MGE ENERGY INC (MGEE) stock intrinsic value fair value estimate & owner earnings analysis

MGE Energy owns Madison Gas and Electric, the regulated electric and natural gas utility serving Madison and surrounding Dane County in south-central Wisconsin. Its prices are set by the Public Service Commission of Wisconsin in two-year rate cases that allow it to recover its costs and earn a set return on the plant it has invested in (its "rate base"). The most recent settlement, covering 2026 and 2027, authorizes a 9.8% return on equity with about 56% of the regulated capital structure in equity, and an average rate base rising from about $1.58 billion in 2025 to $1.72 billion in 2026 and $1.93 billion in 2027. It also owns a small stake in American Transmission Co. and the entities that own its shares of the West Campus and Elm Road power plants. How we measure earnings. We count the capital spending needed to keep the existing system in shape (which we set equal to depreciation) as an ongoing cost, and treat spending above that as new investment. On that basis owner earnings were about $3.66 per share in 2025 ($134 million), up from $3.17 in 2024 and $3.43 in 2023. Because we value the business before its lenders are paid, we add back cash interest ($35.8 million in 2025). That gives about $170 million of cash from the business in 2025. We compared that figure with the capital the company had invested in each of 2023-2025. The return came to 8.2%, 7.6% and 8.0%. 2025 was the middle year, so we use it as our starting level. What changed from our previous estimate. Our earlier estimate of about $126 a share had two problems. It grew earnings by 6-7% a year as new solar, battery, wind and gas projects came into service, but it did not subtract the roughly $1.1 billion of spending above depreciation that MGE plans for 2026-2030 to build them. That spending is larger than the company's entire annual earnings, and it is paid for with new borrowing and new shares. It also valued earnings after interest and never deducted the debt, which quietly assumes today's low-cost loans last forever on today's terms. Now we value each new project as what it really is: money spent up front that then earns the regulated return. We value the whole business first and then subtract what it owes. With a 6% discount rate and a regulated return of about 7.8% on new investment, the building program adds value, but much less than simply growing earnings would suggest. That is the main reason our estimate is lower. Debt. As of March 31, 2026 MGE had about $906 million of long-term notes, $40 million of commercial paper and a $19.5 million finance lease. In January 2026 it issued $90 million of new notes at 5.05%-5.79% and paid off its last first mortgage bonds. The notes are fixed-rate, with a weighted coupon of about 4.6%, and many run to the 2040s and 2050s. Among them are $60 million at 2.48% due 2031 and $40 million at 2.63% due 2033. Because this debt is cheaper than 6% for many years, we reduce its value by about $82 million. That gives net debt of about $883 million, or $24.04 per share. Maturities are small: $21.6 million in 2026, $54.9 million in 2027, $25.8 million in 2028 and $55.9 million in 2029. The main covenant caps debt at 65% of total capital, and debt is currently about 42%. In every case the business earns roughly three times its interest bill even after the borrowing needed for the building program, so we do not see a refinancing problem. Base case (about $66.54 per share). The existing business keeps producing about $170 million a year. This is a franchised monopoly utility that has served Madison for more than a century under state rate regulation, and nothing we can identify ends that. The 2026-2030 capital plan is built as disclosed: $392 million in 2026, $570 million in 2027 (including a one-third share of the RockGen gas plant, about $203 million) and about $300 million a year in 2028-2030. It includes Sunnyside, Koshkonong, High Noon, Ursa, Badger Hollow, Saratoga, Darien and the Elm Road gas conversion. Each dollar above depreciation earns about 7.8% (the 9.8% authorized equity return on 56% equity plus interest on the rest), starting the year after it is spent. We credit no growth beyond 2030, because further projects need future approvals and outside funding. Cash from the business rises from about $178 million in 2026 to about $254 million by 2030, but the heavy spending in 2026-2027 comes first. The business is worth about $3.33 billion ($90.58 per share). Less $883 million of net debt, the shares are worth about $2.45 billion, or $66.54 per share. For comparison, cash from the business grew 13.7% in 2025, and this case assumes about 4.9% growth in 2026. The tiny 0.15% electric rate change for 2026 and the fact that most new plant enters rates only from 2027 argue for the slower start. Bear case (about $53.08 per share). The existing business earns at its weakest recent rate, 2024's 7.6% on invested capital, or about $161 million. At the 2028 rate case the regulator cuts the allowed equity return to about 9.0%, which costs about $8.7 million a year. Many of the new projects are minority stakes of 8-33% built by partner utilities, and in this case they come in late: each dollar earns only about 7.0%, starting two years after it is spent. The business is worth about $2.83 billion ($77.12 per share). Less the $883 million owed, the shares are worth about $1.95 billion, or $53.08 per share. Bull case (about $79.17 per share). The existing business earns at its best recent rate, 2023's 8.2%, or about $175 million. The capital plan is delivered on schedule and earns about 8.2%. Rate base keeps growing after 2030 at about $150 million a year above depreciation through 2040, in line with the company's long record of investing more than depreciation every year. The business is worth about $3.79 billion ($103.21 per share). After the $883 million of debt, the shares are worth about $2.91 billion, or $79.17 per share. What we left out. The filings describe no signed large data-center or other large-customer contract, so no such growth is included. We assume new shares are issued at fair value, so they neither add to nor take from existing holders. If the company sells shares above what they are worth, holders gain a little; if it sells below, they lose. Projects marked as still awaiting regulatory approval (RockGen, Dawn Harvest, Akron and others) add only modest value even if approved, because a regulated return is only slightly above our 6% rate. What could make this wrong. The value rests mainly on the regulator continuing to allow a return near today's 9.8% on a rate base that grows by well over half by 2030. A much lower allowed return, or disallowed project costs, would push value toward the bear case. On the other side, a new large load such as a data center, if contracted and approved, would add growth we do not count today. Accounting note. Year-by-year working-capital movements for 2016-2022 were estimated from summary figures rather than taken line by line from the cash-flow statements. The 2023-2025 figures, which drive this valuation, come directly from the filed statements.