# MGE Energy Inc: Form 10-Q for the period ended Jun 30, 2023

- Company: [MGE Energy Inc](/companies/mgee.md) (CIK 1161728)
- Form: 10-Q
- Filed: 2023-08-03
- Accepted by EDGAR: Aug 3, 2023, 17:23 ET
- Period: 2023-06-30
- Accession: 0000950170-23-037779
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1161728/000095017023037779/mgee-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1161728/000095017023037779/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $38.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | $78.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $6.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $13.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $28.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $59.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.79 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $1.65 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.79 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $1.65 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 36,186,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 36,183,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $127.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $107.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $29.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-06-30 | $16.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $222.5m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $2.56bn | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $159.4m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2023-06-30 | $651.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-06-30 | $35.1m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2023-06-30 | $42.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-06-30 | $1.11bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 58,897 characters.

### General

MGE Energy is an investor-owned public utility holding company operating through subsidiaries in five business segments:

- Regulated electric utility operations, conducted through MGE,
- Regulated gas utility operations, conducted through MGE,
- Nonregulated energy operations, conducted through MGE Power and its subsidiaries,
- Transmission investments, representing our equity investment in ATC and ATC Holdco, and
- All other, which includes corporate operations and services.

Our principal subsidiary is MGE, which generates and distributes electric energy, distributes natural gas, and represents a majority portion of our assets, liabilities, revenues, and expenses. MGE generates, purchases, and distributes electricity to approximately 161,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 173,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.

Our nonregulated energy operations own interests in electric generating capacity that is leased to MGE. The ownership/leasing structure was adopted under applicable state regulatory guidelines for MGE's participation in these generation facilities, consisting principally of a stable return on the equity investment in the new generation facilities over the term of the related leases. The nonregulated energy operations include an ownership interest in two coal-fired generating units in Oak Creek, Wisconsin and a partial ownership of a cogeneration project on the 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.

### Executive Overview

Our primary focus today and for the foreseeable future is our core utility customers at MGE as well as creating long-term value for our shareholders. MGE continues to face the challenge of providing its customers with reliable power at competitive prices. MGE works on meeting this challenge by investing in more efficient generation projects, including renewable energy sources. As we work toward achieving 80% carbon reduction by 2030 (from 2005 levels), MGE continues to examine and pursue opportunities to reduce the proportion that coal generation represents in its generation mix, as evidenced by its most recent announcements of the retirement of Columbia (a coal generation plant), the planned change in the Elm Road Units fuel source from coal to natural gas, and its 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.

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:

- Weather, and its impact on customer sales,
- Economic conditions, including current business activity and employment and their impact on customer demand,
- Regulation and regulatory issues, and their impact on the timing and recovery of costs,
- Energy commodity prices, including natural gas prices,
- Equity price risk pertaining to pension related assets,
- Credit market conditions, including interest rates and our debt credit rating,
- Environmental laws and regulations, including adopted and pending environmental rule changes, and
- Other factors listed in "Item 1A. Risk Factors" in our 2022 Annual Report on Form 10-K.

During the three months ended June 30, 2023, MGE Energy's earnings were $28.7 million or $0.79 per share compared to $21.8 million or $0.60 per share during the same period in the prior year. MGE's earnings during the three months ended June 30, 2023, were $22.2 million compared to $14.0 million during the same period in the prior year.

During the six months ended June 30, 2023, MGE Energy's earnings were $59.8 million or $1.65 per share compared to $56.2 million or $1.55 per share during the same period in the prior year. MGE's earnings during the six months ended June 30, 2023, were $46.4 million compared to $41.3 million during the same period in the prior year.

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

*(In millions)*

| Business Segment: | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Electric Utility | $21.6 | $13.0 | $34.9 | $27.6 |
| Gas Utility | 0.6 | 1.1 | 11.4 | 13.2 |
| Nonregulated Energy | 5.4 | 5.5 | 11.0 | 10.9 |
| Transmission Investments | 1.9 | 1.9 | 3.8 | 3.7 |
| All Other | (0.8) | 0.3 | (1.3) | 0.8 |
| Net Income | $28.7 | $21.8 | $59.8 | $56.2 |

Our net income during the three and six months ended June 30, 2023, compared to the same periods in the prior year primarily reflects the effects of the following factors:

#### Electric Utility

An increase in electric investments contributed to earnings for 2023. Timing of 2023 depreciation expense and lower fuel costs also contributed to higher earnings in the first half of 2023. Depreciation expense is expected to increase during the remainder of 2023 after significant capital projects (Badger Hollow II and Paris) are completed. The increase in earnings in 2023 was partially offset by lower electric retail sales attributable to warmer than normal weather during the heating season in the first quarter of 2023. Electric retail sales decreased approximately 3% during the first quarter of 2023 compared to the same period in the prior year.

#### Gas Utility

Lower gas retail sales resulting from warmer than normal weather in the first quarter of 2023 contributed to lower gas earnings for the six months ended June 30, 2023. Gas retail sales decreased approximately 12%. Heating degree days (a measure for determining the impact of weather during the heating season) decreased by approximately 14% in the first half of 2023 compared to the same period in the prior year.

#### All Other

Investment distribution 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.

The following developments affected the first six months of 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.

Utility Solar: Large solar generation projects recently purchased, 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.

| Project | Ownership Interest | Source | Share of Generation | Share of Estimated Costs(a) | Costs incurred as of June 30, 2023(a) | Date of Commercial Operation |
| --- | ---: | --- | --- | --- | --- | --- |
| Red Barn | 10% | Wind | 9.16 MW | $18 million | $16.4 million | April 2023 |
| Badger Hollow II | 33% | Solar | 50 MW | $86 million(f) | $53.3 million(b)(c) | Late 2023 or early 2024(d) |
| Paris | 10% | Solar/Battery | 20 MW/11 MW | $61 million(f) | $25.8 million(b) | 2024(d)(e) |
| Darien | 10% | Solar/Battery | 25 MW/ 7.5 MW | $50 million(f) | $11.4 million(b) | 2024(d)(e) |

(a) Excluding AFUDC.

(b) MGE received specific approval to recover 100% AFUDC. After tax, MGE recognized $4.0 million, $1.3 million, and $0.1 million of AFUDC equity through June 30, 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) Battery storage timing to be determined.

(f) 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 and will continue to request recovery of the updates in its rate case proceedings.

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 Savings: MGE has deferred fuel savings through the six months ended June 30, 2023. As of June 30, 2023, MGE had deferred $1.2 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 of the Notes to the Consolidated Financial Statements in this Report for further information regarding fuel cost proceedings.

In the near term, several items may affect us, including:

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. These costs will be subject to the PSCW's annual review of 2022 fuel costs, expected to be completed during 2023. MGE has proposed to recover these costs over a 12-month period from October 2023 through September 2024.

2024/2025 Rate Proceeding: In April 2023, MGE filed with the PSCW a proposed 2024/2025 rate application. MGE has proposed for a 3.75% increase for electric rates and a 2.56% increase to gas rates for 2024. The proceeding addresses rates for 2025 proposing a 3.41% increase for electric rates and a 1.66% increase to gas rates for 2025. A final order is expected before the end of the year. See "Other Matters" below for additional information on the 2024/2025 rate proceeding.

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 6.2% and 6.4% of our net income during the six months ended June 30, 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 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 target.

- *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 continues to evaluate additional investments to replace the generation from Columbia while maintaining electric service reliability. These investments include cost-effective, clean energy projects to help achieve MGE's carbon reduction goals.

Elm Road Units: MGE, along with the plant co-owners, 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, MGE expects coal 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 2035, 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.

- *Growing renewable generation.* During 2023 through 2027 MGE has forecasted over 40% of its total capital expenditures will be for several renewable generation projects. The forecasted capital expenditures include announced projects such as Red Barn (Wind; 9.16 MW), Badger Hollow II (Solar; 50 MW), Paris (Solar and Battery; 20 MW/11 MW), Darien (Solar and Battery; 25 MW/7.5 MW), recently PSCW approved solar project Koshkonong (Solar and Battery; 30 MW/16.5 MW), and other projects to be announced in the future. See the 2023-2027 capital expenditures forecast disclosed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K.
- *Natural gas as a fuel source.* West Riverside: In March 2023, MGE purchased 25 MW of capacity of West Riverside and retains the option to purchase an additional 25 MW of capacity from West Riverside until May 2025. MGE currently expects to exercise this option in a future period.

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 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 expect to file a notification with the PSCW and expect to request recovery of any increases in MGE's next rate proceeding. See "Other Matters" below for additional information on the solar procurement disruptions.

Financing Plans: As of June 30, 2023, MGE has $86 million of remaining regulatory authority from the PSCW to issue long-term debt to finance authorized utility capital expenditures and maturing long-term debt. MGE expects to use a portion of the remaining authority during the second half of 2023 to refinance $30 million long-term debt maturing in September 2023.

The following discussion is based on the business segments as discussed in Footnote 14 of the Notes to Consolidated Financial Statements in this Report.

### Results of Operations

### Three Months Ended June 30, 2023 and 2022

### Electric sales and revenues

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

*(In thousands, except CDD)*

|  | Revenues Three Months Ended June 30, 2023 | 2022 | % Change | Sales (kWh) Three Months Ended June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | $40,324 | $37,555 | 7.4% | 201,892 | 204,967 | (1.5)% |
| Commercial | 63,428 | 57,960 | 9.4% | 438,953 | 446,387 | (1.7)% |
| Industrial | 3,577 | 3,476 | 2.9% | 38,354 | 40,262 | (4.7)% |
| Other-retail/municipal | 10,243 | 9,376 | 9.2% | 92,796 | 91,685 | 1.2% |
| Total retail | 117,572 | 108,367 | 8.5% | 771,995 | 783,301 | (1.4)% |
| Sales to the market | 3,554 | 3,198 | 11.1% | 50,207 | 22,064 | 127.6% |
| Other | 366 | 385 | (4.9)% | — | — | —% |
| Total | $121,492 | $111,950 | 8.5% | 822,202 | 805,365 | 2.1% |
| Cooling degree days (normal 194) |  |  |  | 205 | 277 | (26.0)% |

Electric revenue increased $9.5 million during the three months ended June 30, 2023, compared to the same period in the prior year, due to the following:

*(In millions)*

|  |  |
| --- | ---: |
| Rate changes | $10.2 |
| Revenue subject to refund, net | 1.8 |
| Sales to the market | 0.4 |
| Customer fixed and demand charges | (1.6) |
| Net decrease in commercial, industrial and other-retail/municipal volume | (0.8) |
| Decrease in residential volume | (0.5) |
| Total | $9.5 |

- *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 the three months ended June 30, 2023 were $10.2 million higher than those charged during the same period in the prior year. 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.
- *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 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.
- *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 the three months ended June 30, 2023, sales made at higher market volumes were partially offset by decreased market prices compared to the same period in the prior year, reflecting an increase in sales. 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.
- *Customer fixed and demand charges.* During the three months ended June 30, 2023, fixed and demand charges decreased $1.6 million primarily attributable to the decrease in demand charges for commercial customers and decreased fixed residential customer charge.

### Electric fuel and purchased power

*(In millions)*

|  | Three Months Ended June 30, 2023 | 2022 | $ Change |
| --- | ---: | ---: | ---: |
| Fuel for electric generation | $13.6 | $13.9 | $(0.3) |
| Purchased power | 5.8 | 13.6 | (7.8) |

The $0.3 million decrease in fuel for electric generation was due to an approximately 21% decrease in the average cost offset by an approximately 24% increase in internal generation. Columbia generation was higher during the three months ended June 30, 2023, compared to the same period in the prior year as a result of market prices.

The $7.8 million decrease in purchased power was due to an approximately 39% decrease in market purchases as a result of higher internal generation and an approximately 53% decrease in average cost.

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 that exceed 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 for each of the periods indicated:

*(In thousands, except HDD and average*

| rate per therm of retail customer) | Revenues Three Months Ended June 30, 2023 | 2022 | % Change | Therms Delivered Three Months Ended June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | $16,688 | $23,648 | (29.4)% | 13,593 | 15,263 | (10.9)% |
| Commercial/Industrial | 8,207 | 15,172 | (45.9)% | 14,794 | 15,902 | (7.0)% |
| Total retail | 24,895 | 38,820 | (35.9)% | 28,387 | 31,165 | (8.9)% |
| Gas transportation | 1,235 | 1,340 | (7.8)% | 16,032 | 16,810 | (4.6)% |
| Other | 161 | 24 | n.m.% | — | — | —% |
| Total | $26,291 | $40,184 | (34.6)% | 44,419 | 47,975 | (7.4)% |
| Heating degree days (normal 812) |  |  |  | 739 | 870 | (15.1)% |
| Average rate per therm of retail customer | $0.877 | $1.246 | (29.6)% |  |  |  |

n.m. not meaningful

Gas revenue decreased $13.9 million during the three months ended June 30, 2023, compared to the same period in the prior year, due to the following:

*(In millions)*

|  |  |
| --- | ---: |
| Rate changes | $(10.7) |
| Decrease in volume | (3.7) |
| Other | 0.5 |
| Total | $(13.9) |

- *Rate changes.* In December 2021, the PSCW authorized MGE to increase 2023 rates for retail gas customers by approximately 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 for natural gas decreased driving lower rates during the three months ended June 30, 2023.

The average retail rate per therm for the three months ended June 30, 2023, decreased approximately 30% compared to the same period in the prior year, reflecting a decrease in natural gas commodity costs (recovered through the PGA).

- *Volume.* For the three months ended June 30, 2023, retail gas deliveries decreased approximately 9% compared to the same period in the prior year primarily attributable to favorable weather conditions during the second quarter of 2022.

### Cost of gas sold

Cost of gas sold decreased $14.0 million during the three months ended June 30, 2023, compared to the same period in the prior year. Average cost per therm decreased approximately 62% and therms delivered decreased approximately 11%. 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

During the three months ended June 30, 2023, operations and maintenance expenses increased $0.5 million, compared to the same period in the prior year. The following contributed to the net change:

*(In millions)*

|  |  |
| --- | ---: |
| Increased electric production expenses | $1.1 |
| Increased other expenses | 0.6 |
| Increased administrative and general costs | 0.3 |
| Decreased electric distribution expenses | (1.1) |
| Decreased customer accounts costs | (0.4) |
| Total | $0.5 |

- Increased electric production expenses are primarily related to an increase in Columbia maintenance costs.
- Electric distribution expenses were higher in 2022 primarily related to June 2022 storm response costs.

### Consolidated depreciation expense

Electric depreciation expense increased $3.7 million and gas depreciation expense increased $0.1 million during the three months ended June 30, 2023, compared to the same period in the prior year. 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 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.

### Nonregulated Energy Operations - MGE Energy and MGE

The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF), which have been formed to own and lease electric generating capacity to assist MGE. During both the three months ended June 30, 2023 and 2022, net income at the nonregulated energy operations segment was $5.5 million.

### 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. ATC Holdco's transmission development activities have been suspended for the near term. During both the three months ended June 30, 2023 and 2022, other income at the transmission investment segment primarily reflects ATC's operations and was $2.6 million. See Footnote 3 of the Notes to Consolidated Financial

Statements in this Report for summarized financial information regarding ATC and "Other Matters" below for additional information concerning ATC.

### All Other Operations - MGE Energy

### Other income

The decrease of $1.5 million in other income from all other operations during the three months ended June 30, 2023 primarily results from increased investment distribution losses from our venture capital funds 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.

### Consolidated Income Taxes - MGE Energy and MGE

See Footnote 4 of the Notes to Consolidated Financial Statements in this Report for the effective tax rate reconciliation.

### Noncontrolling Interest, Net of Tax - MGE

Noncontrolling interest, net of tax, reflects the accounting required for MGE Energy's interest in MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF). MGE Energy owns 100% of MGE Power Elm Road and MGE Power West Campus. They are not owned by MGE. 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:

*(In millions)*

|  | Three Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| MGE Power Elm Road | $3.6 | $3.8 |
| MGE Power West Campus | 1.8 | 1.8 |

### Results of Operations

### Six Months Ended June 30, 2023 and 2022

### Electric sales and revenues

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

*(In thousands, except CDD)*

|  | Revenues Six Months Ended June 30, 2023 | 2022 | % Change | Sales (kWh) Six Months Ended June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | $81,544 | $78,029 | 4.5% | 408,082 | 426,851 | (4.4)% |
| Commercial | 122,965 | 112,409 | 9.4% | 860,125 | 872,916 | (1.5)% |
| Industrial | 6,863 | 6,623 | 3.6% | 74,606 | 79,523 | (6.2)% |
| Other-retail/municipal | 19,862 | 18,205 | 9.1% | 172,475 | 172,295 | 0.1% |
| Total retail | 231,234 | 215,266 | 7.4% | 1,515,288 | 1,551,585 | (2.3)% |
| Sales to the market | 6,312 | 6,080 | 3.8% | 53,823 | 73,216 | (26.5)% |
| Other revenues | 1,190 | 693 | 71.7% | — | — | —% |
| Total | $238,736 | $222,039 | 7.5% | 1,569,111 | 1,624,801 | (3.4)% |
| Cooling degree days (normal 194) |  |  |  | 205 | 277 | (26.0)% |

38

Electric revenue increased $16.7 million during the six months ended June 30, 2023, compared to the same period in the prior year, due to the following:

*(In millions)*

|  |  |
| --- | ---: |
| Rate changes | $20.3 |
| Revenue subject to refund, net | 2.6 |
| Other | 0.5 |
| Sales to the market | 0.2 |
| Decrease in residential volume | (2.8) |
| Customer fixed and demand charges | (2.4) |
| Net decrease in commercial, industrial and other-retail/municipal volume | (1.7) |
| Total | $16.7 |

- *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 the six months ended June 30, 2023 were $20.3 million higher than those charged during the same period in the prior year. 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.
- *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 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.
- *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 the six months ended June 30, 2023, sales were made at higher market prices and partially offset by decreased market volumes compared to the same period in the prior year, reflecting a decrease in sales. 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.
- *Residential volume.* During the six months ended June 30, 2023, residential sales decreased by approximately 4% compared to the same period in the prior year. This decrease was driven by warmer than normal weather in the first quarter of 2023.
- *Customer fixed and demand charges.* During the six months ended June 30, 2023, fixed and demand charges decreased $2.4 million primarily attributable to the decrease in demand charges for commercial customers. and decreased fixed residential customer charge.
- *Commercial, industrial and other-retail/municipal volume.* During the six months ended June 30, 2023, sales decreased by approximately 2% compared to the same period in the prior year driven by warmer weather in the first quarter of 2023.

### Electric fuel and purchased power

*(In millions)*

|  | Six Months Ended June 30, 2023 | 2022 | $ Change |
| --- | ---: | ---: | ---: |
| Fuel for electric generation | $27.4 | $27.4 | $— |
| Purchased power | 21.2 | 26.2 | (5.0) |

The $5.0 million decrease in purchased power was due to an approximately 13% decrease in market purchases as a result of lower customer sales and an approximately 26% decrease in average cost.

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 that exceed 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 for each of the periods indicated:

*(In thousands, except HDD and average*

| rate per therm of retail customer) | Revenues Six Months Ended June 30, 2023 | 2022 | % Change | Therms Delivered Six Months Ended June 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | $72,412 | $80,331 | (9.9)% | 60,746 | 70,925 | (14.4)% |
| Commercial/Industrial | 49,710 | 55,423 | (10.3)% | 57,249 | 63,794 | (10.3)% |
| Total retail | 122,122 | 135,754 | (10.0)% | 117,995 | 134,719 | (12.4)% |
| Gas transportation | 3,767 | 3,216 | 17.1% | 38,305 | 42,876 | (10.7)% |
| Other revenues | 364 | 25 | n.m.% | — | — | —% |
| Total | $126,253 | $138,995 | (9.2)% | 156,300 | 177,595 | (12.0)% |
| Heating degree days (normal 4,365) |  |  |  | 3,929 | 4,588 | (14.4)% |
| Average rate per therm of retail customer | $1.035 | $1.008 | 2.7% |  |  |  |

n.m. not meaningful

Gas revenue decreased $12.7 million during the six months ended June 30, 2023, compared to the same period in the prior year, due to the following:

*(In millions)*

|  |  |
| --- | ---: |
| Decrease in volume | $(11.4) |
| Rate changes | (2.2) |
| Other | 0.9 |
| Total | $(12.7) |

- *Volume.* For the six months ended June 30, 2023, retail gas deliveries decreased approximately 12% compared to the same period in the prior year primarily attributable to warmer than normal weather in the first quarter of 2023. During the first quarter of 2022, the weather was slightly colder than normal.
- *Rate changes.* In December 2021, the PSCW authorized MGE to increase 2023 rates for retail gas customers by approximately 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 for natural gas decreased driving lower rates during the six months ended June 30, 2023.

The average retail rate per therm excluding customer fixed charge for the six months ended June 30, 2023, decreased approximately 2% compared to the same period in the prior year, reflecting a decrease in natural gas commodity costs (recovered through the PGA).

### Cost of gas sold

Cost of gas sold decreased $11.0 million during the six months ended June 30, 2023, compared to the same period in the same period in the prior year. Therms delivered decreased approximately 13%, partially offset by an approximately 1% increase in cost per therm. 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

During the six months ended June 30, 2023, operations and maintenance expenses increased $0.5 million, compared to the same period in the prior year. The following contributed to the net change:

*(In millions)*

|  |  |
| --- | ---: |
| Increased electric production expenses | $1.2 |
| Increased other expenses | 0.7 |
| Increased administrative and general costs | 0.6 |
| Decreased customer accounts costs | (1.1) |
| Decreased electric distribution expenses | (0.9) |
| Total | $0.5 |

- Increased electric production expenses are primarily related to an increase in Columbia maintenance costs.
- Decreased customer accounts costs 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.
- Electric distribution expenses were higher in 2022 primarily related to June 2022 storm response costs.

### Consolidated depreciation expense

Electric depreciation expense increased $7.2 million and gas depreciation expense increased $0.2 million during the six months ended June 30, 2023, compared to the same period in the prior year. 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 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.

### Nonregulated Energy Operations - MGE Energy and MGE

The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF), which have been formed to own and lease electric generating capacity to assist MGE. During the six months ended June 30, 2023 and 2022, net income at the nonregulated energy operations segment was $11.0 million and $10.9 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. ATC Holdco's transmission development activities have been suspended for the near term. During the six months ended June 30, 2023 and 2022, other income at the transmission investment segment primarily reflects ATC's operations and was $5.2 million and $5.1 million, respectively. See Footnote 3 of the Notes to Consolidated Financial Statements in this Report for summarized financial information regarding ATC and "Other Matters" below for additional information concerning ATC.

### All Other Operations - MGE Energy

### Other income

The decrease of $2.6 million in other income from all other operations during the six months ended June 30, 2023, primarily results from increased investment distribution losses from our venture capital funds 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.

### Consolidated Income Taxes - MGE Energy and MGE

See Footnote 4 of the Notes to Consolidated Financial Statements in this Report for the effective tax rate reconciliation.

### Noncontrolling Interest, Net of Tax - MGE

Noncontrolling interest, net of tax, reflects the accounting required for MGE Energy's interest in MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF). MGE Energy owns 100% of MGE Power Elm Road and MGE Power West Campus. They are not owned by MGE. 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:

*(In millions)*

|  | Six Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| MGE Power Elm Road | $7.3 | $6.7 |
| MGE Power West Campus | 3.6 | 3.6 |

### Contractual Obligations and Commercial Commitments - MGE Energy and MGE

There were no material changes, other than from the normal course of business, to MGE Energy's and MGE's contractual obligations (representing cash obligations that are considered to be firm commitments) and commercial commitments (representing commitments triggered by future events) during the six months ended June 30, 2023, except as noted below. Further discussion of the contractual obligations and commercial commitments is included in Footnote 16 of the Notes to Consolidated Financial Statements and "Contractual Obligations and Commercial Commitments for MGE Energy and MGE" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2022 Annual Report on Form 10-K.

### Purchase Contracts – MGE Energy and MGE

See Footnote 8.c. of Notes to Consolidated Financial Statements in this Report for a description of commitments as of June 30, 2023, that MGE Energy and MGE have entered with respect to various commodity supply and transportation contracts to meet their obligations to deliver electricity and natural gas to customers.

### Long-term Debt – MGE Energy and MGE

In March 2023, $19.3 million of City of Madison, Wisconsin Industrial Development Revenue Refunding Bonds, Series 2020A were remarketed. See Footnote 6.c. of Notes to Consolidated Financial Statements in this Report for further information.

### 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" under Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources in the 2022 Annual Report on Form 10-K for information regarding MGE Energy's and MGE's credit facilities.

### Cash Flows

The following summarizes cash flows for MGE Energy and MGE during the six months ended June 30, 2023 and 2022:

*(In thousands)*

| Cash provided by (used for): | MGE Energy 2023 | 2022 | MGE 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Operating activities | $126,991 | $111,276 | $125,050 | $109,549 |
| Investing activities | (111,759) | (69,063) | (108,506) | (66,300) |
| Financing activities | (11,943) | (36,568) | (13,720) | (33,791) |

### 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 the six months ended June 30, 2023, was $127.0 million, an increase of $15.7 million when compared to the same period in the prior year, driven by:

A $28.1 million increase in cash as a result of higher overall collections from customers during the six months ended June 30, 2023, when compared to the prior year. This increase was driven by the 2023 rates approved by the PSCW, effective January 1, 2023, and decrease in the per-unit cost of natural gas during the six months ended June 30, 2023.

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

A decrease of $3.3 million in cash from higher payments for MGE Energy's federal and state taxes during the six months ended June 30, 2023, when compared to the prior year.

A decrease of $1.7 million in cash from higher payments for interest, driven by MGE's issuance of long-term debt during the fourth quarter of 2022 and first quarter of 2023, compared to the prior period.

A decrease of $6.7 million in cash from higher payments for other operation and maintenance expenses. During the first quarter of 2023, a $2.0 million contribution to the MGE Foundation was paid.

### MGE

Cash provided by operating activities during the six months ended June 30, 2023, was $125.1 million, an increase of $15.5 million when compared to the same period in the prior year, driven by:

A $28.1 million increase in cash as a result of higher overall collections from customers during the six months ended June 30, 2023, when compared to the prior year. This increase was driven by the 2023 rates approved by the PSCW, effective January 1, 2023, and decrease in the per-unit cost of natural gas during the six months ended June 30, 2023.

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

A decrease of $3.0 million in cash from higher payments for MGE's federal and state taxes during the six months ended June 30, 2023, when compared to the prior year.

A decrease of $1.7 million in cash from higher payments for interest, driven by MGE's issuance of long-term debt during the fourth quarter of 2022 and first quarter of 2023, compared to the prior period.

A decrease of $7.4 million in cash from higher payments for other operation and maintenance expenses.

### Capital Requirements and Investing Activities

### MGE Energy

MGE Energy's cash used for investing activities increased $42.7 million during the six months ended June 30, 2023, when compared to the same period in the prior year.

Capital expenditures during the six months ended June 30, 2023, were $107.7 million. This amount represents an increase of $41.7 million from the expenditures made in the same period in the prior year. This increase primarily reflects the purchase of 25 MW of West Riverside and purchase of Red Barn wind farm.

### MGE

MGE's cash used for investing activities increased $42.2 million during the six months ended June 30, 2023, when compared to the same period in the prior year.

Capital expenditures during the six months ended June 30, 2023, were $107.7 million. This amount represents an increase of $41.7 million from the expenditures made in the same period in the prior year. This increase primarily reflects the purchase of 25 MW of West Riverside purchase of Red Barn wind farm.

### MGE Energy's and MGE's Capital Requirements

MGE Energy's and MGE's liquidity are primarily affected by their capital expenditure requirements. During the six months ended June 30, 2023, capital expenditures for MGE Energy and MGE totaled $107.7 million, which included $105.2 million of utility capital expenditures. The primary driver of the increased utility capital expenditures during the six months ended June 30, 2023, were the purchases of West Riverside and Red Barn wind farm.

MGE does not currently expect any material changes to its construction plans as presented in the 2023 through 2027 capital expenditure forecast included under Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources in the 2022 Annual Report on Form 10-K. MGE is monitoring import regulations under the Uyghur Forced Labor Protection Act and the U.S. Department of Commerce investigation. These disruptions have had and may continue to impact current and future solar projects increasing costs or causing delays in construction timelines. As projects are delayed, timing of capital expenditures will be correspondingly shifted. See "Other Matters" below for additional information on the solar procurement disruptions.

### Cash Used for Financing Activities

### MGE Energy

Cash used for MGE Energy's financing activities was $11.9 million during the six months ended June 30, 2023, compared to $36.6 million for the same period in the prior year.

During the six months ended June 30, 2023, dividends paid were $29.5 million compared to $28.0 million in the prior year. The increase reflected a higher dividend rate per share ($0.815 vs. $0.775).

During the six months ended June 30, 2023, MGE borrowed $50 million through the issuance of senior unsecured notes which was used to assist with financing additional capital expenditures and other corporate obligations. In addition, $19.3 million of Industrial Development Revenue Bonds was tendered by their holders as required by the terms of the bonds and remarketed as permitted by those terms. There were no long-term debt borrowings during the six months ended June 30, 2022.

During the six months ended June 30, 2023, net short-term debt repayments were $28.5 million, compared to $5.5 million of repayments in the same period in the prior year.

### MGE

During the six months ended June 30, 2023, cash used for MGE's financing activities was $13.7 million, compared to $33.8 million for the same period in the prior year.

During the six months ended June 30, 2023, cash dividends to parent (MGE Energy) were $21.0 million, compared to $12.0 million in the same period in the prior year.

Distributions to parent from noncontrolling interest, which represent distributions from MGE Power Elm Road and MGE Power West Campus to MGE Energy, were $10.3 million during the six months ended June 30, 2023, compared to $13.3 million in the same period in the prior year.

During the six months ended June 30, 2023, MGE borrowed $50 million through the issuance of senior unsecured notes which was used to assist with financing additional capital expenditures and other corporate obligations. In addition, $19.3 million of Industrial Development Revenue Bonds was tendered by their holders as required by the terms of the bonds and remarketed as permitted by those terms. There were no long-term debt borrowings during the six months ended June 30, 2022.

During the six months ended June 30, 2023, net short-term debt repayments were $28.5 million, compared to $5.5 million of repayments in the same period in the prior year.

### Capitalization Ratios

MGE Energy's capitalization ratios were as follows:

|  | MGE Energy June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Common shareholders' equity | 60.4% | 60.4% |
| Long-term debt(a) | 37.3% | 35.7% |
| Short-term debt | 2.3% | 3.9% |

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

### 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.

### Environmental Matters

See the discussion of environmental matters included in the 2022 Annual Report on Form 10-K, as updated by Footnote 8.a. of Notes to Consolidated Financial Statements in this Report.

### Other Matters

### Rate Matters

In December 2021, the PSCW approved a settlement agreement to increase gas rates 0.96% in 2023 and a potential 2023 electric rate change to be addressed through a limited reopener.

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

In April 2023, MGE filed a 2024/2025 rate application with a proposed increase of 3.75% for electric rates and a 2.56% increase for gas rates in 2024. The application addresses rates for 2025 proposing a 3.41% increase for electric rates and a 1.66% increase to gas rates for 2025. PSCW approval is pending. A final order is expected before the end of the year.

Details related to MGE's 2023 approved settlement agreement and 2023 electric limited reopener, and 2024/2025 proposed rate proceeding are as follows:

*(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)(d) | $1,202,123 | $13,995 | 9.8% | 56.12% | 1/1/2024 |
| Gas (2024 Test Period)(d) | $338,417 | $3,701 | 9.8% | 56.12% | 1/1/2024 |
| Electric (2025 Test Period)(d) | $1,281,236 | $13,871 | 9.8% | 56.05% | 1/1/2025 |
| Gas (2025 Test Period)(d) | $345,463 | $3,341 | 9.8% | 56.05% | 1/1/2025 |

(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 - Executive Overview 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.

(d) Pending approval by the PSCW.

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

### 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 6.2% and 6.4% of our net income during the six months ended June 30, 2023 and 2022, respectively, 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 expect to file a notification with the PSCW and expect to request recovery of any increases in MGE's next rate proceeding.

### U.S. Department of Commerce Investigation

In March 2022, the U.S. Department of Commerce (USDOC) 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 USDOC 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 disruptions cause costs to exceed the levels approved for specific projects, we expect to file a notification with the PSCW and expect to request recovery of any increases in MGE's next rate proceeding.

### Adoption of Accounting Principles and Recently Issued Accounting Pronouncements

See Footnote 2 of Notes to Consolidated Financial Statements in this Report for discussion of new accounting pronouncements.

## Market risk

As filed, 171 characters.

There were no material changes to the market risks disclosed in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our 2022 Annual Report on Form 10-K.

## Controls and procedures

As filed, 2,218 characters.

During the second quarter of 2023, each registrant's management, including the principal executive officer and principal financial officer, evaluated its disclosure controls and procedures related to the recording, processing, summarization, and reporting of information in its periodic reports that it files with the SEC. These disclosure controls and procedures have been designed to ensure that material information relating to that registrant, including its subsidiaries, is accumulated and made known to that registrant's management, including these officers, by other employees of that registrant and its subsidiaries as appropriate to allow timely decisions regarding required disclosure, and that this information is recorded, processed, summarized, evaluated, and reported, as applicable, within the time periods specified in the SEC's rules and forms. The evaluations take into account changes in the internal and external operating environments that may impact those controls and procedures. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision making can be faulty and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Also, MGE Energy does not control or manage certain of its unconsolidated entities and thus, its access and ability to apply its procedures to those entities is more limited than is the case for its consolidated subsidiaries.

As of June 30, 2023, each registrant's principal executive officer and principal financial officer concluded that its disclosure controls and procedures were effective. Each registrant intends to strive continually to improve its disclosure controls and procedures to enhance the quality of its financial reporting.

During the quarter ended June 30, 2023, there were no changes in either registrant's internal controls over financial reporting that materially affected, or are reasonably likely to affect materially, that registrant's internal control over financial reporting.

## Risk factors

As filed, 127 characters.

There were no material changes from the risk factors disclosed in Item 1A. Risk Factors in our 2022 Annual Report on Form 10-K.

Filed Aug 3, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-037779. Last ingested by Listed: Oct 24, 2026, 15:05 ET. No prices; not investment advice.