. In December 2024, MGE and Columbia's co-owners announced plans to explore converting at least one unit of Columbia to natural gas before the end of 2029.

Previous wording

Environmental Initiatives – Natural gas distribution: Building upon our long-standing commitment to providing affordable, sustainable energy, MGE has set a goal to achieve net-zero methane emissions from its natural gas distribution system by 2035. If MGE can accelerate plans to achieve that goal—through the evolution of new technologies, such as renewable natural gas—it will. MGE is working to reduce overall emissions from its natural gas distribution system cost-effectively as quickly as possible.

Current wording

Environmental Initiatives – Natural gas distribution: Building upon our long-standing commitment to providing affordable, sustainable energy, MGE has set a goal to achieve net-zero methane emissions from its natural gas distribution system by 2035. If MGE can accelerate plans to achieve net-zero methane emissions from its natural gas system—through the evolution of new technologies, such as renewable natural gas—it will. MGE is working to reduce overall emissions from its natural gas distribution system in a quick and cost-effective manner. For customers who want to reduce their environmental footprint further, MGE introduced a renewable natural gas program in May 2024, after approval by the PSCW. MGE purchases renewable thermal credits on behalf of customers who voluntarily elect in the program to offset the emissions associated with the customer's monthly natural gas usage.

Previous wording

Solar Procurement Disruptions: MGE is monitoring import regulations under the Uyghur Forced Labor Protection Act and the U.S. Department of Commerce investigation on whether to impose new solar tariffs. These disruptions have a potential to impact current and future solar projects which may result in an increase in costs or delays in construction timelines. In the event that such disruptions cause costs to exceed the levels approved for specific projects, we have filed, and expect to continue to file, notifications with the PSCW and expect to request recovery of any cost increases in MGE's future rate proceedings. See "Other Matters" below for additional information on solar procurement disruptions.

Current wording

Solar Procurement Disruptions: MGE is monitoring import regulations under the Uyghur Forced Labor Protection Act and the U.S. Department of Commerce new solar tariffs. These disruptions have a potential to impact current and future solar projects which may result in an increase in costs or delays in construction timelines. In the event that such disruptions cause costs to exceed the levels approved for specific projects, we have filed, and expect to continue to file, notifications with the PSCW and expect to request recovery of any increases in MGE's future rate proceedings. See "Other Matters" below for additional information on the solar procurement disruptions.

Previous wording

The following discussion is based on the business segments as discussed in Footnote 22 of the Notes to Consolidated Financial Statements in this Report.

Current wording

The following discussion is based on the business segments as discussed in Footnote 22 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report.

Previous wording

Electric revenue increased $24.6 million during 2023 compared to 2022, due to the following:

Current wording

Electric revenue increased $7.9 million during 2024 compared to 2023, due to the following:

Previous wording

Rate changes. In December 2022, the PSCW authorized MGE to increase 2023 rates for retail electric customers by approximately 9.01%. Rates charged to retail customers during 2023 were $42.4 million higher than those charged during 2022. See Footnote 9 of the Notes to Consolidated Financial Statements in this Report for further information on the rate increase. Any increase in rates associated with fuel or purchase power costs are generally offset in fuel and purchased power costs and do not have a significant impact on net income.

Current wording

Rate changes. In December 2023, the PSCW authorized MGE to increase 2024 rates for retail electric customers by approximately 1.54%. Rates charged to retail customers during 2024 were $6.5 million higher than those charged during 2023. See Footnote 9 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report for further information on the rate increase. Any increase in rates associated with fuel or purchase power costs are generally offset in fuel and purchased power costs and do not have a significant impact on net income.

Previous wording

Customer fixed and demand charges. During 2023, fixed and demand charges decreased $3.2 million primarily attributable to the decrease in demand charges for commercial customers and decreased fixed residential customer charge.

Current wording

Customer fixed and demand charges. During 2024, fixed and demand charges increased $2.6 million primarily attributable to the increase in demand charges for commercial customers.

Previous wording

Sales to the market. Sales to the market typically occur when MGE has more generation and purchases in the MISO market than are needed for its customer demand. The excess electricity is then sold to other utilities or power marketers in the MISO market. During 2023, sales were made at lower market prices compared to 2022. The revenue generated from these sales is included in fuel rules monitored costs. See fuel rules discussion in Footnote 9 of the Notes to Consolidated Financial Statements.

Current wording

Sales to the market. Sales to the market typically occur when MGE has more generation and purchases in the MISO market than are needed for its customer demand. The excess electricity is then sold to other utilities or power marketers in the MISO market. During 2024, market volumes increased compared to 2023, reflecting increase in sales. However, the cost of capacity sold decreased offsetting the revenue generated from increased sales to the market from excess generation and purchases. The revenue generated from these sales is included in fuel rules costs. See fuel rules discussion in Footnote 9 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report.

Previous wording

Volume. During 2023, residential sales decreased by approximately 2% compared to 2022. The decrease was driven by unfavorable weather. Commercial, industrial, and other-retail/municipal sales decreased by approximately 1% during 2023 compared to 2022.

Current wording

Volume. During 2024, residential sales decreased by approximately 1% compared to 2023. The decrease was driven by unfavorable weather.

Previous wording

The $3.7 million decrease in fuel for electric generation was due to an approximately 11% decrease in the average cost offset by an approximately 5% increase in internal generation. West Riverside was purchased in March 2023 contributing to the increase in internal generation during 2023, compared to 2022.

Current wording

The $3.6 million decrease in fuel for electric generation was due to an approximately 17% decrease in the average cost, partially offset by an approximately 13% increase in internal generation. Renewable generation increased approximately 26% driven by new generation sources including Badger Hollow II.

Previous wording

Excluding deferred fuel costs, purchased power decreased $19.7 million. The decrease in purchased power was due to an approximately 18% decrease in market purchases as a result of lower customer sales and increased internal generation. An approximately 21% decrease in average cost also contributed to the decrease in purchase power costs. Deferred fuel cost recovered in 2023 is $5.4 million compared to $8.7 million deferred in 2022.

Current wording

Excluding deferred fuel costs, purchased power decreased $9.7 million. The decrease in purchased power was due to an approximately 30% decrease in market purchases as a result of increased internal generation. Furthermore, there was an approximately 4% increase in average cost partially offsetting the decrease in market purchases. Deferred fuel cost recovered in 2024 is $6.7 million compared to $5.4 million in 2023.

Previous wording

Fuel and purchased power costs are generally offset by electric revenue and do not have a significant impact on net income. MGE expects to seek and receive recovery of fuel and purchased power costs outside the fuel rules bandwidth in customer rates. See Footnote 9 of the Notes to Consolidated Financial Statements in this Report for further information on the fuel rules bandwidth.

Current wording

Fuel and purchased power costs are generally offset by electric revenue and do not have a significant impact on net income. MGE expects to seek and receive recovery of fuel and purchased power costs outside the fuel rules bandwidth in customer rates. See Footnote 9 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report for further information on the fuel rules bandwidth.

Previous wording

Gas revenue decreased $48.7 million during 2023 compared to 2022, due to the following:

Current wording

Gas revenue decreased $21.4 million during 2024 compared to 2023, due to the following:

Previous wording

Rate changes. In December 2021, the PSCW authorized MGE to increase 2023 rates for retail gas customers by 0.96%.

Current wording

Rate changes. In December 2023, the PSCW authorized MGE to increase 2024 rates for retail gas customers by 2.44%.

Previous wording

MGE recovers the cost of natural gas in its gas segment through the purchased gas adjustment clause (PGA). Under the PGA, MGE is able to pass through to its gas customers the cost of gas. Changes in PGA recoveries affect revenues but do not change net income in view of the pass-through treatment of the costs. Payments for natural gas decreased driving lower rates during 2023. The average retail rate per therm for 2023 decreased approximately 10% compared to 2022, reflecting a decrease in natural gas commodity costs (recovered through the PGA).

Current wording

MGE recovers the cost of natural gas in its gas segment through the purchased gas adjustment clause (PGA). Under the PGA, MGE is able to pass through to its gas customers the cost of gas. Changes in PGA recoveries affect revenues but do not change net income in view of the pass-through treatment of the costs. Payments for natural gas decreased driving lower rates during 2024.

Previous wording

Volume. For 2023, retail gas deliveries decreased approximately 13% compared to 2022 primarily related to unfavorable weather conditions in the current year.

Current wording

Volume. For 2024, retail gas deliveries decreased approximately 4% compared to 2023 primarily attributable to unfavorable weather conditions in the first half of 2024.

Previous wording

A $45.9 million decrease in cost of gas sold was driven by lower cost per therm of gas. Average cost per therm decreased approximately 20%. A decrease in volume of approximately 13% also contributed to the decrease in cost. MGE recovers the cost of natural gas in its gas segment through the PGA as described under gas deliveries and revenue above.

Current wording

Cost of gas sold decreased $24.0 million in 2024 compared to 2023. Cost per therm decreased approximately 19% and therms delivered decreased approximately 4%. MGE recovers the cost of natural gas in its gas segment through the PGA as described under "Gas deliveries and revenues" above.

Previous wording

For 2023, operations and maintenance expenses increased $6.1 million, compared to 2022. The following contributed to the net change:

Current wording

For 2024, operations and maintenance expenses increased $12.7 million, compared to 2023. The following contributed to the net change:

Previous wording

Electric other income increased $3.4 million and gas other income increased $0.4 million during 2023, compared to 2022, primarily related to pension and other postretirement other than service costs.

Current wording

Electric other income decreased $9.8 million and gas other income decreased $5.7 million during 2024, compared to 2023, primarily related to pension and other postretirement other than service costs.

Previous wording

Electric interest expense increased $3.0 million and gas interest expense increased $1.3 million during 2023, compared to 2022, primarily related to new long-term debt issuances. See Footnote 14 of the Notes to Consolidated Financial Statements in this Report for additional information on the new debt issuances.

Current wording

Electric interest expense increased $2.2 million and gas interest expense increased $0.8 million during 2024, compared to 2023, primarily related to new long-term debt issuances. See Footnote 14 of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report for additional information on the new debt issuances.