MGE Energy (MGEE) Risk Analysis

Because we operate in an industry that requires employees with specialized technical skills, we must attract, train, and retain a specialized workforce to meet current and future needs. Events such as an aging workforce without sufficient replacement workers, mismatch of skill sets to future needs, labor market conditions, evolving employee culture expectations, or unavailability of contract resources may lead to operating challenges and increased costs. Some of the challenges include lack of resources, loss of knowledge, and time required for replacement employees to develop necessary skills. Failure to identify qualified replacement employees could increase costs as a result of decreased productivity and increased safety incidents. If we are unable to attract and retain an appropriately qualified workforce, our operations could be negatively affected. We are also subject to multiple collective bargaining agreements covering approximately 318 employees as of December 31, 2025. Future negotiation of these collective bargaining agreements could lead to work stoppages or other disruptions to our operations, which could adversely affect our financial condition and results of operations.

Changes to 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, and may continue to be, 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 in the future 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.

If corporate tax rates or policies change, we may be required to record material charges against earnings. Increased tax rates could create timing delays before regulated rates allow recovery of those tax increases in revenues. In addition, IRS tax policies such as tax normalization, Treasury Regulations, and evolving guidance under the IRA and OBBBA may impact our ability to economically deliver certain types of resources relative to market prices. OBBBA includes provisions for the phase-out of certain tax credits over time, creating uncertainty around long-term project economics and potentially accelerating investment timelines. These changes could require us to modify resource plans, accelerate construction schedules, or seek alternative financing structures, all of which may increase costs and risk. There is uncertainty regarding whether and how the current and future Presidential administrations or U.S. Congress will continue to address tax policy and regulation. We have historically reduced our consolidated federal and state income tax liability through various tax credits. We may not be able to fully use these tax credits if future taxable income is insufficient or if transferability options are limited. Any future disallowance of credits due to legislative changes or adverse determinations could materially affect our tax obligations and financial results. The IRA introduced new labor requirements that are conditions to qualification for renewable tax credits. Failure to meet these requirements on renewable projects that began construction after January 28, 2023, could result in a significant reduction in the amount of renewable tax credits, which could adversely impact our financial condition and results of operations. OBBBA introduces additional eligibility requirements, including compliance with Foreign Entity of Concern (FEOC) rules, which may restrict the use of certain equipment or components in renewable projects. Failure to meet FEOC requirements could disqualify projects from tax credits, significantly increasing costs and reducing expected returns. Our utility business owns and operates renewable energy generating facilities that produce PTC and ITC credits. The amount of credits earned depends on facility in-service dates and operating factors, including generation output, transmission constraints, pricing trends, adverse weather conditions, equipment reliability, and the applicable credit rates. These factors, combined with labor requirements under IRA and FEOC compliance risks and credit phase-outs under OBBBA, could reduce credits and increase 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. Any of the considerations mentioned above 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. There is also uncertainty as to when or how credit rating agencies, capital markets, the FERC, or state public utility commissions will treat impacts of any future federal or state tax regulation. These impacts could result in credit rating downgrades or negatively affect financial metrics such as funds from operations-to-debt ratios.

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. There is uncertainty regarding whether and how the current and future Presidential administrations will address 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 regulatory activity, there may be an increase in the number and scope of environmental laws and regulations aimed at carbon sources, including 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 have affected us, and may continue to affect us by, among other items: - 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.

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. Our operations have been, and may continue to be, 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, employee wages and benefits, and other resources. Inflationary pressures in the economy could lead to higher expenses which may adversely impact our financial condition and results of operations.

The credit markets have experienced disruption and uncertainty. To the extent that such issues affect the ability or willingness of credit providers or investors to participate in the credit markets or particular types of investments, or affect their perception of the risk associated with particular types of investments, our cost of borrowing could be affected. Furthermore, if we are unable to access the capital and credit markets on favorable terms, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and liquidity and our ability to repay or refinance our debt. We also rely on our credit ratings to access the credit markets. If our credit ratings are downgraded for any reason, borrowing costs would increase, the number of potential investors could decrease, or we could be required to provide additional credit assurance, including cash collateral, to contract counterparties.

Our revenues and the timing of cost recovery could be adversely impacted by improvements in power generation, storage, and use of technology to minimize energy use. Advancements in distributed generation, including commercial and residential solar installations and commercial micro turbines, continue to improve the cost-effectiveness of customer self-supply of electricity. Similarly, improvements in energy storage technology, such as batteries and fuel cells, enable customers to meet their around-the-clock electricity needs without relying on the electricity we provide. Legislation or regulations could support these technologies, permit third-party sales, and allow interconnection to our distribution system. Improvements in energy efficiency and voluntary conservation efforts will also affect consumption. AI-driven energy management tools could also enable customers to optimize usage and further reduce purchases from us. Such developments could reduce customer purchases of electricity but may not reduce our investment and operating requirements due to our obligation to serve customers, including those whose self-supply resources fail. Because a portion of our costs are recovered through volumetric charges, reductions in electricity deliveries could affect the timing of our recovery of those costs and may require changes to rate structures.

We operate in a highly engineered industry that requires the continued operation of sophisticated information technology systems and network infrastructure to manage our finances, operate our control facilities, provide electric and gas service to our customers, and enable compliance with applicable regulatory requirements. Our generation and distribution facilities and computer-based systems and other infrastructure or physical assets are vulnerable to interruption, the introduction of viruses, malware, ransomware, security breaches, terrorist-style attacks, fire, power loss, system malfunction, network outages, unauthorized access, 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. Generation, transmission systems, and natural gas pipelines are part of an interconnected system. Therefore, a disruption caused by the impact of a cybersecurity incident on the regional electric transmission grid, natural gas pipeline infrastructure or other fuel sources of our third-party service providers' operations, could also negatively impact our business. 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. We maintain security measures to protect our information technology and control systems, network infrastructure and other assets. Despite such measures, we have been and may in the future be subject to cyber incidents. While we have not been subject to cyber incidents that have had a material impact on operations to date, the safeguards we have may not always be effective due to the evolving nature of cyber attacks. Moreover, the rapid evolution and increased adoption of AI technologies may intensify our cybersecurity risks. We cannot guarantee that the protections we have in place 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, equipment may fail to work and confidential data could be compromised, any additional costs may not be recoverable in rates, or may exceed cyber insurance limits, or may not be covered by cyber insurance and could adversely impact our results of operations.

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. Any resulting interruption of services would result in lost revenues and additional costs. Lack of gas or decreased gas pressure from interstate pipeline systems may result in unexpected energy interruptions and may lead to additional costs for alternative energy sources. 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.

We serve a variety of industries, including customers with large load requirements, such as data centers and other facilities. At this time, our service area does not include any large-scale data centers. The recent and ongoing expansion of data centers associated with increasing demand for artificial intelligence (AI) and other cloud-based services is a national trend. This trend could lead to a significant increase in demand for electricity and gas if data centers expand or are developed within our service area over the next several years, which could require a rapid and significant increase in generation capacity and the development of related infrastructure. Alternatively, demand for electricity and gas could be lower than currently expected if the expansion of data centers and the associated increase in demand does not develop as anticipated. We continue to evaluate the potential impacts of the development, construction, and operation of new data centers in our service area and will continue to evaluate potential mitigants to these risks, which could materially impact our operations, financial condition and results of operations. However, we cannot predict whether the data centers under consideration will ever commence operations in our service area or the size of the load obligations of data centers that do become operational. Furthermore, the City of Madison has enacted a temporary moratorium on the development of new large-scale data centers to evaluate their impact on local infrastructure and resources, which may delay or prevent the commencement of operations for planned projects within the City of Madison. Other pending or future legislative or regulatory actions may also impact the development, construction and operation of new data centers in our service area.