Executive Summary / Key Takeaways

• MGE Energy (NASDAQ:MGEE) is a regulated utility holding company focused on providing essential electric and gas services in Wisconsin, underpinned by a strategic pivot towards significant renewable energy investment and carbon reduction goals.
• Recent performance in Q1 2025 demonstrated solid growth, with net income increasing to $41.6 million ($1.14 per share) from $33.8 million ($0.93 per share) in Q1 2024, driven primarily by increased utility investments and favorable weather impacts on sales.
• The company is actively executing its energy transition strategy, targeting an 80% carbon reduction by 2030 and net-zero methane emissions by 2035, involving the retirement or conversion of coal assets and substantial investment in solar and battery storage projects.
• MGEE operates within a favorable regulatory framework in Wisconsin, providing stability and allowing for recovery of prudently incurred costs, including environmental compliance and capital investments, though future rate case approvals are subject to regulatory review.
• Key risks include potential cost increases and project delays from supply chain disruptions (tariffs, UFLPA) and evolving environmental regulations, which could impact capital expenditure timing and recovery.

A Foundation of Stability: MGEE's Regulated Core

MGE Energy operates as an investor-owned public utility holding company, with its primary asset being Madison Gas and Electric Company (MGE). MGE serves as the regulated electric and gas utility, providing essential services to communities in Dane County and surrounding areas in south-central and western Wisconsin. This core business benefits from the inherent stability of a regulated monopoly structure, where rates are set by the Public Service Commission of Wisconsin (PSCW) to allow for the recovery of costs and a reasonable return on invested capital.

The company's structure has evolved over time, notably with the contribution of electric transmission assets to American Transmission Company (ATC), resulting in MGE Energy holding an equity interest in ATC through its subsidiary MGE Transco. This forms the basis of the transmission investment segment, providing a stable income stream from regional transmission operations. Further expansion into transmission development outside Wisconsin is pursued through ATC Holdco. MGE Energy also holds nonregulated energy assets, primarily generation facilities leased to MGE, structured to provide a predictable return under state regulatory guidelines.

MGEE operates within a competitive landscape typical of the regulated utility sector, where direct competition for customers within service territories is limited by franchise agreements. However, MGEE competes for capital and faces indirect competition from other energy providers and technologies. Larger regional players like WEC Energy Group (WEC), Alliant Energy (LNT), Xcel Energy (XEL), and Ameren (AEE) operate across broader territories and often benefit from greater economies of scale. These larger peers may exhibit lower operating costs per unit and potentially faster innovation cycles due to their size and R&D budgets. MGEE's strength lies in its localized focus and customer relationships within its service area. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, MGEE's established presence in its Wisconsin service area provides a solid base.

Powering the Future: Strategy and Technological Transition

At the heart of MGEE's current strategy is a significant commitment to energy transition and decarbonization. The company has set ambitious goals, including an 80% reduction in carbon emissions from 2005 levels by 2030 and achieving net-zero methane emissions from its natural gas distribution system by 2035. This strategic pivot is driving substantial capital investment and operational changes.

A key component of this transition is moving away from fossil fuels, particularly coal. MGE, along with co-owners, plans to retire Columbia Units 1 and 2 by the end of 2029 and is exploring converting at least one unit to natural gas before then. Furthermore, the Elm Road Units are slated to end coal as a primary fuel, transitioning to natural gas by the end of 2030, with coal used only as a backup, and a full transition away from coal expected by the end of 2032.

Simultaneously, MGE is aggressively expanding its renewable generation portfolio. The company is acquiring or seeking joint ownership interests in numerous solar and wind projects, often paired with battery storage. This includes projects like Paris (10% ownership, 11 MW Battery, estimated commercial operation 2025 Battery), Darien (10% ownership, 25 MW Solar / 7.5 MW Battery, estimated commercial operation March 2025 Solar / 2026 Battery), Koshkonong (10% ownership, 30 MW Solar / 16.5 MW Battery, estimated commercial operation 2026 Solar / 2027 Battery), and Sunnyside (100% ownership, 20 MW Solar / 40 MW Battery, estimated commercial operation 2026 Solar / 2027 Battery). Several other solar and wind projects are pending PSCW approval with estimated commercial operation dates through 2028. These investments, totaling approximately 178 MW of solar and 18 MW of wind (approved or pending), represent a tangible commitment to its clean energy targets.

While the company does not appear to detail proprietary technological breakthroughs in generation technology itself (MGEE typically invests in commercially available solar, wind, and battery storage), its strategic use of these technologies, particularly integrating utility-scale renewables and battery storage into its grid, is a key operational focus. The company's investment in grid modernization, mentioned as a driver for rate increases, also reflects technological efforts to manage a more distributed and intermittent energy supply reliably. The Renewable Flat Bill program, while perhaps not a unique technology, is a customer-facing technological application that allows customers to support local renewables and potentially gain energy cost stability, offering a quantifiable benefit in customer engagement and potentially higher satisfaction compared to more traditional utility offerings. This customer-centric approach to deploying available renewable technology provides a localized competitive advantage against larger, less nimble peers. The company's R&D focus appears centered on integrating these new assets and optimizing grid performance rather than fundamental technology development.

The "so what" for investors is that these strategic investments, particularly in regulated assets like renewable generation and grid infrastructure, are typically added to the rate base, providing a predictable return approved by the PSCW. This capital deployment supports earnings growth within the regulated framework, offsetting the eventual retirement of older, less economic fossil fuel assets. The company has received specific approval to recover 100% of Allowance for Funds Used During Construction (AFUDC) on projects like Paris, Darien, and Koshkonong during their construction phase, further supporting earnings during the investment cycle.

Performance Reflecting Investment and Weather

MGE Energy's financial performance in the first quarter of 2025 demonstrates the impact of its strategic investments and external factors like weather. Net income for the three months ended March 31, 2025, rose to $41.6 million, or $1.14 per share, compared to $33.8 million, or $0.93 per share, in the same period of 2024.

This increase was primarily driven by the regulated utility segments. The Electric Utility segment saw net income rise to $20.2 million from $15.8 million, benefiting from increased electric investments included in the 2025 rate case and higher residential sales volume due to favorable weather compared to the warmer-than-normal Q1 2024. Total electric revenues increased by 8.0%, from $116.1 million to $125.5 million, with residential sales volume up 7.7%. Sales to the market also increased significantly, though this revenue is largely offset by fuel costs and has minimal impact on net income.

The Gas Utility segment also contributed significantly, with net income increasing to $13.6 million from $10.6 million. This was largely attributable to higher gas retail sales volume, which rose approximately 19% in Q1 2025 compared to Q1 2024, driven by a 13% increase in heating degree days. Total gas revenues increased by 24.4%, from $75.2 million to $93.5 million. While rate changes contributed to the revenue increase, the cost of natural gas is recovered through the Purchased Gas Adjustment (PGA) clause, meaning changes in gas costs and PGA recoveries impact revenue but not net income.

Operating expenses saw an increase, with operations and maintenance rising by $2.6 million, partly due to higher transmission costs and increased customer service and electric production expenses. Depreciation and amortization increased by $1.1 million, notably in the electric segment, reflecting assets like the Paris solar project being placed in service.

Liquidity remains adequate, supported by cash on hand, operating cash flows, and access to credit facilities and capital markets. Capital expenditures totaled $47.7 million in Q1 2025, an increase from $44.8 million in Q1 2024, primarily reflecting increased spending on renewable generation facilities. MGE had $280 million of remaining regulatory authority to issue long-term debt as of March 31, 2025, to finance authorized capital expenditures. The company's capitalization structure remains sound, with common shareholders' equity representing 62.1% of total capitalization as of March 31, 2025, a slight increase from 61.5% at the end of 2024.

Outlook and Potential Headwinds

MGEE's outlook is closely tied to its ongoing capital investment plan and the regulatory environment. The company does not currently expect material changes to its total forecasted capital expenditures for 2025 through 2029, which support its energy transition goals. However, the mix and timing of these investments may shift based on reliability needs and external factors.

In April 2025, MGE filed a proposed two-year rate case for 2026-2027, seeking PSCW approval for electric rate increases of 4.89% in 2026 and 4.33% in 2027, and gas rate increases of 2.33% in 2026 and 2.16% in 2027. These proposed increases are primarily driven by the need to recover costs associated with increased rate base from investments in new generation (solar, battery, West Riverside), grid modernization, and transmission costs for electric, and distribution infrastructure improvements for gas. A final order is expected before the end of the year. The existing 2024-2025 rate order includes an earnings sharing mechanism, limiting the utility's ability to retain earnings significantly above the authorized 9.70% Return on Equity.

Several risks could impact the execution of MGEE's strategy and its financial outlook. Evolving environmental regulations, including final rules on wastewater (ELG), greenhouse gas emissions, and particulate matter (PM2.5), could require additional capital expenditures and operating costs. While management expects to recover these costs in future rates, the timing and scope of recovery are subject to regulatory approval.

Supply chain disruptions, particularly related to solar projects, pose a tangible risk. Import regulations like the Uyghur Forced Labor Protection Act (UFLPA) and U.S. Department of Commerce solar tariffs have impacted and may continue to impact the cost and timeline of solar projects. Recent bans under the UFLPA in January 2025 affecting solar supply chain providers, and new tariffs under Executive Orders, add further uncertainty. While MGE has filed and expects to continue filing notifications with the PSCW for cost increases exceeding approved levels and requesting recovery in future rate cases, delays or disallowed costs could impact earnings and capital deployment schedules.

Conclusion

MGE Energy presents an investment thesis centered on the stability of its regulated utility operations and the growth potential derived from its strategic energy transition. The company's commitment to decarbonization through significant investment in renewable generation, battery storage, and grid modernization, coupled with the planned retirement and conversion of coal assets, positions it to meet evolving environmental standards and customer expectations.

Recent financial performance in Q1 2025 underscores the earnings power of the regulated segments, benefiting from both strategic investments entering the rate base and favorable weather. While the company faces potential headwinds from regulatory uncertainties and supply chain risks impacting its renewable buildout, its history of recovering prudently incurred costs within the Wisconsin regulatory framework provides a degree of confidence in its ability to manage these challenges. The proposed rate case for 2026-2027 outlines a clear path for future rate base growth and associated earnings potential. For investors seeking exposure to a stable utility with a clear, regulated path towards a cleaner energy future, MGEE's strategy and investment pipeline warrant close consideration, balanced against the execution risks inherent in large-scale infrastructure projects and the evolving regulatory and trade landscapes.