# MGE ENERGY INC (MGEE) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MGE ENERGY INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1161728/000095017024017706/mgee-20231231.htm
Accession: 0000950170-24-017706
Filing date: 2024-02-21
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MGEE/
All MD&A years: /company/MGEE/mda/
Previous year: /company/MGEE/mda/fy2022/ (FY 2022)
Next year: /company/MGEE/mda/fy2024/ (FY 2024)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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, which generate and distribute electricity to approximately 163,000 customers in Dane County, Wisconsin,

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

•
Nonregulated energy operations, conducted through MGE Power and its subsidiaries, which owns interests in electric generating capacity that is leased to MGE,

•
Transmission investments, representing our equity investment in ATC, which owns and operates electric transmission facilities primarily in Wisconsin, and ATC Holdco, a company created to facilitate out-of-state electric transmission development and investments, and

•
All other, which includes corporate operations and services.

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:

•
reducing the proportion that coal generation represents in its generation mix, as evidenced by its announcements of the retirement of Columbia (a coal generation plant) and the planned change in the Elm Road Units fuel source from coal to natural gas, and

•
growing ownership of renewable generation sources.

MGE will continue to focus on growing earnings while controlling operating and fuel costs. MGE's goal is to provide safe and efficient operations in addition to providing customer value. We believe it is critical to maintain a strong credit rating consistent with financial strength in MGE in order to accomplish these goals.

The ownership/leasing structure for our nonregulated energy operations was adopted under applicable state regulatory guidelines for MGE's participation in these generation facilities, consisting principally of a stable return on the equity investment in the new generation facilities over the term of the related leases. The nonregulated energy operations include an ownership interest in two coal-fired generating units in Oak Creek, Wisconsin and a partial ownership of a cogeneration project on the UW-Madison campus. A third party operates the units in Oak Creek, and MGE operates the cogeneration project. Due to the nature of MGE's participation in these facilities, the results of MGE Energy's nonregulated operations are also consolidated into MGE's consolidated financial position and results of operations under applicable accounting standards.

We have not included a discussion of results of operations and changes in financial position for the year ended December 31, 2022, as compared to the year ended December 31, 2021. That discussion can be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 22, 2023.

Executive Overview

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:

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Weather, and its impact on customer sales,

•
Economic conditions, including current business activity and employment and their impact on customer demand,

•
Rates, 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,

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•
Credit market conditions, including interest rates and our debt credit rating,

•
Environmental laws and regulations, including adopted and pending environmental rule changes, and

•
Other factors listed in Item 1A. Risk Factors of this Report.

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.

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

[[GREPCENT_TABLE]]
[["(In millions)","","Year Ended December 31,"],["Business Segment:","","2023","","","2022"],["Electric Utility","","$","75.9","","","$","65.2"],["Gas Utility","","","14.1","","","","18.2"],["Nonregulated Energy","","","22.4","","","","22.1"],["Transmission Investments","","","7.7","","","","6.7"],["All Other","","","(2.4",")","","","(1.2",")"],["Net Income","","$","117.7","","","$","111.0"]]
[[/GREPCENT_TABLE]]

Our net income during 2023 compared to 2022 primarily reflects the effects of the following factors:

Electric Utility

An increase in electric investments contributed to earnings for 2023. Timing of depreciation expense and lower fuel costs also contributed to higher earnings in 2023. Depreciation expense is expected to increase in 2024 with the completion of significant capital projects such as Badger Hollow II and Paris.

Gas Utility

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.

Transmission Investments

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.

All Other

Investment losses from our venture capital funds resulted in lower earnings in 2023 compared to the same period in the prior year. These venture capital investments support early-stage companies working to advance smart technologies, the customer experience, distributed energy resources, electrification, cybersecurity and other priorities for utility companies such as greater sustainability.

Significant Events

The following events affected 2023:

2022/2023 Rate Settlement Agreement and 2023 Electric Limited Rate Case Reopener: In December 2021, the PSCW approved a settlement agreement for MGE's 2022 rate case. As part of that settlement agreement, the PSCW approved a 0.96% increase in 2023 gas rates and a 2023 electric rate change to be addressed through a limited rate case reopener. In December 2022, the PSCW approved an 9.01% increase to electric rates for 2023. See "Other Matters" below for additional information on the 2022/2023 rate case settlement and 2023 Electric Limited Rate Case Reopener.

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

[[GREPCENT_TABLE]]
[["Project","","Ownership Interest","","Source","","Share of Generation","","Share of Estimated Costs(a)","","Costs Incurred as of December 31, 2023(a)","","Date of Commercial Operation"],["Red Barn","","10%","","Wind","","9.16 MW","","$18 million","","$16.7 million","","April 2023"],["Badger Hollow II","","33%","","Solar","","50 MW","","$86 million(e)","","$81.6 million(b)(c)","","December 2023"],["Paris","","10%","","Solar/Battery","","20 MW/11 MW","","$61 million(e)","","$35.0 million(b)","","2024(d) Solar 2025(d) Battery"],["Darien","","10%","","Solar","","25 MW","","$46 million(e)(f)","","$25.5 million(b)","","2024(d)"]]
[[/GREPCENT_TABLE]]

(a)
Excluding AFUDC.

(b)
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.

(c)
Includes an allocation of common facilities at Badger Hollow placed in service in November 2021.

(d)
Estimated date of commercial operation.

(e)
Estimated costs are expected to exceed PSCW previously approved CA levels. Notifications are provided to the PSCW when costs increase above CA levels. MGE has requested, and will continue to request, recovery of the updated estimated costs in its rate case proceedings.

(f)
As part of its order, the PSCW approved battery capacity with this project, which is no longer included in the current estimate. We will continue to evaluate timing, cost, and feasibility of the installation of batteries.

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.

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.

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.

During 2024, several items may affect us, including:

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.

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.

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.

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

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generating plants. We would expect to seek and receive recovery of any such costs in rates. However, it is difficult to estimate the amount of such costs due to the uncertainty as to the timing and form of any legislation or rules, and the scope and time of the recovery of costs in rates, which may occur after those costs have been incurred and paid.

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

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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.

Elm Road Units: MGE, along with the plant co-owner, announced plans to end the use of coal as a primary fuel at the Elm Road Units and transition the plant to natural gas. Transition plans and costs will be subject to PSCW approval. MGE's remaining use of coal is expected to be further reduced as the Elm Road Units transition to natural gas. By the end of 2030, coal is expected to be used only as a backup fuel at the Elm Road Units. This transition will help MGE meet its 2030 carbon reduction goals. By the end of 2032, MGE expects that the Elm Road Units will be fully transitioned away from coal, which will eliminate coal as an internal generation source for MGE.

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Growing renewable generation. MGE is seeking to acquire a joint interest in several renewable generation projects. See our 2024-2028 capital expenditures forecast included under "Liquidity and Capital Resources" below for information on these projects.

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Natural gas as a fuel source. West Riverside: MGE is seeking PSCW approval to purchase an additional ownership interest in West Riverside. See the 2024-2028 capital expenditures forecast included under "Liquidity and Capital Resources" below for additional information on West Riverside.

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.

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.

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

Results of Operations

Year Ended December 31, 2023, Versus the Year Ended December 31, 2022

Electric sales and revenues

The following table compares MGE's electric revenues and electric kWh sales by customer class for each of the years indicated:

[[GREPCENT_TABLE]]
[["","","Revenues","","Sales (kWh)"],["(In thousands, except CDD)","","2023","","2022","","% Change","","2023","","2022","","% Change"],["Residential","","$","171,137","","$","161,300","","6.1%","","871,558","","884,476","","(1.5)%"],["Commercial","","","252,268","","","232,057","","8.7%","","1,772,483","","1,790,397","","(1.0)%"],["Industrial","","","13,759","","","13,303","","3.4%","","151,283","","152,734","","(1.0)%"],["Other-retail/municipal","","","40,815","","","37,323","","9.4%","","363,643","","363,213","","0.1%"],["Total retail","","","477,979","","","443,983","","7.7%","","3,158,967","","3,190,820","","(1.0)%"],["Sales to the market","","","10,163","","","19,385","","(47.6)%","","132,143","","132,079","","0.0%"],["Other revenues","","","1,587","","","1,799","","(11.8)%","","\u2014","","\u2014","","\u2014%"],["Total","","$","489,729","","$","465,167","","5.3%","","3,291,110","","3,322,899","","(1.0)%"],["Cooling degree days (normal 705)","","","","","","","","","","780","","787","","(0.9)%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["(In millions)"],["Rate changes","","$","42.4"],["Sales to the market","","","(9.2",")"],["Decrease in volume","","","(3.7",")"],["Customer fixed and demand charges","","","(3.2",")"],["Revenue subject to refund, net","","","(1.5",")"],["Other","","","(0.2",")"],["Total","","$","24.6"]]
[[/GREPCENT_TABLE]]

•
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.

•
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.

•
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.

•
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.

•
Revenue subject to refund. For cost recovery mechanisms, any over-collection of revenues resulting from costs authorized to be collected from customers in rates exceeding actual costs is recorded as a reduction of

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revenue in the period incurred, as the over-collection is expected to be refunded to customers in a subsequent period. In the year the over-collection is refunded, rates are reduced and offset as revenue subject to refund. There is no net income impact in the year the costs are refunded.

Electric fuel and purchased power

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(In millions)","","2023","","","2022","","","$ Change"],["Fuel for electric generation","","$","57.6","","","$","61.3","","","$","(3.7",")"],["Purchased power","","","41.2","","","","46.8","","","","(5.6",")"]]
[[/GREPCENT_TABLE]]

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.

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.

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

Gas deliveries and revenues

The following table compares MGE's gas revenues and gas therms delivered by customer class during each of the years indicated:

[[GREPCENT_TABLE]]
[["(In thousands, except HDD and average","","Revenues","","Therms Delivered"],["rate per therm of retail customer)","","2023","","2022","","% Change","","2023","","2022","","% Change"],["Residential","","$","116,640","","$","143,544","","(18.7)%","","97,326","","114,162","","(14.7)%"],["Commercial/Industrial","","","75,410","","","99,165","","(24.0)%","","96,053","","106,911","","(10.2)%"],["Total retail","","","192,050","","","242,709","","(20.9)%","","193,379","","221,073","","(12.5)%"],["Gas transportation","","","7,399","","","5,780","","28.0%","","72,181","","78,966","","(8.6)%"],["Other revenues","","","563","","","183","","n.m.%","","\u2014","","\u2014","","\u2014%"],["Total","","$","200,012","","$","248,672","","(19.6)%","","265,560","","300,039","","(11.5)%"],["Heating degree days (normal 6,991)","","","","","","","","","","6,167","","7,210","","(14.5)%"],["Average rate per therm of retail customer","","$","0.993","","$","1.098","","(9.6)%"]]
[[/GREPCENT_TABLE]]

n.m. not meaningful

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

[[GREPCENT_TABLE]]
[["(In millions)"],["Rate changes","","$","(31.7",")"],["Decrease in volume","","","(18.5",")"],["Other","","","1.3"],["Revenue subject to refund, net","","","0.2"],["Total","","$","(48.7",")"]]
[[/GREPCENT_TABLE]]

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

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

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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).

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

•
Other. Other revenues increased primarily related to an increase in the number of gas customers in 2023, which increased fixed customer charge revenue as compared to 2022.

Cost of gas sold

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.

Consolidated operations and maintenance expenses

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

[[GREPCENT_TABLE]]
[["(In millions)"],["Increased administrative and general costs","","$","6.4"],["Increased electric distribution expenses","","","0.7"],["Increased customer services","","","0.7"],["Increased gas distribution expenses","","","0.6"],["Increased other expenses","","","0.3"],["Decreased customer accounts costs","","","(1.9",")"],["Decreased electric production expenses","","","(0.7",")"],["Total","","$","6.1"]]
[[/GREPCENT_TABLE]]

•
Increased administrative and general costs are primarily related to an increase in employee payroll related costs including expenses recorded for the long-term incentive plan and pension and OPEB service costs.

•
Decreased customer accounts are primarily related to lower technology support costs which were higher in 2022 during the stabilization period of the new customer information system that went live in September 2021.

Consolidated depreciation expense

Electric depreciation expense increased $14.5 million and gas depreciation expense increased $0.3 million for 2023, compared to 2022. As part of the PSCW approved electric limited reopener for 2023, MGE accelerated the depreciation schedule for Columbia Unit 2 from 2038 to 2029 to align with the depreciation schedule previously approved for Columbia Unit 1. The accelerated depreciation schedule, which began in 2023, for Columbia Unit 2 contributed to the increase in electric depreciation expense.

Electric and gas other income and interest expense

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.

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.

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

39

generating capacity to assist MGE. For 2023 and 2022, net income at the nonregulated energy operations segment was $22.4 million and $22.1 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 to pursue transmission development opportunities that typically have long development and investment lead times before becoming operational. During 2023 and 2022, other income at the transmission investment segment primarily reflects ATC's operations and was $10.6 million and $9.1 million, respectively. See Footnote 7 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.

All Other Operations - MGE Energy

Other income

The decrease of $1.7 million in other income from all other operations during 2023, primarily reflects results from investment losses recognized in 2023, from our venture capital funds compared to investment gains recognized in 2022. These venture capital investments support early-stage companies working to advance smart technologies, the customer experience, distributed energy resources, electrification, cybersecurity and other priorities for utility companies such as greater sustainability.

Consolidated Income Taxes - MGE Energy and MGE

See Footnote 10 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; 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:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(In millions)","","2023","","","2022"],["MGE Power Elm Road","","$","14.7","","","$","14.3"],["MGE Power West Campus","","","7.2","","","","7.3"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

MGE Energy and MGE expect to have adequate liquidity to support future operations and capital expenditures over the next twelve months. Available resources include cash and cash equivalents, operating cash flows, liquid assets, borrowing working capacity under revolving credit facilities, and access to equity and debt capital markets. MGE Energy expects to generate funds from operations and both long-term and short-term debt financing. See "Credit Facilities" below for information regarding MGE Energy's and MGE's credit facilities.

Cash Flows

The following summarizes cash flows for MGE Energy and MGE during 2023 and 2022:

[[GREPCENT_TABLE]]
[["","","MGE Energy","","","MGE"],["(In thousands)","","2023","","","2022","","","2023","","","2022"],["Cash provided by (used for):"],["Operating activities","","$","237,561","","","$","153,735","","","$","231,822","","","$","151,067"],["Investing activities","","","(230,020",")","","","(180,145",")","","","(224,027",")","","","(176,095",")"],["Financing activities","","","(10,483",")","","","25,543","","","","(11,590",")","","","27,730"]]
[[/GREPCENT_TABLE]]

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Cash Provided by Operating Activities

Cash flows from operating activities for MGE Energy and MGE principally reflect the receipt of customer payments for electric and gas service and outflows related to fuel for electric generation, purchased power, gas, and operation and maintenance expenditures.

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 2023 was $237.6 million, an increase of $83.8 million when compared to 2022, driven by:

•
A $71.7 million increase in cash from lower payments for fuel and purchased power at our generation plants, as well as lower natural gas costs to our customers during 2023, when compared to 2022, primarily driven by a decrease in the price of natural gas.

•
A $9.5 million increase in cash as a result of higher overall collections from customers during 2023, when compared to 2022. This increase was driven by the 2023 rates approved by the PSCW, effective January 1, 2023.

•
An increase of $11.5 million in cash from lower payments for other operation and maintenance expenses.

•
An increase of $1.4 million in cash from higher dividends received from ATC investment.

These increases in net cash provided by operating activities were partially offset by:

•
A decrease of $6.6 million in cash from higher payments for MGE Energy's federal and state taxes during 2023, when compared to 2022.

•
A decrease of $3.6 million in cash from higher payments for interest, driven by MGE's issuance of long-term debt during the fourth quarter of 2022 and during 2023.

MGE

Cash provided by operating activities for 2023 was $231.8 million, an increase of $80.8 million when compared to 2022, driven by:

•
A $71.7 million increase in cash from lower payments for fuel and purchased power at our generation plants, as well as lower natural gas costs to our customers during 2023, when compared to 2022, primarily driven by a decrease in the price of natural gas.

•
A $9.5 million increase in cash as a result of higher overall collections from customers during 2023, when compared to 2022. This increase was driven by the 2023 rates approved by the PSCW, effective January 1, 2023.

•
An increase of $11.4 million in cash from lower payments for other operation and maintenance expenses.

These increases in net cash provided by operating activities were partially offset by:

•
A decrease of $8.0 million in cash from higher payments for MGE's federal and state taxes during 2023, when compared to 2022.

•
A decrease of $3.6 million in cash from higher payments for interest, driven by MGE's issuance of long-term debt during the fourth quarter of 2022 and during 2023.

41

Capital Requirements and Investing Activities

Cash outflows for MGE Energy and MGE principally reflect capital expenditures. See "Capital Expenditures" below for more information.

MGE Energy

MGE Energy's cash used for investing activities increased $49.9 million for 2023 when compared to 2022.

Capital expenditures for 2023 were $222.1 million. This amount represents an increase of $47.0 million from the expenditures made in 2022. This increase primarily reflects the purchase of 25 MW of West Riverside and purchase of Red Barn wind farm.

Capital contributions in ATC and other investments increased $1.8 million for 2023 when compared to 2022.

MGE

MGE's cash used for investing activities increased $47.9 million for 2023 when compared to 2022.

Capital expenditures for 2023 were $222.1 million. This amount represents an increase of $47.0 million from the expenditures made in 2022. This increase primarily reflects the purchase of 25 MW of West Riverside and purchase of Red Barn wind farm.

Capital Expenditures

The following table shows MGE Energy's actual capital expenditures for both 2022 and 2023, and forecasted capital expenditures for 2024 through 2028:

[[GREPCENT_TABLE]]
[["(In thousands)","","Actual","","","Forecasted"],["For the years ended December 31,","","2022","","","2023","","","2024","","","2025","","","2026","","","2027","","","2028"],["Electric","","$","141,273","","","$","180,743","","","$","177,000","","","$","186,000","","","$","193,000","","","$","222,000","","","$","207,000"],["Gas","","","27,656","","","","36,402","","","","28,000","","","","29,000","","","","32,000","","","","29,000","","","","28,000"],["Utility plant total","","","168,929","","","","217,145","","","","205,000","","","","215,000","","","","225,000","","","","251,000","","","","235,000"],["Nonregulated","","","6,101","","","","4,926","","","","9,000","","","","10,000","","","","7,000","","","","6,000","","","","8,000"],["MGE Energy total","","$","175,030","","","$","222,071","","","$","214,000","","","$","225,000","","","$","232,000","","","$","257,000","","","$","243,000"]]
[[/GREPCENT_TABLE]]

Forecasted capital expenditures are based upon management's assumptions with respect to future events, including the timing and amount of expenditures associated with environmental compliance initiatives, legislative and regulatory action, supply chain and market disruptions, customer demand and support for electrification and renewable energy resources, energy conservation programs, load growth, the timing of any required regulatory approvals, and the adequacy of rate recovery. Actual events may differ materially from these assumptions and result in material changes to those forecasted amounts, particularly in the final forecasted years.

MGE is targeting at least 80% carbon reduction from electric generation by 2030 (from 2005 levels) and net-zero carbon electricity by 2050. Solar, wind, and battery storage projects are a major step toward deep decarbonization and greater use of clean energy sources in pursuit of our goal. MGE continues to evaluate solar, wind, and battery storage projects that align with its goals as legacy fossil fuel-fired facilities are retired. The target early retirement date for Columbia is June 2026. MGE has included forecasted capital expenditures for the years 2024 through 2026 for projects to replace Columbia's generation.

The following table provides further detail of MGE Energy's forecasted capital expenditures, separating spending into capital project categories for 2024 through 2028:

42

[[GREPCENT_TABLE]]
[["(In thousands)","","Forecasted"],["For the years ended December 31,","","2024","","2025","","2026","","2027","","2028"],["Electric renewables(a)","","$76,000","","$102,000","","$114,000","","$146,000","","$132,000"],["Electric production","","42,000","","21,000","","20,000","","13,000","","13,000"],["Electric distribution","","59,000","","63,000","","59,000","","63,000","","62,000"],["Gas distribution","","28,000","","29,000","","32,000","","29,000","","28,000"],["Utility plant total","","205,000","","215,000","","225,000","","251,000","","235,000"],["Nonregulated","","9,000","","10,000","","7,000","","6,000","","8,000"],["MGE Energy total","","$214,000","","$225,000","","$232,000","","$257,000","","$243,000"]]
[[/GREPCENT_TABLE]]

(a)
Includes solar and wind generation and battery storage.

Our forecasted capital expenditures reflect the following significant renewable projects that are proposed or currently under construction:

[[GREPCENT_TABLE]]
[["Project","","Source","","Ownership Interest","","Share of Generation/Battery Storage","","Share of Costs(b)","","Estimated Date of Commercial Operation"],["Paris(a)","","Solar/Battery","","10%","","20MW/11MW","","$61 million(c)(d)","","2024 Solar 2025 Battery"],["Darien(a)","","Solar","","10%","","25MW","","$46 million(c)(d)(e)","","2024"],["Strix","","Solar","","100%","","6MW","","$12 million","","2024"],["High Noon(f)","","Solar","","10%","","30MW","","$65 million","","2026"],["Koshkonong(a)","","Solar","","10%","","30MW","","$54 million(c)(e)","","2026"]]
[[/GREPCENT_TABLE]]

(a)
Approved by the PSCW.

(b)
Excluding AFUDC.

(c)
Requested, in the case of projects pending PSCW approval, or received, in the case of Paris, Darien, and Koshkonong approval to recover 100% AFUDC.

(d)
See Footnote 6 of Notes to Consolidated Financial Statements in the Report for information on costs incurred.

(e)
As part of its order, the PSCW approved battery capacity with these projects, which are no longer included in the 2024-2028 forecast. MGE will continue to evaluate timing, cost, and feasibility of the installation of batteries.

(f)
Pending approval by the PSCW. Battery storage has been proposed as part of this project and has not been included in the 2024-2028 forecast. MGE will continue to evaluate timing, cost, and feasibility of the installation of batteries.

In 2023, MGE notified the PSCW of increases in projected costs at Badger Hollow II, Paris, and Darien. The main drivers were increases in the costs of key commodities, labor, and solar modules resulting from supply chain and market disruptions. See Footnote 6 of Notes to Consolidated Financial Statements in this Report for more information on these projects. Furthermore, solar panel procurement disruptions have also shifted construction timelines. MGE continues to assess the potential impact of these disruptions on current and future solar projects that may result in an increase in costs or delays in construction timelines. See further information on procurement disruptions discussed earlier under "Executive Overview."

West Riverside: In March 2023, MGE purchased 25 MW of capacity of West Riverside. In September 2023, MGE, along with joint applicants, filed an application with the PSCW requesting approval for a sale and purchase of additional ownership interests in West Riverside. If approved, MGE's share of West Riverside will increase 25 MW at a purchase price of approximately $25 million. The closing and actual transfer of ownership is expected to occur in June 2024. MGE has requested approval from the PSCW to defer a recovery of and a return on the purchase of the additional ownership of West Riverside and to be reflected in a future rate case filing.

Electric and Gas Distribution: In 2024 through 2028, electric and gas capital expenditures include investment in enhanced metering solutions to provide customers with more timely and detailed energy use information. Investments in advanced metering infrastructure will provide additional benefits including outage and demand response and automated meter reading capabilities. Forecasted total capital expenditures for those years is approximately $39 million.

43

Financing Activities

The principal sources and uses of cash are related to short-term and long-term borrowings and repayments and the payment of cash dividends.

MGE Energy

Cash used for MGE Energy's financing activities was $10.5 million for 2023, compared to $25.5 million of cash provided by financing activities in 2022.

For 2023, cash dividends paid were $60.4 million compared to $57.5 million in 2022. The increase reflected a higher dividend rate per share ($1.67 vs. $1.59).

During 2023, MGE issued $120.0 million of senior unsecured notes that were used to repay $30 million of maturing unsecured senior notes and to assist with financing additional capital expenditures and other corporate obligations, compared to $25.0 million issued in 2022. In addition, $19.3 million of Industrial Development Revenue Bonds were tendered by their holders as required by the terms of the bonds and remarketed as permitted by those terms.

For 2023, net short-term debt repayments were $32.5 million, compared to $65.0 million of borrowings in 2022.

MGE

During 2023, cash used for MGE's financing activities was $11.6 million, compared to $27.7 million of cash provided by financing activities in 2022.

Cash dividends to parent (MGE Energy) were $41.0 million in 2023, compared to $33.5 million in 2022.

Distributions to parent (MGE Energy) from noncontrolling interest, which represent distributions from MGE Power Elm Road and MGE Power West Campus, were $20.5 million for 2023, compared to $22.0 million in 2022. The noncontrolling interest arises from the accounting required for the entities, which are not owned by MGE but are consolidated as VIEs.

During 2023, MGE issued $120.0 million of senior unsecured notes that were used to repay $30 million of maturing unsecured senior notes and to assist with financing additional capital expenditures and other corporate obligations, compared to $25.0 million issued in 2022. In addition, $19.3 million of Industrial Development Revenue Bonds were tendered by their holders as required by the terms of the bonds and remarketed as permitted by those terms.

For 2023, net short-term debt repayments were $32.5 million compared to $65.0 million of borrowings in 2022.

Dividend Restrictions

Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a lesser degree, MGE's first mortgage bonds. The PSCW order restricts any dividends that MGE may pay MGE Energy if its common equity ratio, calculated in the manner used in the rate proceeding, is less than 55%. MGE's thirteen month rolling average common equity ratio as of December 31, 2023, is 57.7%, as determined under the calculation used in the rate proceeding. This restriction did not restrict MGE's payment of dividends in 2023. Cash dividends of $41.0 million and $33.5 million, respectively, were paid by MGE to MGE Energy in 2023 and 2022. The rate proceeding calculation includes indebtedness imputed amounts for MGE's outstanding purchase power capacity payments and other PSCW adjustments but does not include the indebtedness associated with MGE Power Elm Road and MGE Power West Campus, which are consolidated into MGE's financial statements but are not direct obligations of MGE.

MGE has covenanted with the holders of its first mortgage bonds not to declare or pay any dividend or make any other distribution on or purchase any shares of its common stock unless, after giving effect thereto, the aggregate amount of all such dividends and distributions and all amounts applied to such purchases, after December 31, 1945, shall not exceed the earned surplus (retained earnings) accumulated subsequent to December 31, 1945. As

44

of December 31, 2023, approximately $699.6 million was available for the payment of dividends under this covenant.

MGE Power West Campus has covenanted with the holders of its outstanding senior secured notes not to declare or make distributions to us in the event that, both before and after giving effect to such distribution, its total debt to total capitalization would exceed 0.65 to 1.00 or its projected debt service coverage ratio for the following four fiscal quarters would be less than 1.25 to 1.00. Projected debt service coverage considers the projected revenues available for debt service, after deducting expenses other than debt service, in relation to projected debt service on indebtedness.

MGE Power Elm Road has covenanted with the holders of its outstanding senior secured notes not to declare or make distributions to us in the event that, both before and after giving effect to such distribution, its projected debt service coverage ratio for the following four fiscal quarters would be less than 1.25 to 1.00. Projected debt service coverage considers the projected revenues available for debt service, after deducting expenses other than debt service, in relation to projected debt service on indebtedness.

Credit Facilities

As of December 31, 2023, MGE Energy and MGE had the following aggregate bank commitments and available capacity under their credit agreements:

[[GREPCENT_TABLE]]
[["Borrower","","Aggregate Bank Commitments","","","Outstanding Commercial Paper","","","Letters of Credit Issued Inside Credit Facilities","","","Outstanding Borrowings","","","Available Capacity","","","Expiration Date"],["(In millions)"],["MGE Energy","","$","50.0","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","50.0","","","November 8, 2027"],["MGE","","$","130.0","","","$","38.0","","","$","0.7","","","$","\u2014","","","$","91.3","","","November 8, 2027"]]
[[/GREPCENT_TABLE]]

Borrowings under the Credit Agreements may bear interest at a rate based upon either a "floating rate" or an "Adjusted Term SOFR Rate," plus an adder based upon the credit ratings assigned to MGE's senior unsecured long-term debt securities. The "floating rate" is calculated on a daily basis as the highest of a prime rate and several adjusted interest rate indices (as set forth in the Credit Agreements), subject to a floor of one percent per annum or zero, depending on the credit agreement. The "floating rate" adder ranges from zero to 0.125%. The "Adjusted Term SOFR Rate" is calculated as provided in the Credit Agreements. The "Adjusted Term SOFR Rate" adder ranges from 0.625% to 1.125%.

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. As of December 31, 2023, the ratio of consolidated debt to consolidated total capitalization for each of MGE Energy and MGE, as calculated under the credit agreements' covenant, were 40.1% and 43.2%, respectively. See Footnote 13 of the Notes to Consolidated Financial Statements in this Report for additional information regarding the credit facilities.

Capitalization Ratios

MGE Energy's capitalization ratios were as follows:

[[GREPCENT_TABLE]]
[["","","MGE Energy"],["","","2023","","","2022"],["Common shareholders' equity","","","59.9","%","","","60.4","%"],["Long-term debt(a)","","","38.1","%","","","35.7","%"],["Short-term debt","","","2.0","%","","","3.9","%"]]
[[/GREPCENT_TABLE]]

(a)
Includes the current portion of long-term debt.

45

Credit Ratings

MGE Energy's and MGE's access to the capital markets, including, in the case of MGE, the commercial paper market, and their respective financing costs in those markets, may depend on the credit ratings of the entity that is accessing the capital markets.

None of MGE Energy's or MGE's borrowing is subject to default or prepayment as a result of a downgrading of credit ratings, although a downgrading of MGE's credit ratings would increase fees and interest charges under both MGE Energy's and MGE's credit agreements and may affect the collateral required to be posted under derivative transactions.

Contractual Obligations and Commercial Commitments for MGE Energy and MGE

MGE Energy's and MGE's contractual obligations as of December 31, 2023, representing cash obligations that are considered to be firm commitments, are as follows:

[[GREPCENT_TABLE]]
[["","","","","","Payment Due Within:","","","Due After"],["(In thousands)","","Total","","","1 Year","","","2-3 Years","","","4-5 Years","","","5 Years"],["MGE Energy"],["Long-term debt(a)","","$","728,547","","","$","5,146","","","$","25,718","","","$","81,841","","","$","615,842"],["Short-term debt(b)","","","38,000","","","","38,000","","","","\u2014","","","","\u2014","","","","\u2014"],["Interest expense(c)","","","458,691","","","","32,142","","","","63,455","","","","58,814","","","","304,280"],["Leases(d)","","","59,277","","","","2,336","","","","3,742","","","","2,554","","","","50,645"],["Purchase obligations(e)","","","220,099","","","","86,039","","","","81,198","","","","15,465","","","","37,397"],["Construction obligations(f)","","","46,914","","","","46,914","","","","\u2014","","","","\u2014","","","","\u2014"],["Other obligations(g)","","","20,592","","","","16,074","","","","1,398","","","","1,121","","","","1,999"],["Total MGE Energy contractual obligations","","$","1,572,120","","","$","226,651","","","$","175,511","","","$","159,795","","","$","1,010,163"],["MGE"],["Long-term debt(a)","","$","728,547","","","$","5,146","","","$","25,718","","","$","81,841","","","$","615,842"],["Short-term debt(b)","","","38,000","","","","38,000","","","","\u2014","","","","\u2014","","","","\u2014"],["Interest expense(c)","","","458,691","","","","32,142","","","","63,455","","","","58,814","","","","304,280"],["Leases(d)","","","59,277","","","","2,336","","","","3,742","","","","2,554","","","","50,645"],["Purchase obligations(e)","","","220,099","","","","86,039","","","","81,198","","","","15,465","","","","37,397"],["Construction obligations(f)","","","46,914","","","","46,914","","","","\u2014","","","","\u2014","","","","\u2014"],["Other obligations(g)","","","12,498","","","","7,980","","","","1,398","","","","1,121","","","","1,999"],["Total MGE contractual obligations","","$","1,564,026","","","$","218,557","","","$","175,511","","","$","159,795","","","$","1,010,163"]]
[[/GREPCENT_TABLE]]

(a)
Long-term debt consisting of secured first mortgage bonds, unsecured medium-term notes, and Industrial Development Revenue Bonds issued by MGE, and private placement debt issued by MGE, MGE Power Elm Road, and MGE Power West Campus.

(b)
Short-term debt consisting of commercial paper for MGE. See Footnote 13 of the Notes to Consolidated Financial Statements in this Report.

(c)
Amount represents interest expense on long-term debt. See Footnote 14 of the Notes to Consolidated Financial Statements in this Report for further discussion of the long-term debt outstanding as of December 31, 2023.

(d)
Leases. See Footnote 5 of the Notes to Consolidated Financial Statements in this Report.

(e)
Purchase obligations consist primarily of the purchase of electricity and natural gas, electric transmission, natural gas storage capacity, natural gas pipeline transportation, and the purchase and transport of coal. See Footnote 16.c. of the Notes to Consolidated Financial Statements in this Report.

(f)
Construction obligations consist primarily of Paris, Darien, and other renewable projects.

(g)
Other obligations are primarily related to investment commitments, environmental projects, and uncertain tax positions.

The above amounts do not include any contributions for MGE's pension and postretirement plans. MGE does not expect to need to make any required contributions to the qualified plans for 2024. The contributions for years after 2024 are not yet currently estimated. Due to uncertainties in the future economic performance of plan assets, discount rates, and other key assumptions, estimated contributions are subject to change. MGE may also elect to make additional discretionary contributions to the plans.

The above amounts do not include future capital calls by ATC and ATC Holdco. In January 2024, MGE Transco made a $0.7 million contribution to ATC. The amount and timing of future capital calls to these entities is uncertain and primarily dependent on the operations and expansion of ATC and the development activities by ATC Holdco.

46

MGE Energy's and MGE's commercial commitments as of December 31, 2023, representing commitments triggered by future events and including financing arrangements to secure obligations of MGE Energy and MGE, are as follows:

[[GREPCENT_TABLE]]
[["","","","","","Expiration Within:","","","Due After"],["(In thousands)","","Total","","","1 Year","","","2-3 Years","","","4-5 Years","","","5 Years"],["MGE Energy"],["Lines of credit(a)","","$","180,000","","","$","\u2014","","","$","\u2014","","","$","180,000","","","$","\u2014"],["MGE"],["Lines of credit(b)","","$","130,000","","","$","\u2014","","","$","\u2014","","","$","130,000","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

(a)
Amount includes the facilities discussed in (b) plus an additional line of credit. MGE Energy has available at any time a $50 million committed revolving credit agreement, expiring in November 2027. As of December 31, 2023, MGE Energy had no borrowings outstanding under this credit facility.

(b)
Amount includes two committed revolving credit agreements totaling $130 million expiring in November 2027. These credit facilities are used to support commercial paper issuances. As of December 31, 2023, MGE had $38 million of commercial paper outstanding backed by the facilities but no borrowings outstanding. As of December 31, 2023, MGE had $0.7 million of letters of credit issued inside credit facilities.

Other Matters

Rate Matters

In December 2021, the PSCW approved a settlement agreement for MGE's 2022 rate case. As part of the settlement agreement, the PSCW approved a 0.96% increase in 2023 gas rates and a potential 2023 electric rate change to be addressed through a limited rate case reopener.

In December 2022, the PSCW approved the electric rate case reopener. The reopener provides for a 9.01% increase to electric rates for 2023.

In December 2023, the PSCW approved the 2024/2025 rate application for an increase of 1.54% for electric rates and a 2.44% increase for gas rates in 2024. The application also approves a 4.17% increase for electric rates and a 1.32% increase to gas rates for 2025.

Details related to MGE's 2022/2023 approved settlement agreement, 2023 electric limited reopener, and 2024/2025 rate proceeding are shown in the table below:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","Authorized Average Rate Base(a)","","","Authorized Average CWIP(b)","","","Authorized Return on Common Equity(c)","","","Common Equity Component of Regulatory Capital Structure","","","Effective Date"],["Electric (2023 Test Period)","","$","1,162,516","","","$","19,976","","","","9.8","%","","","55.63","%","","1/1/2023"],["Gas (2023 Test Period)","","","312,270","","","","8,228","","","","9.8","%","","","55.63","%","","1/1/2023"],["Electric (2024 Test Period)","","$","1,185,550","","","$","10,727","","","","9.7","%","","","56.13","%","","1/1/2024"],["Gas (2024 Test Period)","","","335,533","","","","7,160","","","","9.7","%","","","56.13","%","","1/1/2024"],["Electric (2025 Test Period)","","$","1,241,502","","","$","7,106","","","","9.7","%","","","56.06","%","","1/1/2025"],["Gas (2025 Test Period)","","","341,369","","","","7,146","","","","9.7","%","","","56.06","%","","1/1/2025"]]
[[/GREPCENT_TABLE]]

(a)
Average rate base amounts reflect MGE's allocated share of rate base and do not include construction work in progress (CWIP) or a cash working capital allowance and were calculated using a forecasted 13-month average for the test periods. The PSCW provides a return on selected CWIP and a cash working capital allowance by adjusting the percentage return on rate base.

(b)
50% of the forecasted 13-month average CWIP for the test periods which earns an AFUDC return. Projects eligible to earn 100% AFUDC are excluded from this balance and discussed further in the Management Discussion and Analysis of Financial Condition and Results of Operations - Significant Events section.

(c)
Authorized returns on common equity may not be indicative of actual returns earned or projections of future returns, as actual returns will be affected by the volume of electricity or gas sold.

See Footnote 9.a. of the Notes to Consolidated Financial Statements in this Report for further discussion of rate proceedings.

47

ATC

MISO transmission owners, including ATC, are involved in two complaints filed at FERC by several parties challenging that the base ROE in effect for MISO transmission owners, including ATC, was no longer just and reasonable. Each complaint provided for a 15-month statutory refund period: November 12, 2013 through February 11, 2015 (the "First Complaint Period") and February 12, 2015 through May 11, 2016 (the "Second Complaint Period").

In May 2020, FERC issued an order further refining the methodology for setting authorized ROE. This refined methodology increased the authorized ROE from 9.88% to 10.02%. This base ROE is effective for the First Complaint Period and for all periods following September 2016. This order also dismissed the second complaint. Accordingly, no refunds were ordered for the Second Complaint Period.

As a result of the May 2020 FERC order, our share of ATC's earnings reflected a $0.6 million reduction of our reserve. Additionally, our share of ATC's earnings reflected the derecognition of a possible refund related to the Second Complaint Period as ATC considered such a refund to be no longer probable. However, due to pending requests for rehearing, a loss related to the 2015 complaint remains possible. Our share of the estimated refund for the Second Complaint Period is approximately $2.3 million. MGE has not recorded a possible loss for the Second Complaint Period.

Several petitions for review of FERC’s prior orders were filed with the U.S. Court of Appeals for the D.C. Circuit (the "Court") and an oral argument was held in November 2021. In August 2022, the Court ruled that four of the five arguments made by the complaining parties were unpersuasive. However, the Court agreed that FERC’s decision to reintroduce a risk-premium model into its ROE methodology was arbitrary and capricious. The Court vacated the underlying orders for the First Complaint Period and remanded to FERC for further proceedings. In 2022, our share of ATC's earnings reflected an estimated possible loss of approximately $0.9 million, inclusive of interest and net of tax, for a possible additional refund for the First Complaint Period and for the period following the Second Complaint Period. Although the Court agreed that FERC was correct to use the base ROE established in the first complaint to adjudicate the second, and that FERC was right to dismiss the second complaint, the second complaint was also remanded for FERC to reopen proceedings. Any reduction in ATC's ROE could result in lower equity earnings and distributions from ATC in the future.

We derived approximately 6.4% and 5.9%, respectively, of our net income for 2023 and 2022 from our investment in ATC.

Uyghur Forced Labor Protection Act

In June 2021, the U.S. Customs and Border Protection (CBP) issued a Withhold Release Order (WRO) against silica-based products made by Hoshine Silicon Industry Co. Ltd., a company located in China's Xinjiang Uyghur Autonomous Region. As a result of this WRO, CBP is holding many solar panels imported into the United States until importers can prove that the panels do not contain materials originating from this region. The Uyghur Forced Labor Protection Act (UFLPA), a federal law that became effective on June 21, 2022, further established that all goods mined, produced, or manufactured wholly or in part in Xinjiang or by certain defined entities are prohibited from U.S. importation. Suppliers for MGE's current solar projects were able to provide the CBP sufficient documentation to meet WRO compliance requirements, and MGE expects the same will be true for UFLPA purposes, however we cannot currently predict what, if any, impact the UFLPA will have on the overall supply of solar panels into the United States and the related impact to timing and cost of solar projects included in our capital plan. 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 a notification with the PSCW and expect to request recovery of any cost increases in MGE's future rate proceedings.

U.S. Department of Commerce Investigation

In March 2022, the U.S. Department of Commerce announced a solar tariff investigation on solar panels from four Southeast Asian countries. This investigation could result in additional tariffs on solar panels. In June 2022, the U.S. Department of Commerce issued a 24-month exemption from tariffs for solar panel and module imports from these four countries. MGE is currently assessing the potential impact of these disruptions on current and future solar projects which may result in an increase in costs or delays in construction timelines. In the event that such

48

disruptions cause costs to exceed the levels approved for specific projects, we have filed and expect to continue to file a notification with the PSCW and expect to request recovery of any cost increases in MGE's future rate proceedings.

Critical Accounting Estimates - MGE Energy and MGE

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to regulatory assets and liabilities, unbilled revenues, pension obligations, and income taxes. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Those values may differ from these estimates under different assumptions or conditions. We believe the following critical accounting estimates affect our more significant judgments used in the preparation of our consolidated financial statements.

Regulatory Assets/Liabilities

Regulatory assets represent costs that have been deferred to future periods when it is probable that the regulator will allow future recovery of those costs through rates. MGE bases its assessment of recovery on precedents established by the regulatory body. Regulatory liabilities represent previous collections from customers that are expected to be refunded to customers in future periods. Regulatory assets and regulatory liabilities typically include deferral of energy costs, the normalization of income taxes, pension and other postretirement costs, the deferral of certain operating expenses, and non-ARO removal costs. The accounting for these regulatory assets and liabilities is in accordance with regulatory accounting standards.

MGE continually assesses whether the regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. This assessment considers factors such as changes in the regulatory environment, recent rate orders to other regulated entities under the same jurisdiction, and the status of any pending or potential deregulation legislation. If future recovery of costs becomes no longer probable, the assets and liabilities would be recognized as current-period revenues or expenses.

Amortization of regulatory assets and liabilities is provided over the recovery or deferral period as allowed in the related regulatory agreement.

Unbilled Revenues

Revenues from the sale of electricity and gas are recorded when they are delivered to customers. Sales quantity is measured by customers' meters. Due to the large volume of those meters, it is impractical to read all of them at month end. Meters are read on a systematic basis throughout the month based on established meter-reading schedules. Consequently, at the end of any month, there exists a quantity of electricity and gas that has been delivered to customers but has not been captured by the meter readings. As a result, management must estimate revenue related to electricity and gas delivered to customers between meter-read dates and the end of the reporting period. These estimates include:

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The amount of electricity expected to be lost in the process of its transmission and distribution to customers (referred to as line loss) and the amount of electricity actually delivered to customers.

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The amount of gas expected to be lost in the process of distribution to customers and the amount of gas actually delivered to customers.

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The mix of sales between customer rate classes having different rates, which is based upon historical utilization assumptions.

MGE monitors the reasonableness of the unbilled revenue estimate through the review of ratios such as unbilled electric consumption compared to billed electric sales. To confirm the reasonableness of unbilled gas, the estimated unbilled consumption is compared to various other statistics, including percent of gas available for sale, change in unbilled month-to-month and change in unbilled compared to the prior year.

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Pension and Other Postretirement Benefit Plans

MGE provides employees with certain retirement (pension) and postretirement (health care and life insurance) benefits. In order to measure the expense and obligations associated with these benefits, management must make a variety of estimates, including discount rates used to value certain liabilities, the expected return on plan assets set aside to fund these costs, the rate of compensation increase, employee turnover rates, retirement rates, health care trends, mortality rates, and other factors. These accounting estimates may change due to the uncertainty attached to the estimate as well as the fact that these estimates are difficult to measure. Different estimates used could result in recognizing different amounts of expense over different periods of time. Recovery in rates is expected.

MGE uses third-party specialists to assist with evaluating its assumptions and measurement of the costs and obligations associated with these retirement benefits. The discount rate and expected return on plan assets are based primarily on available investment yields and the historical performance of plan assets. They are critical accounting estimates because they are subject to management's judgment and can materially affect financial performance.

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Assumed return on assets. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested (or to be invested) to provide for the benefits included in the projected benefit obligation. For 2023, MGE used an assumed return on assets of 7.00% for pension and 6.59% for other postretirement benefits. In 2024, the pension asset assumption will increase to 7.24% and the postretirement benefit assumption will increase to 6.81%. The annual expected rate of return is based on projected long-term equity and bond returns, maturities and asset allocations. Holding other assumptions constant, for every 1% reduction in the expected rate of return on plan assets, annual pension and other postretirement cost would increase by approximately $4.0 million, before taxes.

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Discount rate. The discount rate represents the rate at which pension obligations could effectively be settled on a present-value basis. MGE uses high-grade bond yields as a benchmark for determining the appropriate discount rate. MGE uses individual spot rates rather than a weighted average of the yield curve spot rates to measure the service cost and interest cost components for net periodic benefit cost. Holding other assumptions constant, a 0.5% decrease in the discount rate on the obligation balance as of December 31, 2023, would increase annual pension and other postretirement cost by approximately $1.2 million, before taxes.

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Medical trend assumptions. The health care cost trend rate is the assumed rate of increase in per-capita health care charges.

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Mortality rate assumption. Expected mortality rates are used in the valuation to determine the expected duration of future benefit payments to the plan participants. MGE utilizes mortality tables and projection scales developed by the society of actuaries. These tables and scales were last updated in 2021.

See Footnote 11 of the Notes to Consolidated Financial Statements in this Report for additional discussion of these plans.

Income Tax Provision

MGE Energy's and MGE's income tax provisions, including both current and deferred components, are based on estimates, assumptions, calculations, and interpretation of tax statutes for the current and future years. Determination of current-year federal and state income tax will not be settled for years.

Management regularly makes assessments of tax return outcomes relative to financial statement tax provisions and adjusts the tax provisions in the period when facts become final.

Additionally, in determining our current income tax provision, we assess temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our balance sheets. When we maintain deferred tax assets, we assess the likelihood that these assets will be recovered through adjustments to future taxable income. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. A valuation allowance is recorded for those benefits that do not meet this criterion. We record an allowance reducing the asset to a value we believe will be recoverable based on our expectation of future taxable income. We believe the accounting

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estimate related to the valuation allowance is a critical accounting estimate because it is highly susceptible to change from period to period as it requires management to make assumptions about our future income over the lives of the deferred tax assets, and the impact of increasing or decreasing the valuation allowance is potentially material to our results of operations.