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United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended:

December 31, 2022

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission

File No.

Name of Registrant, State of Incorporation, Address

of Principal Executive Offices, and Telephone No.

IRS Employer

Identification No.

000-49965

MGE Energy, Inc.

(a Wisconsin Corporation)

133 South Blair Street

Madison, Wisconsin 53788

(608) 252-7000 | mgeenergy.com

39-2040501

000-1125

Madison Gas and Electric Company

(a Wisconsin Corporation)

133 South Blair Street

Madison, Wisconsin 53788

(608) 252-7000 | mge.com

39-0444025

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 

Title of Class

 

Trading Symbol

Name of Each Exchange on which Registered

MGE Energy, Inc.

Common Stock, $1 Par Value Per Share

MGEE

The NASDAQ Stock Market

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

 

Title of Class

Madison Gas and Electric Company

Common Stock, $1 Par Value Per Share

 

Indicate by check mark if the registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.

MGE Energy, Inc. Yes ☒ No ☐ Madison Gas and Electric Company Yes ☒ No ☐

 

Indicate by check mark if the registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

MGE Energy, Inc. Yes ☐ NoMadison Gas and Electric Company Yes ☐ No

 

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days.

MGE Energy, Inc. Yes ☒ No ☐ Madison Gas and Electric Company Yes ☒ No ☐

 

Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit such files):

MGE Energy, Inc. Yes ☒ No ☐ Madison Gas and Electric Company Yes ☒ No ☐

 

 


 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:

 

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

MGE Energy, Inc.

Madison Gas and Electric Company

If an emerging growth company, indicate by checkmark if the registrants have elected not to use the extended transition period for complying with any new or revised financial reporting standards provided pursuant to Section 13(a) of the Exchange Act.

MGE Energy, Inc.Madison Gas and Electric Company

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

MGE Energy, Inc. Madison Gas and Electric Company

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

MGE Energy, Inc.Madison Gas and Electric Company

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

MGE Energy, Inc.Madison Gas and Electric Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

MGE Energy, Inc. Yes ☐ No Madison Gas and Electric Company Yes ☐ No

 

The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of each registrant as of June 30, 2022 was as follows:

MGE Energy, Inc.

$2,808,969,657

Madison Gas and Electric Company

$0

 

The number of shares outstanding of each registrant's common stock as of January 31, 2023, were as follows:

MGE Energy, Inc.

36,163,370

Madison Gas and Electric Company

17,347,894

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of MGE Energy, Inc.'s definitive proxy statement to be filed before April 30, 2023, relating to its annual meeting of shareholders, are incorporated by reference into Part III of this annual report on Form 10-K.

 

Madison Gas and Electric Company meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore omitting (i.) the information otherwise required by Item 601 of Regulation S-K relating to a list of subsidiaries of the registrant as permitted by General Instruction (I)(2)(b), (ii.) the information otherwise required by Item 10 relating to Directors and Executive Officers as permitted by General Instruction (I)(2)(c), (iii.) the information otherwise required by Item 11 relating to Executive Compensation as permitted by General Instruction (I)(2)(c), (iv.) the information otherwise required by Item 12 relating to Security Ownership of Certain Beneficial Owners and Management as permitted by General Instruction (I)(2)(c), and (v.) the information otherwise required by Item 13 relating to Certain Relationships and Related Transactions as permitted by General Instruction (I)(2)(c).

 


 

Table of Contents

 

 

Filing Format.

4

Forward-Looking Statements.

4

Where to Find More Information.

4

Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report.

5

PART I.

7

 

Item 1. Business.

7

 

Item 1A. Risk Factors.

18

 

Item 1B. Unresolved Staff Comments.

26

 

Item 2. Properties.

27

 

Item 3. Legal Proceedings.

29

 

Item 4. Mine Safety Disclosures.

29

PART II.

30

 

Item 5. Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

30

 

Item 6. [Reserved].

30

 

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

31

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

49

 

Item 8. Financial Statements and Supplementary Data.

51

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

108

 

Item 9A. Controls and Procedures.

108

 

Item 9B. Other Information.

108

 

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

108

PART III.

109

 

Item 10. Directors, Executive Officers, and Corporate Governance.

109

 

Item 11. Executive Compensation.

109

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

109

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

110

 

Item 14. Principal Accounting Fees and Services.

110

PART IV.

111

 

Item 15. Exhibits and Financial Statement Schedules.

111

 

Item 16. Form 10-K Summary.

114

 

Signatures - MGE Energy, Inc.

119

 

Signatures - Madison Gas and Electric Company.

120

 

3


 

Filing Format

 

This combined Form 10-K is being filed separately by MGE Energy, Inc. (MGE Energy) and Madison Gas and Electric Company (MGE). MGE is a wholly owned subsidiary of MGE Energy and represents a majority of its assets, liabilities, revenues, expenses, and operations. Thus, all information contained in this report relates to, and is filed by, MGE Energy. Information that is specifically identified in this report as relating solely to MGE Energy, such as its financial statements and information relating to its nonregulated business, does not relate to, and is not filed by, MGE. MGE makes no representation as to that information. The terms "we" and "our," as used in this report, refer to MGE Energy and its consolidated subsidiaries, unless otherwise indicated.

 

Forward-Looking Statements

 

This report, and other documents filed by MGE Energy and MGE with the Securities and Exchange Commission (SEC) from time to time, contain forward-looking statements that reflect management's current assumptions and estimates regarding future performance and economic conditions—especially as they relate to economic conditions, future load growth, revenues, expenses, capital expenditures and rate recovery, financial resources, regulatory matters, and the scope and expense associated with future environmental regulation. These forward-looking statements are made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believe," "expect," "anticipate," "estimate," "could," "should," "intend," "will," and other similar words, and words relating to goals, targets and projections, generally identify forward-looking statements. Both MGE Energy and MGE caution investors that these forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those projected, expressed, or implied.

 

The factors that could cause actual results to differ materially from the forward-looking statements made by a registrant include (a) those factors discussed in Item 1A. Risk Factors, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, Footnote 16. Commitments and Contingencies, and (b) other factors discussed herein and in other filings made by that registrant with the SEC.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this report. MGE Energy and MGE undertake no obligation to release publicly any revision to these forward-looking statements to reflect events or circumstances after the date of this report, except as required by law.

 

Where to Find More Information

 

We file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and other information with the SEC. The SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

MGE Energy maintains a website at mgeenergy.com, and MGE maintains a website at mge.com. Copies of the reports and other information that we file with the SEC may be obtained from our websites free of charge. Information contained on MGE Energy's and MGE's websites shall not be deemed incorporated into, or to be a part of, this report.

4


 

Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report

 

Abbreviations, acronyms, and definitions used in the text and notes of this report are defined below.

 

MGE Energy and Subsidiaries:

 

 

 

 

 

CWDC

 

Central Wisconsin Development Corporation

MAGAEL

 

MAGAEL, LLC

MGE

 

Madison Gas and Electric Company

MGE Energy

 

MGE Energy, Inc.

MGE Power

 

MGE Power, LLC

MGE Power Elm Road

 

MGE Power Elm Road, LLC

MGE Power West Campus

 

MGE Power West Campus, LLC

MGE Services

 

MGE Services, LLC

MGE State Energy Services

 

MGE State Energy Services, LLC

MGE Transco

 

MGE Transco Investment, LLC

MGEE Transco

 

MGEE Transco, LLC

North Mendota

 

North Mendota Energy & Technology Park, LLC

 

 

 

Other Defined Terms:

 

 

 

 

 

2017 Tax Act

 

Tax Cuts and Jobs Act of 2017

2020 Plan

 

MGE Energy's 2020 Performance Unit Plan

2021 Incentive Plan

 

MGE Energy's 2021 Long-Term Incentive Plan

AFUDC

 

Allowance for Funds Used During Construction

ANR

 

ANR Pipeline

ARO

 

Asset Retirement Obligation

ATC

 

American Transmission Company LLC

ATC Holdco

 

ATC Holdco, LLC

Badger Hollow I

 

Badger Hollow I Solar Farm

Badger Hollow II

 

Badger Hollow II Solar Farm

BART

 

Best Available Retrofit Technology

Blount

 

Blount Station

BTA

 

Best Technology Available

CA

 

Certificate of Authority

CAA

 

Clean Air Act

CASAC

 

Clean Air Scientific Advisory Committee

CBP

 

United States Customs and Border Patrol

CAVR

 

Clean Air Visibility Rule

CCR

 

Coal Combustion Residual

CO2

 

Carbon Dioxide

codification

 

Financial Accounting Standards Board Accounting Standards Codification

Columbia

 

Columbia Energy Center

Cooling degree days (CDD)

 

Measure of the extent to which the average daily temperature is above 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide cooling

COVID-19

 

Coronavirus Disease 2019 and its variants

COSO

 

Committee of Sponsoring Organizations

CSAPR

 

Cross-State Air Pollution Rule

CWA

 

Clean Water Act

D.C. Circuit

 

United States Court of Appeals for the District of Columbia Circuit

Dth

 

Dekatherms

EEI

 

Edison Electric Institute

ELG

 

Effluent Limitations Guidelines

Elm Road Units

 

Elm Road Generating Station

EPA

 

United States Environmental Protection Agency

FASB

 

Financial Accounting Standards Board

FIP

 

Federal Implementation Plan

FERC

 

Federal Energy Regulatory Commission

Forward Wind

 

Forward Wind Energy Center

FTR

 

Financial Transmission Rights

GAAP

 

Generally Accepted Accounting Principles

GHG

 

Greenhouse Gas

5


 

heating degree days (HDD)

 

Measure of the extent to which the average daily temperature is below 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide heating

ICF

 

Insurance Continuance Fund

IPCC

 

Intergovernmental Panel on Climate Change

IRA

 

Inflation Reduction Act

IRS

 

Internal Revenue Service

kVA

 

Kilovolt Ampere

KW

 

Kilowatt, a measure of electric energy generating capacity

kWh

 

Kilowatt-hour

MISO

 

Midcontinent Independent System Operator, Inc. (a regional transmission organization)

MW

 

Megawatt

MWh

 

Megawatt-hour

NAAQS

 

National Ambient Air Quality Standards

Nasdaq

 

The Nasdaq Stock Market

NERC

 

North American Electric Reliability Corporation

NNG

 

Northern Natural Gas Company

NOx

 

Nitrogen Oxides

NSPS

 

New Source Performance Standards

NYSE

 

New York Stock Exchange

O'Brien

 

O'Brien Solar Fields

OSCE

 

State of Wisconsin's Office of Sustainability and Clean Energy

Paris

 

Paris Solar and Battery Park

Paris Agreement

 

Paris Agreement under the United Nations Framework Convention on Climate Change

PCBs

 

Polychlorinated Biphenyls

the Petition

 

Petition for Judicial Review of Agency Action

PGA

 

Purchased Gas Adjustment clause

PM

 

Particulate Matter

PPA

 

Purchased power agreement

PSCW

 

Public Service Commission of Wisconsin

REC

 

Renewable Energy Credit

RER

 

Renewable Energy Rider

Riverside

 

Riverside Energy Center in Beloit, Wisconsin

ROE

 

Return on Equity

RTO

 

Regional Transmission Organization

Saratoga

 

Saratoga Wind Farm

SCR

 

Selective Catalytic Reduction

SEC

 

Securities and Exchange Commission

SIP

 

State Implementation Plan

SO2

 

Sulfur Dioxide

SOFR

 

Secured Overnight Funding Rate

the State

 

State of Wisconsin

Stock Plan

 

Direct Stock Purchase and Dividend Reinvestment Plan of MGE Energy

Two Creeks

 

Two Creeks Solar Farm

USDOC

 

United States Department of Commerce

UW

 

University of Wisconsin at Madison

VIE

 

Variable Interest Entity

WCCF

 

West Campus Cogeneration Facility

WDNR

 

Wisconsin Department of Natural Resources

WEPCO

 

Wisconsin Electric Power Company

working capital

 

Current assets less current liabilities

WOTUS

 

Waters of the United States

WPDES

 

Wisconsin Pollutant Discharge Elimination System

WPL

 

Wisconsin Power and Light Company

WPSC

 

Wisconsin Public Service Corporation

WRERA

 

Worker, Retiree and Employer Recovery Act of 2008

XBRL

 

eXtensible Business Reporting Language

6


 

PART I.

 

Item 1. Business.

 

MGE Energy operates in the following business segments:

 

Regulated electric utility operations – generating, purchasing, and distributing electricity through MGE.

 

Regulated gas utility operations – purchasing and distributing natural gas through MGE.

 

Nonregulated energy operations – owning and leasing electric generating capacity that assists MGE through MGE Energy's wholly owned subsidiaries MGE Power Elm Road and MGE Power West Campus.

 

Transmission investments – representing our investment in American Transmission Company LLC, a company engaged in the business of providing electric transmission services primarily in Wisconsin, and our investment in ATC Holdco LLC, a company created to facilitate out-of-state electric transmission development and investments.

 

All other – investing in companies and property that relate to the regulated operations and financing the regulated operations, through its wholly owned subsidiaries CWDC, MAGAEL, MGE State Energy Services, North Mendota, and Corporate functions.

 

MGE's utility operations represent a majority of the assets, liabilities, revenues, expenses, and operations of MGE Energy. MGE Energy's nonregulated energy operations currently include an undivided interest in two coal-fired generating units located in Oak Creek, Wisconsin, which we refer to as the Elm Road Units, and an undivided interest in a cogeneration facility located on the Madison campus of the University of Wisconsin, which we refer to as the West Campus Cogeneration Facility or WCCF.

 

As a public utility, MGE is subject to regulation by the PSCW and the FERC. The PSCW has authority to regulate most aspects of MGE's business including rates, accounts, issuance of securities, and plant siting. The PSCW also has authority over certain aspects of MGE Energy as a holding company of a public utility. FERC has jurisdiction, under the Federal Power Act, over certain accounting practices and certain other aspects of MGE's business.

 

MGE Energy's subsidiaries are also subject to regulation under local, state, and federal laws regarding air and water quality and solid waste disposal. See "Environmental" below.

 

MGE Energy was organized as a Wisconsin corporation in 2001. MGE was organized as a Wisconsin corporation in 1896. Our principal offices are located at 133 South Blair Street, Madison, Wisconsin 53788, and our telephone number is (608) 252-7000.

 

Electric Utility Operations

 

MGE distributes electricity in a service area covering a 264 square-mile area of Dane County, Wisconsin. The service area includes the city of Madison, Wisconsin. It owns or leases ownership interests in electric generation facilities located in Wisconsin and Iowa.

 

As of December 31, 2022, MGE supplied electric service to approximately 161,000 customers, with approximately 90% located in the cities of Fitchburg, Madison, Middleton, and Monona and 10% in adjacent areas.

 

7


 

Electric sales, customers, and revenues for 2022 were comprised of the following:

 

img47105776_0.jpg 

 

Electric operations accounted for approximately 65.2%, 69.4%, and 73.2% of MGE's total 2022, 2021, and 2020 regulated revenues, respectively.

 

See Item 2. Properties for a description of MGE's electric utility plant.

 

MGE is registered with North American Electric Reliability Corporation (NERC) and one regional entity, the Midwest Reliability Organization. The essential purposes of these entities are to develop and implement regional and NERC reliability standards and determine compliance with those standards, including enforcement mechanisms.

 

Transmission

 

American Transmission Company LLC (ATC) was formed by Wisconsin-based utilities who were required by Wisconsin law to contribute their transmission facilities to it in 2001 and is owned by those utilities and their affiliates. ATC's purpose is to provide reliable, economic transmission service to all customers in a fair and equitable manner. ATC plans, constructs, operates, maintains, and expands transmission facilities that it owns to provide adequate and reliable transmission of power. ATC is regulated by FERC for all rate terms and conditions of service. ATC is also regulated by the PSCW for some aspects of its governance and is a transmission-owning member of the MISO.

 

Regional Transmission Organizations (RTO)

 

MISO

MGE is a nontransmission owning member of MISO. MISO, a FERC-approved RTO, is responsible for monitoring the electric transmission system that delivers power from generating plants to wholesale power customers. MISO's role is to ensure equal access to the transmission system and to maintain or improve electric system reliability across 15 U.S. states and the Canadian province of Manitoba.

 

MISO operates a bid-based energy market. MGE offers substantially all of its generation to the MISO market and purchases its load requirement from the MISO market in accordance with the MISO tariff. MGE also participates in the ancillary services market operated by MISO, which is an extension of the existing energy market. Through the operation of the ancillary services market, MISO provides the reserves for MGE's load, and MGE may offer to sell reserves from its generating units.

 

MGE participates in the MISO capacity auction, which provides a forum for buyers and sellers of planning resource credits to interact. Load serving entities such as MGE may participate in the capacity auction to obtain the necessary aggregate planning resource credits needed to meet their planning reserve margin requirement established by the PSCW. Generator owners may participate to sell any excess aggregate planning resource credits.

 

8


 

Fuel supply and generation

 

MGE satisfies its customers' electric demand with internal generation and purchased power. MGE's current fuel mix for generation fluctuates from year-to-year due to fuel pricing in the market, generating unit availability, weather, and customer demand. MGE has a responsibility to its customers to dispatch the lowest cost generation available pursuant to regulatory requirements.

 

MGE's electric energy delivery requirements were satisfied from the following fuel sources:

 

(in MWh)

 

2022

 

 

2021

 

 

2020

 

Coal

 

 

1,219,793

 

 

 

1,797,017

 

 

 

1,566,204

 

Natural gas

 

 

539,265

 

 

 

405,696

 

 

 

502,387

 

Renewable sources(a)

 

 

759,194

 

 

 

581,374

 

 

 

485,965

 

Fuel oil

 

 

475

 

 

 

884

 

 

 

472

 

Purchased power - other(b)(c)

 

 

919,052

 

 

 

726,008

 

 

 

789,058

 

Total fuel sources

 

 

3,437,779

 

 

 

3,510,979

 

 

 

3,344,086

 

 

 

 

 

 

 

 

 

 

 

Adjusted total fuel sources(c)

 

 

3,741,207

 

 

 

3,743,743

 

 

 

3,663,569

 

 

(a)
Includes both internal generation and purchased power.
(b)
Includes third-party purchased power and MISO market activity. A significant percentage of MGE's electric supply comes from internal generation sources. MGE supplements this internal generation with long-term purchase power agreements and spot purchases in the MISO market.
(c)
The MISO market consists of two energy markets, the Day-ahead market and the Real-time market. The table above nets purchases and sales within the same hour in the two MISO markets. For the years ended December 31, 2022, 2021, and 2020, the amount netted between Day-ahead and the Real-time MISO markets was 303,428 MWh, 232,764 MWh, and 319,483 MWh, respectively. These amounts are reflected in "Adjusted total fuel sources."

 

MGE is working toward a more sustainable future for the benefit of all its investors, employees, customers and the broader community. MGE is targeting net-zero carbon electricity by 2050. In early 2022, MGE committed to achieving carbon reductions of at least 80% by 2030, from 2005 levels.

 

MGE's carbon reduction goals are aligned with those of the scientific community, specifically the Intergovernmental Panel on Climate Change (IPCC) and its recommendation of limiting global temperature increases to 1.5 degrees Celsius above pre-industrial levels. In 2020, the University of Wisconsin-Madison's Nelson Institute for Environmental Studies released its analysis of MGE's goal of reaching net-zero carbon electricity by 2050. The IPCC modeling available suggested that by 2050, emissions from electricity generation in industrialized countries should be 87% to 99% lower than the 2005 baseline. The study determined that our 2050 goal is in line with model benchmarks to limit global warming to 1.5 degrees Celsius above pre-industrial levels.

 

MGE is working to achieve a more sustainable energy future using the best, most cost-effective technologies as they become available. MGE's future path to achieve its new target of 80% carbon reduction by 2030 is based on the transition away from coal and the addition of new renewable generation to reach our ultimate target of net-zero carbon by 2050. MGE already has taken action toward its goals:

Transition away from coal - In February 2021, MGE and the other co-owners of Columbia, a two-unit coal-fired generation facility located near Portage, Wisconsin, announced plans to retire that facility. MGE currently owns 19% of the facility. The co-owners intend to retire Unit 1 and Unit 2 by June 2026. Final timing and retirement dates are subject to change depending on operational, regulatory, and other factors. By 2027, with the planned retirement of both units at Columbia, MGE will have eliminated approximately two-thirds of the company’s current coal-fired generation capacity. MGE's remaining use of coal is expected to be further reduced as the Elm Road Units transition to natural gas. MGE is a minority owner of the coal-fired Elm Road Generating Station in Oak Creek, Wisconsin. In late 2021, MGE 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. 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 goal. By 2035, MGE expects that the Elm Road Units will be fully transitioned away from coal, which will eliminate coal as an owned generation source for MGE.

9


 

Renewable generation - Our solar, wind, and battery storage projects, as described below, are a major step toward deep decarbonization and greater use of clean energy sources in pursuit of our net-zero carbon goal. Additionally, MGE seeks to reduce its use of fossil fuels and work to help customers with energy efficiency and electrification, including the electrification of transportation.

 

Since 2015, MGE has announced several new joint and wholly-owned utility-scale wind and solar projects, which are expected to increase MGE's owned renewable capacity by more than nine times when completed. The following is a timeline of when these renewable energy projects have been completed, expected to be completed, or proposed to be completed, and MGE's share of capacity.

 

Year of Commercial Operation

Renewable Energy Project

Fuel Type

Share of Generation

2017

Shared Solar

Solar

.5 MW

2018

Forward Energy Center

Wind

17.6 MW

2019

Saratoga

Wind

66 MW

2020

Morey Field (RER/Shared Solar)

Solar

2.5 MW/3.5 MW

 

Two Creeks

Solar

50 MW

 

Dane County Airport (RER)

Solar

10 MW

2021

Badger Hollow I

Solar

50 MW

 

O’Brien (RER)

Solar

22 MW

2022

Hermsdorf (RER)

Solar

8 MW

2023

Red Barn - under construction

Wind

9.16 MW

 

Badger Hollow II - under construction

Solar

50 MW

 

Paris - under construction

Solar/Battery(b)

20 MW/11 MW

 

Tyto - under construction

Solar

6 MW

2024

Darien

Solar/Battery(b)

25 MW/7.5 MW

2025

Koshkonong – proposed(a)

Solar/Battery(b)

30 MW/16.5 MW

(a)
Pending approval by the PSCW.
(b)
Battery storage timing to be determined.

 

MGE is working to achieve a more sustainable energy future by investing in cost-effective renewable generation and innovative new technologies and services for customers. MGE has emphasized this innovation by developing customer programs to address climate change and encourage our customers to use clean energy. Our Renewable Energy Rider and Shared Solar programs reduce MGE's carbon emissions while providing customers the ability to purchase renewable energy to meet their energy needs, and we have been working on many fronts in the community to further the electrification of transportation.

 

Renewable Energy Rider (RER) – Under this program, MGE partners with large energy users on customized renewable energy solutions. MGE owns the generation assets and RER customers are billed a contractual renewable resource rate for all costs associated with the construction and ongoing operations of the renewable generation facility. This contractual rate is approved by the PSCW and subject to terms and conditions specified in the RER rate schedule. The program entitles RER customers to the contractually-specified energy output of the renewable energy resource. MGE will continue to recover the distribution system costs related to the energy consumed by these customers. Dane County Solar serves the Dane County municipal government. Morey Field RER serves the City of Middleton and Middleton-Cross Plains School District. The O'Brien Solar Fields primarily serve governmental entities such as UW-Madison, Wisconsin Department of Administration, and the City of Fitchburg. Hermsdorf serves the City of Madison and Madison Metropolitan School District. MGE has completed construction of 42.5 MW of capacity for the RER program.

 

Shared Solar Program – This program provides an opportunity for residential and small business customers the option to power their household or business with locally generated solar energy for up to half of their annual energy use. It's an affordable option for customers who want to support local solar. The first solar array associated with this program, owned by MGE, became operational in 2017 and was fully subscribed for its capacity value of 500 KW. MGE expanded the program by completing construction of a second solar facility (Morey Field), which added 3.5 MW of capacity to the program.

 

10


 

Electrifying transportation - The electrification of transportation is a key strategy for reducing carbon emissions. MGE has a network of more than 45 charging stations, powered by renewable energy, serving the growing number of electric vehicles (EV) in our service area. The new EV fast charging hub began serving drivers in late 2021 and features some of the most powerful EV chargers in the Midwest. Charge@Home, MGE's home EV charging program, makes it easy for EV drivers to charge efficiently and conveniently. We have continued to add EVs to our fleet and are targeting 100% all-electric or plug-in hybrid light-duty vehicles by 2030. Additionally, we are working with the City of Madison to further the electrification of its vehicles and buses. The City of Madison currently has a goal of 100% electric buses used for its' new Bus Rapid Transit system located in the downtown region.

 

Natural gas as a fuel source - In December 2022, the PSCW approved MGE's request for its purchase of an ownership interest in the West Riverside Energy Center, a highly efficient, state-of-the-art natural gas-fired plant in Beloit, Wisconsin. MGE's share of West Riverside will be 25 MW. The acquisition of that ownership interest is expected to occur in March 2023. MGE also has an option to purchase an additional 25 MW of capacity from West Riverside until May 2025. MGE currently expects to file in the first half of 2023 with the PSCW a request for a purchase of the additional 25 MW. Natural gas has much lower carbon emission rates compared to coal-fired generation. The investment in the West Riverside plant will help MGE to retire the Columbia coal-fired facility ahead of schedule.

 

Generation sources

MGE receives electric generation supply from coal-fired, gas-fired, and renewable energy sources. These sources include owned facilities as well as facilities leased from affiliates and accounted for under our nonregulated energy operations. See Item 2. Properties for more information regarding these generation sources, including location, capacity, ownership or lease arrangement, and fuel source. See "Nonregulated Energy Operations" below for more information regarding generating capacity leased to MGE by nonregulated subsidiaries.

 

Purchased power

MGE enters into short- and long-term purchase power commitments with third parties to meet a portion of its anticipated electric energy supply needs. As of December 31, 2022, MGE has 30 MW of a renewable purchase power commitment for each of the next five years.

 

Gas Utility Operations

 

MGE transports and distributes natural gas in a service area covering 1,684 square miles in seven south-central Wisconsin counties. The service area includes the city of Madison, Wisconsin and surrounding areas.

 

As of December 31, 2022, MGE supplied natural gas service to approximately 173,000 customers in the cities of Elroy, Fitchburg, Lodi, Madison, Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 25 villages; and all or parts of 50 townships. Gas sales, customers, and revenues for 2022 were comprised of the following:

 

img47105776_1.jpg 

 

11


 

Gas operations accounted for approximately 34.8%, 30.6%, and 26.8% of MGE's total 2022, 2021, and 2020 regulated revenues, respectively.

 

MGE can curtail gas deliveries to interruptible customers. These are customers who agree to reduce their load in the case of an emergency interruption. Approximately 3% of retail gas deliveries in 2022, 2021 and 2020 were to interruptible customers.

 

Gas supply

 

MGE has physical interconnections with ANR Pipeline Company (ANR) and Northern Natural Gas Company (NNG). MGE's primary service territory, which includes Madison and the surrounding area, receives deliveries at one NNG and four ANR gate stations. MGE's outlying territory receives deliveries at NNG gate stations located in Elroy, Prairie du Chien, Viroqua, and Crawford County. Interconnections with two major pipelines provide competition in interstate pipeline service and a more reliable and economical gas supply mix, which includes gas from Canada and the mid-continent and Gulf Coast regions of the United States.

 

During the winter months, when customer demand is high, MGE is primarily concerned with meeting its obligation to customers. MGE meets customer demand by using firm supplies under contracts finalized before the heating season, supplies in storage (injected during the summer), and other firm supplies purchased during the winter period.

 

By contract, a total of 6,515,510 Dth of gas can be injected into ANR's storage fields in Michigan from April 1 through October 31. These gas supplies are then available for withdrawal during the subsequent heating season, November 1 through March 31. Using storage allows MGE to buy gas supplies during the summer season, when prices are normally lower, and withdraw these supplies during the winter season, when prices are typically higher. Storage also gives MGE more flexibility in meeting daily load fluctuations.

 

MGE's contracts for firm transportation service of gas include winter maximum daily quantities of:

 

185,650 Dth (including 116,078 Dth of storage withdrawals) on ANR.
80,410 Dth on NNG.

 

Nonregulated Energy Operations

 

MGE Energy, through our subsidiaries, has developed generation sources that assist MGE in meeting the electricity needs of our customers. These sources consist of the Elm Road Units and the WCCF, which are owned by subsidiaries of MGE Energy and leased to MGE. See Item 2. Properties for a description of these facilities, their joint owners, and the related lease arrangements.

 

Transmission Investments

 

ATC owns and operates electric transmission facilities primarily in Wisconsin. MGE received an interest in ATC when it, like other Wisconsin electric utilities, contributed its electric transmission facilities to ATC as required by Wisconsin law. That interest is presently held by MGE Transco, a wholly-owned subsidiary of MGE Energy. As of December 31, 2022, MGE Transco held a 3.6% ownership interest in ATC.

 

In 2016, ATC Holdco was formed by several of the members of ATC, including MGE Energy, to facilitate electric transmission development and investments outside of Wisconsin, which typically have long development and investment lead times before becoming operational. ATC Holdco's future transmission development activities have been suspended for the near term. MGE Energy's ownership interest in ATC Holdco is held by MGEE Transco, a wholly-owned subsidiary. As of December 31, 2022, MGEE Transco held a 4.4% ownership interest in ATC Holdco.

 

Environmental

 

MGE Energy and MGE are subject to frequently changing local, state, and federal regulations concerning air quality, water quality, land use, threatened and endangered species, hazardous materials handling, and solid waste disposal. These regulations affect the manner in which we conduct our operations, the costs of those

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operations, as well as capital and operating expenditures. Regulatory initiatives, proposed rules, and court challenges to adopted rules, have the potential to have a material effect on our capital expenditures and operating costs. In addition to the regulations discussed below, MGE continues to track state and federal initiatives such as potential state and federal regulations governing surface water and/or groundwater containing per- and polyfluoroalkyl substances, potential changes to regulations governing polychlorinated biphenyl (PCB), potential changes to air and water standards, and potential climate change legislation.

 

In February 2021, MGE and the other co-owners of Columbia announced plans to retire that facility. The co-owners intend to retire Unit 1 and Unit 2 by June 2026. Final timing and retirement dates are subject to change depending on operational, regulatory, and other factors. Effects of environmental compliance discussed below will depend upon the final approved retirement dates and compliance requirement dates.

 

Water Quality

 

Effluent Limitations Guidelines and Standards for Steam Electric Power Generating Point Source Category

The EPA has promulgated water Effluent Limitations Guidelines (ELG) and standards for steam electric power plants which focus on the reduction of metals and other pollutants in wastewater from new and existing power plants. MGE's Columbia plant and Elm Road Units are subject to this rule.

 

See Footnote 16.a. of the Notes to the Consolidated Financial Statements in this Report for further discussion of compliance plans for Columbia and the Elm Road Units. Based on previous treatment of environmental compliance projects, management believes that any compliance costs will be recovered in future rates.

 

Cooling Water Intake Rules (Section 316(b))

Section 316(b) of the Clean Water Act require cooling water intake structures at electric power plants meet best available technology (BTA) standards to reduce mortality from entrainment (drawing aquatic life into a plant's cooling system) and impingement (trapping aquatic life on screens). The EPA finalized its Section 316(b) rule for existing facilities in 2014. Section 316(b) requirements are implemented in Wisconsin through modifications to plants' WPDES permits, which govern plant wastewater discharges.

 

WCCF, Blount, and Columbia are subject to this rule. WCCF employs a system that meets the Section 316(b) rule. Blount's WPDES permit assumes that the plant meets BTA standards for the duration of the permit, which expires in 2023. Before the next permit renewal, MGE is required to complete an entrainment study and recommend a BTA along with other technologies considered. MGE completed the entrainment study in 2021 and submitted the results to the WDNR. The WDNR will make the final BTA determination and include any BTA requirements in Blount's next permit renewal, which is expected to be completed and effective in 2023. Management believes that the BTA determination at Blount will not be material for MGE.

 

Intakes at the Columbia plant are subject to this rule. Columbia's operator received a permit in 2019 requiring studies of intake structures to be submitted to the WDNR by November 2023 to help determine BTA. BTA improvements may not be required given that Columbia is scheduled to retire both units by June 2026. MGE will continue to work with Columbia's operator to evaluate all regulatory requirements applicable to the planned retirements.

 

Management believes that the Section 316(b) rule will not have a material effect on its existing plants and that any compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects.

 

Air Quality

 

Air quality regulations promulgated by the EPA and WDNR in accordance with the Federal Clean Air Act and the Clean Air Act Amendments of 1990 impose restrictions on emission of particulates, sulfur dioxide (SO2), nitrogen oxides (NOx), hazardous air pollutants and other pollutants, and require permits for operation of emission sources. These permits must be renewed periodically. Various newly enacted and/or proposed federal and state initiatives may result in additional operating and capital expenditure costs for fossil-fueled electric generating units.

 

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Ozone NAAQS

The Elm Road Units are located in Milwaukee County, Wisconsin, a nonattainment area. In October 2022, the EPA reclassified Milwaukee County from "marginal" to "moderate" nonattainment under the 2015 ozone NAAQS. The Wisconsin Department of Natural Resources (WDNR) must develop a State Implementation Plan (SIP) for the area, and this reclassification will result in more stringent SIP requirements for both constructing new development and modifying or expanding existing plants in the area. The deadline for moderate classified areas to meet attainment standards is August 2024. MGE will continue to monitor the WDNR's SIP development and the extent to which the requirements will impact the Elm Road Units. At this time, the operator of the Elm Road Units does not expect that the 2015 Ozone NAAQS will have a material effect on its existing plants based on final designations.

 

Fine Particulate Matter (PM2.5) NAAQS

In January 2023, the EPA published a proposed rule to lower the average annual PM2.5 NAAQS from its current level. The EPA also solicited comments on whether to lower the annual standard further than the proposed level, and whether or not to also lower the maximum 24-hour limit to be consistent with recommendations from its Clean Air Scientific Advisory Committee (CASAC). As the rule is currently proposed, the annual PM2.5 NAAQS and the 24-hour limit recommended by the CASAC is not expected to impact the counties where Columbia and the Elm Road Units are located. However, if the annual PM2.5 NAAQS is lowered further than the EPA's currently proposed value, the county where the Elm Road Units are located may be in nonattainment with the standard. A nonattainment designation would require the State of Wisconsin to develop a plan to get into attainment. However, we will not know the impact of this rule with any certainty until it is finalized, counties' attainment status is determined by the EPA, and the State of Wisconsin develops an attainment implementation plan. MGE will continue to follow the rule's developments.

 

Cross-State Air Pollution Rule (CSAPR): Proposed Ozone Season Update based on 2008 Ozone NAAQS

The EPA's CSAPR and its progeny are a suite of interstate air pollution transport rules designed to reduce ozone and fine PM2.5 ambient air levels in areas that the EPA has determined as being significantly impacted by pollution from upwind states.

 

In April 2022, the EPA published a proposed Federal Implementation Plan (FIP) to address state obligations under the Clean Air Act "good neighbor" provisions for the 2015 Ozone NAAQS. See Footnote 16.a. of the Notes to the Consolidated Financial Statements in this Report for further discussion of the proposed rule. MGE expects the rule, if finalized as written, to impact our fossil-fueled generation assets. However, we will not know the impact of this rule with any certainty until it is finalized. We will continue to monitor rule developments.

 

Clean Air Visibility Rule (CAVR)

Columbia is subject to the best available retrofit technology (BART) regulations, a subsection of CAVR, which may require pollution control retrofits. Columbia's existing pollution control upgrades, and the EPA's stance that compliance with the CSAPR equals compliance with BART, should mean that Columbia will not need to do additional work to meet BART requirements. Wisconsin's 2021 SIP argues that Wisconsin will meet its current regional haze goals based on expected emissions reductions, which include Columbia unit retirements. Given that the Wisconsin SIP recognizes the Columbia unit retirements as part of its emission reduction plan, MGE does not anticipate further obligations with this rule at Columbia. MGE will continue to monitor legal developments and any future updates to this rule.

 

Global Climate Change

 

MGE is a producer of greenhouse gas (GHG) emissions, primarily from the fossil fuel generating facilities it uses to meet customers' energy needs, as well as from its natural gas pipeline system and fleet vehicles. Climate change and the regulatory response to it could significantly affect our operations in a number of ways, including increased operating costs and capital expenditures, restrictions on energy supply options, operational limits on our fossil fuel fired plants, permitting difficulties, and emission limits. MGE management would expect to seek and receive rate recovery of such compliance costs, if and when required. MGE continues to monitor proposed climate change legislation and regulation.

 

MGE has taken steps to address GHG emissions through voluntary actions. In 2005, MGE implemented its Energy 2015 Plan. Under the Plan and other actions, our CO2 emissions declined from 2005 to 2015 by approximately 20% even though total system delivered energy increased. In 2015, MGE announced its Energy 2030 framework that

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continues steps to reduce CO2 emissions. Subject to regulatory approvals and other conditions, MGE aims to increase renewable energy to 25% of retail electric sales by 2025 and to 30% by 2030. Under our Energy 2030 framework prior to the announcement of the Columbia retirement, our plan was to reduce CO2 emissions from electricity by 40% from 2005 levels by 2030. In January 2022, MGE announced a new target of 80% carbon reduction from electricity, significantly exceeding the original 2030 goal. Beyond 2030, we are targeting net-zero carbon electricity by 2050, including our commitment to work with our co-owners at our Elm Road Units to reduce coal use by 2030 and eliminate coal use by 2035.

 

Natural gas continues to be a critical resource for meeting reliable, efficient, and affordable energy needs. About half of U.S. households use natural gas for heating. In 2022, MGE completed an in-depth analysis and inventory of our GHG emissions associated with electric generation and distribution, purchase and distribution of natural gas, and other sources, such as indirect emissions from gas usage by our customers. Throughout the natural gas distribution system, MGE already has replaced and upgraded all piping made of material considered to be leak-prone. Additionally, MGE's leak inspection schedule already exceeds federal requirements. MGE is building on our Energy 2030 framework to further address emissions associated with MGE's purchase and distribution of natural gas. The 2030 framework includes strategies for working with our suppliers, pipeline operators, customers, regulators, and other industry stakeholders. The framework also includes the exploration of new and emerging technologies, such as renewable natural gas, to serve our customers more sustainably.

 

Greenhouse Gas Reduction Guidelines under the Clean Air Act 111(d) Rule

 

WCCF, the Elm Road Units, Blount, and Columbia could be impacted by GHG reduction guidelines and approval criteria established under the Clean Air Act for the control of GHG emissions from fossil fuel-fired electric generating units (EGUs). The EPA is undertaking a new rulemaking under section 111(d) of the Clean Air Act to establish emission guidelines and limit GHG emissions from existing fossil fuel-fired EGUs. The EPA is also conducting a comprehensive review of the New Source Performance Standards (NSPS) and may set new emission standards for GHG emissions from new, modified, and/or reconstructed fossil fuel-fired power plants. The EPA anticipates issuing a proposed rule in spring 2023 and a final rule by summer 2024. MGE will continue to evaluate greenhouse gas rule developments, including any new EPA actions towards rule development, and any further court decisions on the EPA's authority to regulate greenhouse gases.

 

Federal Action on Climate Change

 

President Biden's actions on climate change, including multiple executive orders and the recommitment of the U.S. to the Paris Agreement under the United Nations Framework Convention on Climate Change (the Paris Agreement), indicate that climate considerations are a broad focus.

 

In December 2021, President Biden signed an executive order that sets goals for the federal government agencies and operations to have, among other things, 100% carbon-free electricity by 2030, acquisitions of vehicles to be 100% zero-emissions light-duty vehicles by 2027, and all vehicles by 2035, and net-zero emissions from federal operations by 2050. Efforts at the federal level are expected to spur the carbon-neutral economy in the private sector.

 

In August 2022, the federal government enacted the Inflation Reduction Act (IRA). Included in the IRA are federal funds for investment in infrastructure, transportation, energy, and climate change. MGE is monitoring actions on climate change to determine the impact to MGE's decarbonization plans. In September 2022, President Biden signed an executive order on the Implementation of the Energy and Infrastructure Act of 2022. The order directs agencies to implement the energy and infrastructure provisions of the 2022 IRA and directs agencies to take actions towards implementing U.S. climate change priorities to be in line with the Paris Agreement. The Paris Agreement includes progress towards achieving greenhouse gas reductions of 50-52% below 2005 levels in 2030, achieving a carbon pollution-free electricity sector by 2035, and achieving net-zero emissions no later than 2050.

 

MGE is following the development of recommendations and plans developed by agencies as a result of IRA and executive orders, as well as other executive actions taken by the Biden administration, to determine their applicability to MGE's decarbonization plans and to evaluate any potential impact to our operations.

 

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State and Regional Action on Climate Change

 

In August 2019, Wisconsin Governor Tony Evers signed an executive order to establish the Office of Sustainability and Clean Energy (OSCE). The order tasks the OSCE with, among other things, ensuring that the actions of the State of Wisconsin are aligned with the goals and recommendations of the Paris Agreement, verifying that electricity consumed by the State of Wisconsin is 100% carbon-free by 2050, and developing a comprehensive multi-sector clean energy plan for the state. In April 2022, the OSCE released Wisconsin's Clean Energy Plan. The plan includes a goal to achieve net zero carbon by 2050. MGE is engaged in this process by participating on a Stakeholder Advisory Team in a voluntary capacity. MGE will continue to evaluate this plan for its applicability to MGE's decarbonization plans and to evaluate potential impact to our operations.

 

Solid Waste

 

Coal Combustion Residuals Rule

The CCR rule regulates as a solid waste coal ash from burning coal for the purpose of generating electricity and defines what ash use activities would be considered generally exempt beneficial reuse of coal ash. The CCR rule also regulates landfills, ash ponds, and other surface impoundments used for coal combustion residuals by regulating their design, location, monitoring, and operation. The CCR rule requires owners or operators of coal-fired power plants to stop transporting CCR and non-CCR wastewater to unlined surface impoundments. In addition, regulated entities must initiate impoundment closure as soon as feasible and in no event later than April 2021, unless the EPA grants an extension. A site-specific extension to initiate closure of the primary ash pond at Columbia by March 31, 2023, was requested. The EPA has not formally approved the extension.

 

Review of the Elm Road Units has indicated that the costs to comply with this rule are not expected to be significant. See Footnote 16.a. of the Notes to the Consolidated Financial Statements in this Report for further discussion.

 

Renewable Energy Standards

 

Wisconsin law establishes a minimum amount of energy MGE must supply from renewable sources. MGE currently exceeds the applicable minimum requirement of approximately 8%. The costs to comply with this requirement are being recovered in rates.

 

Human Capital

 

The energy industry is ever-changing. MGE Energy and MGE believe it is important to continue to engage our human capital resources as our industry evolves. We are committed to sustainable workforce practices such as career development and training. We offer all employees the opportunity to learn and grow—whether the goal is to increase job proficiency, improve decision-making skills, or prepare for new roles and responsibilities. We work to provide our employees with the tools they need to be successful in their careers. This strategy is essential given our aging workforce.

 

We value equity, diversity, and inclusion. We promote an inclusive, respectful work environment where individuals and groups can achieve their full potential. All employees have equitable access to employment and development opportunities. Everyone is responsible for helping to meet the objectives of our diversity and inclusion policy as well as supporting the concepts of equal opportunity and affirmative action. We believe that our diversity makes us stronger.

 

"We power safety. Work safe. Home safe." That is our commitment at MGE, and it is embraced by our employees. Our journey to safety excellence is guided by our Safety Steering Team. The team meets regularly to examine safety topics and to identify and to prioritize continuous improvement opportunities.

 

For about two years during the COVID-19 pandemic, about half of MGE employees worked remotely. In April 2022, MGE formally began a hybrid work schedule for remote-enabled employees.

 

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As of December 31, 2022, MGE had 701 employees, 322 of which are covered by collective bargaining agreements as described below:

 

Union

 

Number of Employees Represented

 

Expiration of Collective Bargaining Agreement

Local Union 2304 of the International Brotherhood of Electrical Workers

 

231

 

April 30, 2023

Local Union No. 39 of the Office and Professional Employees International Union

 

86

 

May 31, 2023

Local Union No. 2006, Unit 6 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union

 

5

 

October 31, 2023

 

Financial Information About Segments

 

See Footnote 22 of the Notes to the Consolidated Financial Statements in this Report for financial information relating to MGE Energy's and MGE's business segments.

 

Information About our Executive Officers

 

As of December 31, 2022, the executive officers of the registrants were as follows:

 

Executive

 

Title

 

Effective
Date

 

Service
Years as
an Officer

Jeffrey M. Keebler(a)

 

Chairman of the Board, President, and Chief Executive Officer

 

10/01/2018

 

11

Age: 51

 

President and Chief Executive Officer

 

03/01/2017

 

 

 

 

 

 

 

 

 

Jared J. Bushek(a)

 

Vice President – Finance, Chief Information Officer and Treasurer

 

09/01/2020

 

7

Age: 42

 

Assistant Vice President – Chief Information Officer

 

07/23/2015

 

 

 

 

 

 

 

 

 

Lynn K. Hobbie(b)

 

Executive Vice President – Marketing and Communications

 

03/01/2017

 

28

Age: 64

 

 

 

 

 

 

 

 

 

 

 

 

 

Tamara J. Johnson(a)

 

Vice President – Accounting and Controller

 

09/01/2020

 

7

Age: 58

 

Assistant Vice President – Controller

 

07/23/2015

 

 

 

 

 

 

 

 

 

Cari Anne Renlund(a)

 

Vice President, General Counsel and Secretary

 

09/01/2020

 

7

Age: 49

 

Vice President and General Counsel

 

11/02/2015

 

 

 

 

 

 

 

 

 

Note: Ages, years of service, and positions as of December 31, 2022.

(a)
Executive officer of MGE Energy and MGE.
(b)
Executive officer of MGE.

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Item 1A. Risk Factors.

 

MGE Energy and our subsidiaries, including MGE, operate in a regulated market environment that involves significant risks, many of which are beyond our control. The following risk factors may adversely affect our results of operations, cash flows and financial position and market price for our publicly traded securities. While we believe we have identified and discussed below the key risk factors affecting our business, additional unknown risks and uncertainties may adversely affect our performance or financial condition in the future.

 

Regulatory Risk

 

We are subject to extensive government regulation in our business, which affects our costs and responsiveness to changing events and circumstances.

 

Our business is subject to regulation at the State and Federal levels. We are subject to regulation as a holding company by the PSCW. The PSCW regulates MGE's rates; terms and conditions of service; various business practices and transactions; financing; the closure of generating facilities and related cost recovery; and transactions between it and its affiliates, including MGE Energy. MGE is also subject to regulation by the FERC, which regulates certain aspects of its business. We are also subject to oversight and monitoring by MISO. Possible changes to MISO's methodology establishing capacity planning reserve margin requirements may impact new generating facilities such as solar and wind and its accredited energy capacity which may require adjustments to the current resource plan and the need to add additional resources to comply with MISO's proposal or procure capacity in the market whereby such costs might not be recovered in rates. The lack of availability of new and existing generating facilities may also impact our current resource plan to be in accordance with MISO's methodology. ATC, in which we have an investment, is subject to regulation by FERC as to, among other things, rates. The regulations adopted by the State and Federal agencies affect how we do business, our ability to undertake specified actions since pre-approval or authorization may be required for projects, the costs of operations, and the rates charged to recover those costs. Our ability to attract capital also depends, in part, upon our ability to recover our costs and obtain a fair return for shareholders.

 

Our utility revenues are subject to regulatory proceedings, which can affect our ability to recover, and the timing of recovery of, costs that we incur in our operations.

 

Our utility customer rates have a material impact on our financial condition, results of operations, and liquidity. Our ability to obtain adjustments to those rates depends upon timely regulatory action under applicable statutes and regulations. Rate regulation is based on providing an opportunity to recover costs that have been reasonably incurred and the ability to earn a reasonable rate of return on invested capital. However, we have no assurance that our regulators will consider all of our costs to have been reasonably incurred. In addition, our rate proceedings may not always result in rates that fully recover our costs or provide a reasonable return on equity. Certain costs and revenues are deferred as regulatory assets and liabilities for future recovery or refund to customers, as authorized by our regulators. If recovery of regulatory assets is not approved or is no longer deemed probable, these costs would be recognized as a current period expense and could materially and adversely impact our operations and financial performance in that period.

 

We could be subject to higher costs and potential penalties resulting from mandatory reliability standards.

 

MGE must adhere in its electric distribution system to mandatory reliability standards established by NERC. These standards cover areas such as critical infrastructure protection, emergency preparedness, facility design, and transmission operations, among others. The critical infrastructure protection standards focus on physical and access security of cyber assets, as well as incident response and recovery planning. Compliance with these standards affects operating costs and any noncompliance can result in sanctions, including monetary penalties.

 

We are subject to changing environmental laws and regulations that may affect our costs and business plans.

 

We are subject to environmental laws and regulations that affect the manner in which we conduct business, including capital expenditures, operating costs, and potential liabilities. The current presidential administration has and continues to undertake an active effort on climate change-related matters, including restrictions on greenhouse gas emissions, such as carbon. While it is difficult to know the extent of possible legislation or

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regulatory activity, it is expected there will be an increase in the number and scope of environmental laws and regulations aimed at fossil-fueled generation and the transportation of natural gas. These possible changes, as well as evolving consumer sentiment, have affected and may continue to affect our business plans, make them more costly, or expose us to liabilities for past, present, or future operations.

 

Numerous environmental laws and regulations govern many aspects of our present and future operations. These include: air emissions limits and reporting; ambient air quality standards; water quality; water intake and discharges; wetlands; solid and hazardous waste; handling and disposal of hazardous substances; protection of endangered resources, such as threatened and endangered species, protection of cultural resources and archaeological sites; remediation and management of contaminated sites; and control of potential pollution from electric and gas construction sites. These evolving regulations affect us by:

 

Introducing uncertainty into our planning and capital expenditures processes, as changes in requirements may affect the timing and choice of compliance methods and require costly revisions to prior plans and commitments.
Imposing or modifying limits on the operations of our facilities in order to meet restrictions on air emissions, water use or water discharges.
Requiring capital expenditures and changes in operating procedures and costs as a result of the need to install additional pollution controls or more advanced technology or equipment at new or existing facilities.
Mandating increasing purchases of renewable energy, which affects the use of existing generation, and energy efficiency initiatives, which affect revenues.

 

We may be subject to future laws, regulations, or actions associated with public concern with fossil-fuel generation, greenhouse gases, and the effects of global climate change.

 

Our subsidiaries operate or co-own electric power plants that burn fossil fuels, deliver natural gas, and deliver electricity to customers. These business activities are subject to evolving public concern regarding greenhouse gases (GHG), legislative and regulatory action, and possible litigation in response to that public concern. The primary greenhouse gas associated with our subsidiaries' combustion of fossil fuels, and the largest emission in our system overall, is carbon dioxide (CO2).

 

Our subsidiaries have incurred and are expected to continue to incur costs from more stringent regulation of GHG from power plants, natural gas delivery, GHG used in power distribution, and efficiencies lost during power distribution. While it is difficult to know the extent of possible legislation or regulatory activity, the federal government is likely to consider and pass some form of greenhouse gas legislation or regulations. In addition, litigation by environmental nongovernment organizations targeting GHG emissions from the electric power industry is also likely if the federal government fails to act on greenhouse gas initiatives.

 

Climate change could affect us in several other ways:

 

Changes in weather patterns, including swings in intensity, could affect use of electricity and gas by our customers, affecting revenues; and could affect the condition of our facilities, affecting our costs.
We may also incur costs associated with actions taken due to investor interest in reducing our subsidiaries' reliance on fossil fuel generation, and coal in particular. Investors may also move away from investing in fossil fuel generated electricity for reputational or perceived risk-related reasons, which could raise our costs of attracting capital.
If we are not seen as being proactive in addressing concerns:
o
we may experience reputational issues among our customers and the communities that we serve. Those issues could affect customers' energy choices, including efforts at self-supply, and could affect the handling and treatment of our rate requests and cost recovery.
o
we may experience difficulty in attracting investors, which could affect the availability and cost of capital and financing.

 

These matters represent uncertainties in the operation and management of our business.

 

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We face risk for the recovery of fuel and purchased power costs.

 

MGE has price risk exposure with respect to the price of natural gas, electricity, coal, emission credits, and oil. MGE burns natural gas in several of its peak electric generation facilities. In many cases, the cost of purchased power is tied to the cost of natural gas. In the event of an interruption in energy supply, whether due to equipment problems, transmission constraints, or otherwise, we may incur additional costs to obtain alternative sources of energy supply, in order to meet our contractual or regulatory obligations to our customers. Electric fuel rules require Wisconsin utilities to defer electric fuel-related costs that fall outside a symmetrical cost tolerance band around the amount approved for a utility in its annual fuel proceedings. Any over- or under-recovery of the actual costs is determined in the following year and is then reflected in future billings to electric retail customers. The electric fuel-related costs are subject to an excess revenue test. Excess revenues are defined as revenues in the year in question that provide MGE with a greater return on common equity than authorized by the PSCW in MGE's latest rate order. The recovery of under-collected electric fuel-related costs would be reduced by the amount that exceeds the excess revenue test. These costs are subject to the PSCW's annual review of fuel costs completed in the year following the deferral. MGE assumes the risks and benefits of variances that are within the cost tolerance band.

 

Changes in federal income tax policy may adversely affect our financial condition, results of operations, and cash flows, as well as our credit ratings.

 

We currently own and operate renewable energy generating facilities. These facilities generate production tax credits and investment tax credits that we use to reduce our federal tax obligations. The amount of tax credits we earn depends on multiple factors, including facility generation, transmission availability, the cost of qualifying property, and the applicable tax credit rate. In August 2022, the Inflation Reduction Act (IRA) was signed into law. Among other provisions, the IRA: extends current PTC and ITC for renewable technologies (e.g., wind and solar); restores full value of the PTC and ITC for qualifying facilities placed into service after 2021 that satisfy prevailing wage and apprenticeship requirements; creates a PTC for solar, clean hydrogen and nuclear; establishes an ITC for energy storage, microgrids, and interconnection facilities; and allows companies to monetize or sell credits to unrelated parties. Implementation of IRA provisions is subject to the issuance of additional guidance by the U.S. Treasury Department. We continue to monitor new developments in the IRA.

 

If corporate tax rates or policies are changed with future federal or state legislation, we may be required to take material charges against earnings.

 

There is still uncertainty as to when or how credit rating agencies, capital markets, the FERC, or state public utility commissions will treat impacts of the Inflation Reduction Act or any new tax regulation. These impacts could subject us to credit rating downgrades. In addition, certain financial metrics used by credit rating agencies, such as our funds from operations-to-debt percentage, could be negatively impacted by future rulings.

 

We may not be able to use or transfer to a third party all tax credits for which we are eligible.

 

We have historically reduced our consolidated federal and state income tax liability with the use of various tax credits under the applicable tax codes. We may not be able to fully use tax credits if our future federal and state taxable income and related income tax liability is insufficient to permit their use or transfer tax credits to a third party. In addition, any future disallowance of some or all of those tax credits as a result of legislation or an adverse determination by one of the applicable taxing jurisdictions could materially affect our tax obligations and financial results.

 

Operating Risk

 

We are affected by weather, which affects customer demand and can affect the operation of our facilities.

 

The demand for electricity and gas is affected by weather. Very warm and very cold temperatures, especially for prolonged periods, can dramatically increase the demand for electricity and gas for cooling and heating, respectively, as opposed to the softening effect of more moderate temperatures. Our electric revenues are sensitive to the summer cooling season and, to a lesser extent, the winter heating season. Similarly, very cold temperatures can dramatically increase the demand for gas for heating. A significant portion of our gas system

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demand is driven by heating. Extreme summer conditions or storms may stress electric systems, resulting in increased maintenance costs and limiting the ability to meet peak customer demand.

 

We could be adversely affected by changes in the development, and utilization by our customers, of power generation, storage, and use technologies.

 

Our revenues and the timing of the recovery of our costs could be adversely affected by improvements in power generation, storage, and use technology.

 

Advancements in power generation technology, including commercial and residential solar generation installations and commercial micro turbine installations, are improving the cost-effectiveness of customer self-supply of electricity. Improvements in energy storage technology, including batteries and fuel cells, could also better position customers to meet their around-the-clock electricity requirements. It is possible that legislation or regulations could be adopted supporting the use of these technologies that permit third-party sales from such facilities, and allow these facilities to interconnect to our distribution system. Improvements in the energy efficiency of lighting, appliances, and equipment will also affect energy consumption by customers. Such developments could reduce customer purchases of electricity but may not necessarily reduce our investment and operating requirements due to our obligation to serve customers, including those self-supply customers whose equipment has failed for any reason to provide the power they need whether due to inadequate on-site resources, restricted operating hours, or equipment failure. In addition, since a portion of our costs are recovered through charges based upon the volume of power delivered, a reduction in electricity deliveries will affect the timing of our recovery of those costs and may require changes to our rate structures.

 

Changes in power generation, storage, and use technologies could have significant effects on customer behaviors and their energy consumption. Customers could engage in individual conservation efforts by voluntarily reducing their consumption of electricity through changes in energy use and through the use of more energy efficient lighting, appliances, and equipment. They could also change their consumption of electricity through the installation of alternative energy sources, such as rooftop solar panels and micro turbines for self-supply. Customer energy conservation could adversely affect our results of operations by reducing our revenues without necessarily changing our operating costs due to our obligation to serve.

 

We are affected by local, national, and worldwide economic activity.

 

MGE Energy's and MGE's operations are affected by local, national and worldwide economic conditions. The consequences of a prolonged period of reduced economic activity may include lower demand for energy, uncertainty regarding energy prices and the capital and commodity markets, and increased credit risk. A decline in energy consumption may adversely affect our revenues and future growth. Increased credit risk reflects the risk that our retail customers will not pay their bills in a timely manner or at all, which may lead to a reduction in liquidity and an eventual increase in bad debt expense.

 

Higher levels of development and business activity within our service area generally increases the number of customers and their use of electricity and gas. Likewise, recessionary economic conditions generally have an adverse impact on our results of operations. Our business activities, including those of our subsidiaries, are concentrated in the State of Wisconsin. Changes in our local economy could negatively impact the financial condition of our customers, the growth opportunities available to us and our subsidiaries, and our results from operations.

 

More recently, our operations have been impacted by domestic and global supply chain disruptions which are delaying the delivery of materials, equipment, and other resources that are critical to our business operations and projects under construction, including our renewable energy projects. Supply interruptions could affect our ability to operate and maintain our system and ability to implement our long-term goals. Inflation has also increased prices of equipment, materials, and other resources. Inflationary pressures in the economy could lead to higher expenses which may adversely impact our financial condition and results of operations.

 

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The ability to obtain an adequate supply of coal could limit the ability to operate the co-owned coal-fired facilities from which we receive a significant portion of our electric supply.

 

The availability of coal and the means to transport coal could:

 

Affect our operating costs due to increased costs associated with lower levels of owned generation or the need for alternate coal supply or transportation,
Limit the ability to generate electricity if the plant operator is unable to arrange timely deliveries of adequate supplies of coal, and
Result in potentially higher costs for replacement purchased power as well as potential lost market sales opportunities.

 

A significant portion of our electric generating capacity is dependent on coal. Demand for coal has been impacted by prevailing prices for natural gas and coal plant closures and may affect mine performance. Consequently, we are exposed to the risk that counterparties to these contracts will not be able to fulfill their obligations. Disruption in the delivery of fuel, including disruptions as a result of transportation delays, weather, labor relations, force majeure events, or environmental regulations affecting any of our fuel suppliers, has affected, and could affect our ability to generate electricity at our facilities at the desired level. Should counterparties fail to perform, or other unplanned disruptions occur, we may be forced to fulfill the underlying obligation at higher prices. The Columbia plant operator has been, and the plant operators may be, forced to reduce generation at our jointly-held coal units, which would cause us to replace this generation through additional power purchases from third parties. These factors may also affect the terms under which any of the existing coal supply or transportation agreements are renewed or replaced upon the expiration of their current terms.

 

Our ability to manage our purchased power costs is influenced by a number of uncontrollable factors.

 

We are exposed to additional purchased power costs to the extent that our power needs cannot be fully covered by the supplies available from our existing facilities and contractual arrangements. Those needs, and our costs, could be affected by:

 

Increased demand due to, for example, abnormal weather, customer growth, or customer obligations,
The inability to transmit our owned or contracted power from the generation source to our customers due to transmission line constraints, outages, or equipment failures,
Reductions in the availability of power from our owned or contracted generation sources due to equipment failures, shortages of fuel or environmental limitations on operations, and
Failure to perform on the part of any party from which we purchase capacity or energy, whether due to equipment failures or other causes.

 

An unexpected change in demand or the availability of generation or transmission facilities can expose us to increased costs of sourcing electricity in the short-term market where pricing may be more volatile.

 

The equipment and facilities in our operational system are subject to risks that may adversely affect our financial performance.

 

Weather conditions, accidents, and catastrophic events can result in damage or failures of equipment or facilities and disrupt or limit our ability to generate, transmit, transport, purchase, or distribute electricity and gas. Efforts to repair or replace equipment and facilities may take place over prolonged periods or may be unsuccessful. We may also be unable to make the necessary improvements to our operational system, causing service interruptions. Furthermore, our facilities are interconnected with third-party transmission providers. Damage to or failures of these providers' equipment or facilities is out of our control but could lead to service interruptions. The resulting interruption of services would result in lost revenues and additional costs. We are also exposed to the risk of accidents or other incidents that could result in damage to or destruction of our facilities or damage to persons or property. Such issues could adversely affect revenues or increase costs to repair and maintain our systems.

 

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We could be adversely affected by production disruptions at our wind and solar generating facilities.

 

We own and operate wind and solar generating facilities, which generate production tax credits used to reduce our federal tax obligations. Various operating and economic factors, including transmission constraints, unfavorable trends in pricing for wind or solar energy, adverse weather conditions and the breakdown or failure of equipment, could significantly reduce the production tax credits generated by our wind or solar farms, resulting in increased federal income tax expense. We could also be forced to replace lost generation capacity with additional power purchases from third parties, potentially leading to increased costs. These factors could have an adverse impact on our financial condition and results of operations, which could be material depending upon the cause of the disruption and its duration.

 

Our operations and confidential information are subject to the risk of cyber-attacks.

 

Cyber-attacks targeting our electronic control systems used in generation and electric and gas distribution, including denial of service and ransomware attacks, could result in a full or partial disruption of our operations. Any disruption of these control systems could result in a loss of service to customers and loss of revenue, as well as significant expense to repair system damage and remedy security breaches.

 

Our business includes the collection and retention of personally identifiable information of our customers, shareholders, and employees, who expect that we will adequately protect such information. In some cases, we outsource certain functions to vendors that could be targets of cyber-attacks. A significant theft, loss, or fraudulent use of personally identifiable information may cause our business reputation to be adversely impacted and could lead to potentially large costs to notify and protect the impacted persons and subject us to legal claims, fines, or penalties.

 

The safeguards we have may not always be effective due to the evolving nature of cyber-attacks. We cannot guarantee that such protections will be completely successful in the event of a cyber-attack. If the technology systems were to fail or be breached by a cyber-attack, and not be recovered in a timely fashion, we may be unable to fulfill critical business functions and confidential data could be compromised, any additional costs may not be recoverable in rates, or may exceed insurance limits, or may not be covered by insurance and could adversely impact our results of operations.

 

We rely on the performance of our information technology systems, the failure of which could have an adverse effect on our business and performance.

 

We operate in a highly engineered industry that requires the continued operation of sophisticated information technology systems and network infrastructure to manage our finances, to operate our control facilities, to provide electric and gas service to our customers, and to enable compliance with applicable regulatory requirements. Our computer-based systems are vulnerable to interruption, the introduction of viruses, malware, ransomware, security breaches, fire, power loss, system malfunction, network outages and other events that may be beyond our control. System interruptions or failures, whether isolated or more widespread, could impact our ability to provide service to our customers, which could have a material adverse effect on our operations and financial performance.