Form 10-K

 




United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K


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


For the fiscal year ended:

December 31, 2018


[ ] 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

Name of Each Exchange on which Registered

MGE Energy, Inc.

Common Stock, $1 Par Value Per Share

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 [X] No [   ]

Madison Gas and Electric Company

Yes [X] No [   ]




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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 [  ] No [X]

Madison Gas and Electric Company

Yes [  ] No [X]


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. Yes [X] No [ ]


Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files): Yes [X] No [ ]


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]


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.

X

 

 

 

 

Madison Gas and Electric Company

 

 

X

 

 


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 [X]

Madison Gas and Electric Company

Yes [  ] No [X]


The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of each registrant as of June 30, 2018, was as follows:


MGE Energy, Inc.

$2,180,572,457

Madison Gas and Electric Company

$0


The number of shares outstanding of each registrant's common stock as of February 1, 2019, were as follows:


MGE Energy, Inc.

34,668,370

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, 2019, 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 6 relating to Selected Financial Data as permitted by General Instruction (I)(2)(a), (iii.) the information otherwise required by Item 10 relating to Directors and Executive Officers as permitted by General Instruction (I)(2)(c), (iv.) the information otherwise required by Item 11 relating to executive compensation as permitted by General Instruction (I)(2)(c), (v.) 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 (vi.) the information otherwise required by Item 13 relating to Certain Relationships and Related Transactions as permitted by General Instruction (I)(2)(c).




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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.

14

Item 1B. Unresolved Staff Comments.

20

Item 2. Properties.

21

Item 3. Legal Proceedings.

22

Item 4. Mine Safety Disclosures.

22

PART II.

23

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

23

Item 6. Selected Financial Data.

25

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

26

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

48

Item 8. Financial Statements and Supplementary Data.

50

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

107

Item 9A. Controls and Procedures.

107

Item 9B. Other Information.

107

PART III.

108

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

108

Item 11. Executive Compensation.

108

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

108

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

108

Item 14. Principal Accounting Fees and Services.

109

PART IV.

110

Item 15. Exhibits and Financial Statement Schedules.

110

Item 16. Form 10-K Summary.

112

Signatures - MGE Energy, Inc.

117

Signatures - Madison Gas and Electric Company

118





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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, 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 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 17. 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


The public may read and copy any reports or other information that MGE Energy and MGE file with the SEC at the SEC's public reference room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents also are available to the public from commercial document retrieval services, the website maintained by the SEC at sec.gov, MGE Energy's website at mgeenergy.com, and MGE's website at mge.com. Copies 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.



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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 (which holds our interest in ATC)

MGEE Transco

MGEE Transco, LLC (which holds our interest in ATC Holdco)

North Mendota

North Mendota Energy & Technology Park, LLC

 

 

Other Defined Terms:

 

 

 

ACE

Affordable Clean Energy

AFUDC

Allowance for Funds Used During Construction

ANPR

Advanced Notice of Proposed Rulemaking

ANR

ANR Pipeline Company

ARO

Asset Retirement Obligation

ATC

American Transmission Company LLC

ATC Holdco

ATC Holdco, LLC

BART

Best Available Retrofit Technology

Blount

Blount Station

BSER

Best System of Emissions Reductions

BTA

Best Technology Available

CAA

Clean Air Act

CAVR

Clean Air Visibility Rule

CCR

Coal Combustion Residual

CNG

Compressed Natural Gas

CO2

Carbon Dioxide

Codification

Financial Accounting Standards Board Accounting Standards Codification

Columbia

Columbia Energy Center

Cooling degree days

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

COSO

Committee of Sponsoring Organizations

CPP

Clean Power Plan

CSAPR

Cross-State Air Pollution Rule

CWA

Clean Water Act

DTA

Deferred Tax Assets

Dth

Dekatherms

EEI

Edison Electric Institute

EGUs

Electric Generating Units

electric margin

Electric revenues less fuel for electric generation and purchase power costs, a non-GAAP measure

ELG

Effluent Limitations Guidelines

Elm Road Units

Elm Road Generating Station

EPA

United States Environmental Protection Agency

FASB

Financial Accounting Standards Board

FERC

Federal Energy Regulatory Commission

Forward Wind

Forward Wind Energy Center

FTR

Financial Transmission Rights



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GAAP

Generally Accepted Accounting Principles

gas margin

Gas revenues less cost of gas sold, a non-GAAP measure

GHG

Greenhouse Gas

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

IRS

Internal Revenue Service

kVA

Kilovolt Ampere

kWh

Kilowatt-hour

MISO

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

MRO

Midwest Reliability Organization

MW

Megawatt

MWh

Megawatt-hour

NAAQS

National Ambient Air Quality Standards

Nasdaq

The Nasdaq Stock Market

NERC

North American Electric Reliability Corporation

NGO

Nongovernment Organizations

NNG

Northern Natural Gas Company

NOV

Notice of Violation

NOx

Nitrogen Oxides

NYSE

New York Stock Exchange

PCBs

Polychlorinated Biphenyls

PGA

Purchased Gas Adjustment clause

PJM

PJM Interconnection, LLC (a regional transmission organization)

PM

Particulate Matter

PPA

Purchased power agreement

PSCW

Public Service Commission of Wisconsin

REC

Renewable Energy Credit

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

the State

State of Wisconsin

Stock Plan

Direct Stock Purchase and Dividend Reinvestment Plan of MGE Energy

Tax Act

Tax Cuts and Jobs Act

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

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. Their principal offices are located at 133 South Blair Street, Madison, Wisconsin 53788, and their 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, 2018, MGE supplied electric service to approximately 153,000 customers, with approximately 90% located in the cities of Fitchburg, Madison, Middleton, and Monona and 10% in adjacent areas. Of the total number of customers, approximately 87% were residential and 13% were commercial or industrial. Electric retail revenues for 2018, 2017, and 2016 were comprised of the following:


 

 

 

Year Ended December 31,

 

 

 

 

2018

 

2017

 

2016

 

 

Residential

 

35.4%

 

33.5%

 

33.9%

 

 

Commercial

 

52.3%

 

53.2%

 

52.9%

 

 

Industrial

 

3.6%

 

4.0%

 

4.4%

 

 

Public authorities (including the UW)

 

8.7%

 

9.3%

 

8.8%

 

 

Total

 

100.0%

 

100.0%

 

100.0%

 



7




 



Electric operations accounted for approximately 71.8%, 73.6%, and 75.2% of MGE's total 2018, 2017, and 2016 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 (MRO). The essential purposes of these entities are the development and implementation of regional and NERC reliability standards; and determining compliance with those standards, including enforcement mechanisms.


Transmission


American Transmission Company LLC (ATC) was formed by 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, is regulated by the PSCW as to 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 the MISO. MISO, a FERC approved RTO, is responsible for monitoring the electric transmission system that delivers power from generating plants to wholesale power transmitters. MISO's role is to ensure equal access to the transmission system and to maintain or improve electric system reliability in the Midwest.


MISO maintains a bid-based energy market. MGE offers substantially all of its generation on the MISO market and purchases much of its load requirement from the MISO market in accordance with the MISO Tariff. MGE participates in the ancillary services market operated by MISO. That market is an extension of the existing energy market in which MISO assumes the responsibility of maintaining sufficient generation reserves. In 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 voluntary capacity auction, which provides an optional monthly forum for buyers and sellers of aggregate planning resource credits to interact. Load serving entities, such as MGE, may participate in the voluntary capacity auction potentially 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 that are not needed by them.


PJM

MGE is a member of PJM. PJM, an RTO, is a neutral and independent party that coordinates and directs the operation of the transmission grid within its area of coverage, administers a competitive wholesale electricity market, and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.


Fuel supply and generation


MGE satisfies its customers' electric demand with internal generation and purchased power. MGE's current fuel mix for generation will fluctuate 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 Energy 2030 framework details our plan for growth in generation for renewables. This growth will continue as legacy fossil fuel-fired generation assets are retired and replace with renewables, such as wind and solar assets. The transition or displacement of coal-fired resources is ongoing and active. Currently two utility-scale solar projects are awaiting regulatory approval, totaling approximately 100 MW of MGE's combined ownership share.


MGE's carbon intensity is expected to decrease as our use of coal decreases over time, due in part to our investments in cost-effective, efficient renewables like the Saratoga Wind farm, which is expected to come online in 2019, and the purchase of the Forward Wind farm in 2018.




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During 2018, 2017, and 2016, MGE's electric energy delivery requirements were satisfied from the following fuel sources:

 

 

 

 

Year Ended December 31,

 

 

 

 

2018

 

2017

 

2016

 

 

Coal

 

52.3%

 

52.7%

 

48.3%

 

 

Natural gas(a)

 

13.8%

 

11.3%

 

18.6%

 

 

Renewable sources(b)

 

10.5%

 

12.4%

 

10.8%

 

 

Purchased power

 

23.4%

 

23.6%

 

22.3%

 

 

Total

 

100.0%

 

100.0%

 

100.0%

 


(a)

MGE's electric operations burn natural gas in several of its peaking power plants. The market price of natural gas decreased in 2016, which improved the economics of natural gas-fueled generation over other types of generation.


(b)

Includes both internal generation and purchased power.


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. The following table identifies purchase power commitments as of December 31, 2018, with unaffiliated parties for the next five years.


 

(Megawatts)

 

2019

 

2020

 

2021

 

2022

 

2023

 

 

Purchase power commitments

83

 

83

 

83

 

33

 

30

 


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, 2018, MGE supplied natural gas service to approximately 161,000 customers in the cities of Elroy, Fitchburg, Lodi, Madison, Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 25 villages; and all or parts of 49 townships. Of the total number of customers, approximately 90% were residential and 10% were commercial or industrial. Gas revenues for 2018, 2017, and 2016 were comprised of the following:


 

 

Year Ended December 31,

 

 

 

2018

 

2017

 

2016

 

 

Residential

59.4%

 

59.6%

 

60.2%

 

 

Commercial

35.8%

 

35.8%

 

34.9%

 

 

Industrial

1.6%

 

1.3%

 

1.1%

 

 

Transportation service and other

3.2%

 

3.3%

 

3.8%

 

 

Total

100.0%

 

100.0%

 

100.0%

 


Gas operations accounted for approximately 28.2%, 26.4%, and 24.8% of MGE's total 2018, 2017, and 2016 regulated revenues, respectively.


MGE can curtail gas deliveries to its interruptible customers. Approximately 3% of retail gas deliveries in 2018 and 2016 and approximately 4% in 2017 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



9




 



pipeline service and a more reliable and economical gas supply mix, which includes gas from Canada and from the mid-continent and Gulf/offshore regions in the United States.


During the winter months, when customer demand is high, MGE is primarily concerned with meeting its obligation to firm 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 5,934,489 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:


·

167,150 Dth (including 106,078 Dth of storage withdrawals) on ANR.

·

65,828 Dth on NNG.


Nonregulated Energy Operations


MGE Energy, through its subsidiaries, has developed generation sources that assist MGE in meeting the electricity needs of its customers. These sources consist of the Elm Road Units and the WCCF, which are leased by MGE Power Elm Road and MGE Power West Campus, respectively, 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, which is owned by MGE Energy. As of December 31, 2018, 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. MGE Energy's ownership interest in ATC Holdco is held by MGEE Transco, a wholly-owned subsidiary. As of December 31, 2018, MGEE Transco held a 4.4% ownership interest in ATC Holdco. In the near term, it is expected that ATC Holdco will be pursuing transmission development opportunities that typically have long development and investment lead times before becoming operational.


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 they conduct their operations, the costs of those 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 changes to regulations governing polychlorinated biphenyl (PCB), potential changes to air and water standards, and potential climate change legislation.


Water Quality


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

In November 2015, the EPA published its final rule setting Effluent Limitations Guidelines (ELG) for the steam electric power generating industry. The ELG rule establishes federal limits on the amount of metals and other pollutants that can be discharged in wastewater from new and existing steam electric generation plants. The rule will be applied to Wisconsin-based power plants as they renew their WPDES permits, no later than 2023. The operators of the Columbia and Elm Road Units have indicated that equipment upgrades may be necessary to comply with the new discharge standards. Management believes that any compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects.




10




 



EPA Cooling Water Intake Rules (Section 316(b))

Section 316(b) of the Clean Water Act requires that the cooling water intake structures at electric power plants meet best available technology standards so that mortality from entrainment (drawing aquatic life into a plant's cooling system) and impingement (trapping aquatic life on screens) are reduced. 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.


The WCCF, Blount, and Columbia plants are considered existing plants under this rule. The WCCF facility already employs a system that meets the Section 316(b) rule. The Blount plant's WPDES permit assumes that Blount meets best technology available (BTA) for the duration of the permit, which expires in 2023. However, MGE needs to perform an entrainment study by the end of 2021 to determine future BTA, which will be included with the next permit renewal. Section 316(b) applies to river intakes at the Columbia plant. The operator of the Columbia plant is in the process of a WPDES permit renewal. The draft permit directs the Columbia operator to conduct similar studies on their intake structures. The study requirements will not be known until the permit is final. Future BTA requirements at Blount and Columbia will be based on the results of these required intake studies and will be specified in the next permits issued in 2023 or later. MGE expects that the Section 316(b) rule will not have a material effect on its existing plants.


Energy Efficiency and Renewables


The Wisconsin Energy Efficiency and Renewables Act requires that 10% of the state's electricity be generated from renewable sources. MGE is in compliance with the requirement. The costs to comply with the Act and its accompanying regulations are being recovered in rates.


Air Quality


Air quality regulations promulgated by the EPA and Wisconsin Department of Natural Resources (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.


Ozone NAAQS

In May 2018, the EPA issued a final rule which designated the northeast portion of Milwaukee County as being in nonattainment with Ozone National Ambient Air Quality Standards (NAAQS). The Elm Road Units are located in Milwaukee County, outside the designated nonattainment area. In August 2018, several environmental groups, the City of Chicago, and the State of Illinois filed federal lawsuits challenging several of the EPA's attainment designation decisions, including the EPA's partial Milwaukee County designation as being too narrow and not sufficiently protective. MGE is monitoring the outcome of this lawsuit and how it may affect the Elm Road Units in Milwaukee County. See Footnote 17 of the Notes to Consolidated Financial Statements in this Report for additional information.


EPA's Cross-State Air Pollution Rule: Proposed Ozone Season Update based on 2008 Ozone NAAQS

The EPA's CSAPR is an interstate air pollution transport rule designed to reduce ozone and fine particulate (PM2.5) air levels in areas that the EPA has determined are being significantly impacted by pollution from neighboring and upwind states. This is accomplished in the CSAPR through a reduction in SO2 and NOx from qualifying fossil-fuel fired power plants in upwind or "contributing" states. NOx and SO2 contribute to fine particulate pollution and NOx contributes to ozone formation in downwind areas. Reductions are achieved through a cap and trade system. Individual plants can meet their caps through modifications and/or buying allowances on the market.


In October 2016, the EPA finalized rulemaking for an update to CSAPR that incorporated 2008 Ozone NAAQS standards into the rule (the original CSAPR is based on 1997 Ozone NAAQS standards) and began further reducing summertime ozone season NOx allowances in 2017. The update affects 22 states, including Wisconsin, by further limiting statewide NOx allowances in each of those states. The rule also includes revisions to CSAPR that are designed to address issues remaining from the D.C. Circuit remand of CSAPR, including Wisconsin's inclusion in the NOx ozone season portion of the rule. The State of Wisconsin filed a legal challenge to the CSAPR update rule asserting, among other things, that the rule over-controls NOx emissions in Wisconsin.


MGE has met our CSAPR obligations in 2017 and 2018 through a combination of reduced emissions through pollution control (e.g. SCR installation at Columbia), as well as owned, received, and purchased allowances. There remains uncertainty around CSAPR due to legal challenges, however, MGE expects that we will meet ongoing CSAPR obligations for the foreseeable future. MGE will continue to monitor developments and litigations to this rule.




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Clean Air Visibility Rule (CAVR)

Columbia is subject to the best available retrofit technology (BART) regulations, a subsection of the EPA's 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. At this time, however, the BART regulatory obligations, compliance strategies, and costs remain uncertain in Wisconsin due to the continued legal challenges surrounding CSAPR and CAVR. MGE will continue to monitor developments 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, which committed to ensuring a balanced, economic energy supply with reduced environmental emissions. The Plan emphasized increased renewable energy, energy efficiency, and new cleaner generation – three strategies that reduced GHG emissions. Under the Plan and other actions, our CO2 emissions declined from 2005 to 2015 by approximately 20% even though total system energy increased. In 2015, MGE announced its Energy 2030 framework that 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, we will also work to reduce CO2 emissions by 40% from 2005 levels by 2030. MGE is further committed to reducing carbon emissions by 80% from 2005 levels by 2050.


EPA's Greenhouse Gas Reduction Guidelines under the Clean Air Act 111d Rule

The EPA's Clean Power Plan (CPP) rule became effective in December 2015, setting guidelines for states to use in developing plans to control GHG emissions from existing fossil fuel-fired EGUs and systems. When fully implemented in 2030, the CPP was projected to reduce GHG emissions from this sector by 32% below 2005 levels. States were given up to three years to submit a plan or be subject to a federal plan to meet the reduction goals, and states were expected to meet interim goals starting in 2022 and the final goals in 2030. Implementation of the rule was expected to have a direct impact on coal and natural gas fired generating units, including possible changes in dispatch and additional operating costs. In February 2016, the U.S. Supreme Court stayed implementation of the CPP which remains in effect. In October 2017, the EPA proposed to rescind the CPP.


In August 2018, the EPA proposed the Affordable Clean Energy (ACE) rule which would replace the CPP, if successfully implemented. The ACE proposal directs states to submit plans to the EPA for approval that implement standards of performance (called Best System of Emissions Reductions, or BSER) for individual EGUs over 25 MW. ACE defines BSER as on-site, heat-rate efficiency improvements, whereas the CPP defines BSERs using carbon

dioxide emission performance rates. Simple cycle units such as the smaller combustion units, and combined cycle units such as the WCCF are exempt from the proposed rule. Under the ACE proposal, if a state fails to prepare a plan, or its plan is not approved by the EPA, a federal implementation plan will be issued for that state. The proposed ACE as it is currently written has the potential to impact Blount, Columbia, and the Elm Road Units.


Given the pending CPP legal proceedings, and the proposed ACE rule, the nature and timing of any final requirements is subject to uncertainty. MGE is unable to determine with any certainty the impact of the CPP and proposed ACE rule on our operations. If an ACE rule is implemented substantially in the form of the CPP rule, it is expected to have a material impact on MGE. MGE will continue to monitor developments with the proposed ACE rule, the CPP rule, and related litigation.


Solid Waste


EPA's Coal Combustion Residuals Rule

EPA's Coal Combustion Residuals (CCR) rule regulates landfills, ash ponds, and other surface impoundments used to manage coal combustion residuals by regulating their design, location, monitoring, and operation. The CCR rule is implemented in phases to allow for sites with onsite storage and/or disposal to evaluate their compliance with the rule's design criteria. Landfills, impoundments and ash storage systems, such as ash ponds, that cannot meet design criteria will need to close formally within defined timeframes.




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Columbia and the Elm Road Units are subject to this rule. The Elm Road Units' operator has indicated that cost to comply with this rule will not be significant. Columbia's operator has completed a review of their system and has determined that an onsite ash pond will need to be closed by 2023. Columbia's operator will install a dry ash handling system to replace the ash pond. The dry ash handling system installation is planned for 2020-2021. In August 2018, the Court of Appeals for the D.C. Circuit vacated parts of the CCR for not being sufficiently protective of the environment. It is unclear how the EPA will respond to that decision. MGE will continue to monitor potential rule modifications to assess potential impacts on our operations.


Columbia


Based upon current available information, compliance with various environmental requirements and initiatives is expected to result in significant additional operating and capital expenditures at Columbia as noted below.


Columbia Clean Air Act Litigation

Columbia is a coal-fired generating station operated by WPL in which WPL, WPSC, and MGE have ownership interests. In December 2009, the EPA sent a Notice of Violation (NOV) to the co-owners, including MGE. The NOV alleged that WPL and the Columbia co-owners failed to comply with appropriate pre-construction review and permitting requirements and, as a result, violated the Prevention of Significant Deterioration program requirements, Title V Operating Permit requirements of the CAA, and the Wisconsin SIP. In June 2013, the court approved and entered a consent decree entered by the EPA, Sierra Club, and the co-owners of Columbia. One of the requirements of the consent decree requires installation of an SCR system at Columbia Unit 2 by December 31, 2018. Installation of the SCR was approved by the PSCW, which was placed in service in 2018.


Employees


As of December 31, 2018, MGE had 706 employees. MGE employs 223 employees who are covered by a collective bargaining agreement with Local Union 2304 of the International Brotherhood of Electrical Workers and 84 employees who are covered by a collective bargaining agreement with Local Union No. 39 of the Office and Professional Employees International Union. These collective bargaining agreements expire on April 30, 2023 and May 31, 2023, respectively. There are also 5 employees covered by a collective bargaining agreement with Local Union No. 2006, Unit 6 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union. This collective bargaining agreement expires on October 31, 2023.


Financial Information About Segments


See Footnote 21 of the Notes to the Consolidated Financial Statements in this Report for financial information relating to MGE Energy's and MGE's business segments.




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Executive Officers of the Registrants


As of December 31, 2018, 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

7

Age: 47

President and Chief Executive Officer

Senior Vice President – Energy Supply and Planning

03/01/2017

07/23/2015


 

Assistant VP – Energy Supply and Customer Service

01/01/2012

 

 

 

 

 

Craig A. Fenrick(b)(c)

Executive Vice President – Energy Operations

03/01/2017

12

Age: 59

Senior Vice President – Energy Operations

07/23/2015

 

 

Vice President – Energy Delivery

02/10/2015

 

 

Vice President – Electric Transmission and Distribution

01/01/2012

 

 

 

 

 

Lynn K. Hobbie(b)

Executive Vice President – Marketing and Communications

03/01/2017

24

Age: 60

Senior Vice President – Marketing and Communications

02/01/2000

 

 

 

 

 

Jeffrey C. Newman(a)

Executive Vice President, Chief Financial Officer, Secretary,

03/01/2017

21

Age: 56

and Treasurer

 

 

 

Senior Vice President, Chief Financial Officer, Secretary,

07/23/2015

 

 

and Treasurer

 

 

 

Vice President, Chief Financial Officer, Secretary, and Treasurer

01/01/2009

 

 

 

 

 

Cari Anne Renlund(b)

Age: 45

Vice President and General Counsel

Dewitt Ross & Stevens S.C. (law firm) – Partner

11/02/2015

06/11 – 10/15

3


Note: Ages, years of service, and positions as of December 31, 2018.


(a)

Executive officer of MGE Energy and MGE.

(b)

Executive officer of MGE.

(c)

Expected to retire April 30, 2019.


Item 1A. Risk Factors.


MGE Energy and our subsidiaries, including MGE, operate in a 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 market price for our publicly traded securities. While MGE Energy and MGE 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 the following aspects of MGE's business: rates, terms and conditions of service; various business practices and transactions; financing; 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. 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 such costs. Our ability to attract capital also depends, in part, upon our ability to obtain a fair return from the PSCW.


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 statues and



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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 (ROE). 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.


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.


MGE Energy's subsidiaries are subject to environmental laws and regulations that affect the manner in which they conduct business, including capital expenditures, operating costs, and potential liabilities. Changes and developments in these laws and evolving regulations may alter or limit 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), and 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 could incur costs from the regulation of GHG from power plants, natural gas delivery, greenhouse gases used in power distribution, and efficiencies lost during power distribution. While the current State and Federal governments are unlikely to pass comprehensive greenhouse gas legislation or regulations in the immediate future, future legislation is likely. In addition, litigation by environmental nongovernment organizations (NGOs) targeting GHG emissions from the electric power industry is also likely if the federal government fails to act on greenhouse gas initiatives. 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. These matters represent uncertainties in the operation and management of our business.




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We face risks associated with the passing of the new tax reform.


On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (Tax Act) into law. The passing of the law significantly lowers MGE's corporate tax rates and triggers a remeasurement of deferred taxes. We have reflected the impact of the Tax Act in our financial results; however, those estimates could be affected by, and require subsequent adjustment as a result of, clarity and regulatory guidance that develops around the Tax Act. Furthermore, while regulation allows us to incorporate changes in tax law into the rate-setting process, there will most likely be timing delays before realization of the changes.


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 unexpected 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. Under the electric fuel rules, MGE is required to defer electric fuel-related costs that fall outside a symmetrical cost tolerance band that is currently plus or minus 2% around the amount approved in its most recent rate order. Any over/under recovery of the actual costs in a year is determined in the following year and is then reflected in future billings to electric retail customers. Under the electric fuel rules, MGE is required to defer the benefit of lower costs, if its actual fuel costs fall outside the lower end of the range, and is required to defer costs, less any excess revenues, if its actual fuel costs exceed the upper end of the range. 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. MGE assumes the risks and benefits of variances that are within the cost tolerance band.


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 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. 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 from us 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.




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We are affected by economic activity within our service area.


Higher levels of development and business activity generally increase the numbers of customers and their use of electricity and gas. Likewise, recessionary economic conditions generally have an adverse impact on our results of operations.


Our ability to obtain an adequate supply of coal could limit our ability to operate our coal-fired facilities.


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


·

Affect our operating costs due to increased costs associated with lower levels of generation or the need for alternate supply or alternate transportation,


·

Limit our ability to generate electricity if we are unable to arrange adequate deliveries 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 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, could limit 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. We may also be forced to reduce generation at our coal units and replace this generation through additional power purchases from third parties. These factors may also affect the terms under which any of our 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 contracted power from its 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, transmission constraints 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 which 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 MGE's 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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Our operations and confidential information are subject to the risk of cyber-attacks.


Our operations rely on sophisticated information technology systems and networks. Cyber-attacks targeting our electronic control systems used at our generating facilities and for electric and gas distribution systems, including denial of service and ransomware attacks, could result in a full or partial disruption of our operations. Any disruption of these operations 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 requires the collection and retention of personally identifiable information of our customers, shareholders, and employees, who expect that we will adequately protect such information. 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. The occurrence of such an event may cause us to become subject to legal claims, fines, or penalties, any of which could adversely impact our results of operations.


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, adversely impacting our financial condition and 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 or failure due to the age of certain systems, the introduction of viruses, malware, ransomware, security breaches, fire, power loss, system malfunction, network outages and other events which 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.


Acts of terrorism could materially and adversely impact our operations and financial condition.


Facilities for electric generation, transmission, and gas and electric distribution are potential targets of terrorist threats and activities. A terrorist act at our facilities could result in a disruption of our ability to generate, transmit, transport, purchase, or distribute electricity or natural gas. A possible attack would have additional adverse effects, including environmental ramifications, increased security and insurance costs, as well as general economic volatility or uncertainty within our service territories. The inability to maintain operational continuity and any additional costs incurred for repairing our facilities could materially and adversely affect our financial condition and results of operations.


Failure to attract and retain an appropriately qualified workforce could affect our operations.


An aging workforce and the retirement of key employees without appropriate replacements 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 result in decreased productivity and increased safety costs. If we are unable to attract and retain an appropriately qualified workforce, our operations could be negatively affected.


We face construction risk in connection with the completion of the Saratoga Wind Farm project.


The 66-megawatt (MW) wind farm project is subject to various risks that could cause costs to increase or delays in completion. These risks include shortages of, the inability to obtain, the cost of, and the consistency of, labor, materials and equipment; the inability of the contractors to perform under their contracts; the inability to agree to terms of contracts or disputes in contract terms; work stoppages; adverse weather conditions; the inability to obtain necessary permits in a timely manner; changes in applicable laws or regulations; adverse interpretation or enforcement of permit conditions; governmental actions; legal action; and unforeseen engineering or technology issues. If the project is over budget, we may not be able to recover excess costs. Inability to recover excess costs, or inability to complete the project in a timely manner, could adversely impact our financial condition and results of operations.




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Failure to successfully manage the implementation of our Enterprise Forward corporate initiative could adversely affect our operations.


MGE committed to undertake a multi-year project aimed at transforming our foundational customer engagement capabilities and enabling it to be flexible in delivering new products and services as outlined in our energy 2030 framework. These objectives are expected to be accomplished through the implementation of a new customer information system, enterprise resource planning platform, along with other solutions that meet the goals of the initiative. Integrating new systems is complex, costly and time consuming. If the systems and related processes do not operate as intended, it could result in disruptions to our business as well as unrecoverable excess costs. Inability to recover excess costs, or inability to implement the project successfully and in a timely manner, could adversely impact our financial condition and results of operations.


Financial Risk


We are exposed to commodity price risk relating to our purchases of natural gas, electricity, coal, oil, and environmental allowances.


We face commodity price risk exposure with respect to the purchase of natural gas, electricity, coal, oil, and environmental allowances. We also face risk through our use of derivatives such as futures, forwards, and swaps, to manage our commodity price risk. We could experience increased costs as a result of volatility in the market values of those commodities. We could also experience losses on our derivative contracts as a result of that market value volatility or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these derivative contracts involves our exercise of judgment and use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts.


Interest rate movements and market performance affects our employee benefit plan costs.


Prevailing interest rates affect our assessment and determination of discount rates and are a key assumption in the determination of the costs and funding of our defined benefit pension plans. Changes in rates may impact the amount of expense and timing of contributions to those plans. The performance of the capital markets affects the values of the assets that are held in trust to satisfy the future obligations under our pension and postretirement benefit plans. We have significant obligations in these areas and hold significant assets in these trusts. A decline in the market value of those assets may increase our current and longer-term funding requirements for these obligations. Changes in the value of trust fund assets may affect the level of required contributions to these trusts to meet benefit obligations. Reduced benefit plan assets could result in increased benefit costs in future years and may increase the amount and accelerate the timing of required future funding contributions.


We are exposed to interest rate risk.


We are exposed to interest rate risk on our variable rate financing. Borrowing levels under commercial paper arrangements vary from period to period depending upon capital investments and other factors. Such interest rate risk means that we are exposed to increased financing costs and associated cash payments as a result of changes in the short-term interest rates.


We are exposed to credit risk primarily through our regulated energy business.


Credit risk is the loss that may result from counterparty nonperformance. We face credit risk primarily through MGE's regulated energy business. Failure of contractual counterparties to perform their obligations under purchase power agreements, commodity supply arrangements, or other agreements may result in increased expenses for MGE as a result of being forced to cover the shortfall in the spot or short-term market, where prices may be more volatile.


As a holding company, we are dependent on upstream cash flows from our subsidiaries for the payment of dividends on our common stock.


As a holding company, we have no operations of our own, and our ability to pay dividends on our common stock is dependent on the earnings and cash flows of our operating subsidiaries and their ability to pay upstream dividends or to repay funds to us. Our subsidiaries have financial obligations that must be satisfied before funding us. These obligations include debt service and obligations to trade creditors, among others. Our subsidiaries are also subject to contractual and regulatory restrictions on the payment of dividends.




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Disruptions in the financial markets or changes to our credit ratings may affect our ability to finance at a reasonable cost and in accordance with our planned schedule.


The credit markets have experienced disruption and uncertainty in prior years. 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. We also rely on our strong credit ratings to access the credit markets. If our credit ratings are downgraded for any reason, borrowing costs could increase, potential investors could decrease, or we could be required to provide additional credit assurance, including cash collateral, to contract counterparties.


General economic conditions may affect our operating revenues and our counterparty risks.


Operational

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.


Counterparty creditworthiness

Credit risk also includes the risk that trading counterparties that owe us money or product will breach their obligations. MGE's risk management policy is to limit transactions to a group of high-quality counterparties. Should the counterparties to these arrangements fail to perform, we may be forced to enter into alternative arrangements. In that event, our financial results could be adversely affected and we could incur losses.


The stock market can be volatile, and various factors, could cause our stock price to decline.


The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies. Many factors affect the volatility and price of our common stock in addition to our operating results and prospects, including economic conditions changes locally and in the broader economy. These conditions include technological change, the level of interest rates and yields on other investments, and the effects of the other risk factors discussed in this report. Our stock price could fluctuate significantly in response to our quarterly or annual results, as well as factors affecting the broader economy that are beyond our control.


Item 1B. Unresolved Staff Comments.


MGE Energy and MGE


None.




20




 



Item 2. Properties.


Electric Generation


Net summer rated capacity in service as of December 31, 2018, was as follows:


Plants

 

Location

 

Commercial Operation Date

 

Fuel

 

Net Summer Rated Capacity (MW)(a)

 

No. of Units

Steam plants:

 

 

 

 

 

 

 

 

 

 

   Columbia

 

Portage, WI

 

1975 & 1978

 

Low-sulfur coal

 

219(b)(c)

 

2

   Blount

 

Madison, WI

 

1957 & 1961

 

Gas

 

103(g)

 

2

   WCCF

 

Madison, WI

 

2005

 

Gas/oil

 

126(d)

 

2

   Elm Road Units

 

Oak Creek, WI

 

2010 & 2011

 

Coal

 

106(b)(e)

 

2

Combustion turbines

 

Madison, WI

 

1964-2000

 

Gas/oil

 

147(f)

 

6

 

 

Marinette, WI

 

 

 

 

 

 

 

 

Portable generators

 

Madison, WI

 

1998-2001

 

Diesel

 

49(f)

 

54

Wind turbines

 

Townships of Lincoln

 

 

 

 

 

 

 

 

 

 

and Red River, WI

 

1999

 

Wind

 

1(f)(g)

 

17

 

 

Township of

 

 

 

 

 

 

 

 

 

  

Brookfield, IA

 

2008

 

Wind

 

4(f)(h)

 

18

 

 

Counties of Dodge

 

 

 

 

 

 

 

 

 

 

and Fond du Lac, WI

 

2008(i)

 

Wind

 

2(i)

 

86

                 Total

 

 

 

 

  

 

 

757

 

 


(a)

Net summer rated capacity is determined by annual testing and may vary from year to year due to, among other things, the operating and physical conditions of the units.

(b)

Baseload generation.

(c)

MGE's share. See "Columbia" below.

(d)

Facility is jointly owned. Based on the terms of the joint plant agreement between MGE and the UW, the UW has the ability to reduce net capability of these units by approximately 17 MW in the summer. The net summer rated capacity shown reflects this decrease. See "WCCF" below.

(e)

MGE's share. See "Elm Road Units" below.

(f)

These facilities are owned by MGE.

(g)

Nameplate capacity rating is 11 MW.

(h)

Nameplate capacity rating is 30 MW.

(i)

Facility is jointly owned with WPL and WPSC. Power from this facility is shared in proportion to each owner's ownership interest. Nameplate capacity rating of the MGE-owned portion is 16.5 MW. Commercial operation date of facility is 2008; MGE purchased its ownership interest in 2018.


Columbia


MGE and two other utilities jointly own Columbia, a coal-fired generating facility consisting of two 556 MW units, which, as of December 31, 2018, accounted for 29% of MGE's net summer rated capacity. Power from this facility is shared in proportion to each owner's ownership interest. As of December 31, 2018, MGE had a 19.4% ownership interest in Columbia. The other owners are WPL, which operates Columbia, and WPSC. The Columbia units burn low-sulfur sub-bituminous coal obtained from the Powder River Basin coal fields located in Wyoming. The coal inventory supply for the Columbia units decreased from approximately 61 days as of December 31, 2017, to approximately 46 days as of December 31, 2018. See "Executive Overview" under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of the reduction in MGE's ownership share in Columbia commencing January 2017 and continuing through June 2020.


Elm Road Units


MGE Power Elm Road and two other owners own undivided interests in the Elm Road Units, consisting of two 615 MW units, which, as of December 31, 2018, accounted for 14% of MGE's net summer rated capacity. Power from these units is shared in proportion to each owner's ownership interest. MGE Power Elm Road owns an 8.33% ownership interest in the Elm Road Units, and its interest in the Elm Road Units is leased to MGE. The other owners are Wisconsin Energy Corporation, which operates the Units, and WPPI Energy, Inc. The Elm Road Units burn bituminous coal obtained from northern West Virginia and southwestern Pennsylvania, and sub-bituminous coal from the Powder River Basin in Wyoming. MGE's share of the coal inventory supply for the Elm Road Units increased from approximately 48 days as of December 31, 2017, to approximately 56 days as of December 31, 2018.


MGE leases MGE Power Elm Road's ownership interest in the Elm Road Units pursuant to two separate facility leases. The financial terms of each facility lease include a capital structure of 55% equity and 45% long-term debt, return on equity of 12.7%, and a lease term of 30 years. At the end of the respective lease terms, MGE may, at its option, renew the facility lease for an additional term, purchase the leased ownership interest at fair market value, or allow the lease to end. The Unit 1 and Unit 2 leases commenced with the commercial operation of each respective unit.



21




 



WCCF


MGE Power West Campus and the UW jointly own undivided interests in a natural gas-fired cogeneration facility on the UW campus. The facility has the capacity to produce 20,000 tons of chilled water, 500,000 pounds per hour of steam, and approximately 150 MW of electricity. The UW owns 45% of the facility, which represents its interest in the chilled-water and steam assets. These assets are used to meet a part of the UW's need for air-conditioning and steam-heat capacity. MGE Power West Campus owns 55% of the facility, which represents its interest in the electric generating assets. These assets are used to provide electricity to MGE's customers. The UW's share of the plant and portion of the earnings from the WCCF are not reflected in the consolidated financial statements of MGE Energy or MGE. MGE Power West Campus' share of the plant is reflected in property, plant, and equipment on MGE Energy's and MGE's consolidated balance sheets.


MGE leases the electric generating assets owned by MGE Power West Campus and is responsible for operating the entire facility. The financial terms of the facility lease include a capital structure of 53% equity and 47% long-term debt, return on equity of 12.1%, and a lease term of 30 years. At the end of the lease term in 2035, MGE may, at its option, renew the facility lease for an additional term, purchase the generating facility at fair market value, or allow the lease contract to end.


Electric and Gas Distribution Facilities


As of December 31, 2018, MGE owned 865 miles of overhead electric distribution line and 1,224 miles of underground electric distribution cable, all of which are located in Wisconsin. These electric distribution facilities are connected by approximately 52 substations, installed with a capacity of 1,202,500 kVA. MGE's gas facilities include 2,900 miles of distribution mains, which are all owned by MGE.


A significant portion of MGE's electric and gas distribution facilities are located above or underneath highways, streets, other public places, or property that others own. MGE believes that it has satisfactory rights to use those places or property in the form of permits, grants, easements, and licenses; however, it has not necessarily undertaken to examine the underlying title to the land upon which the rights rest.


Encumbrances


The principal plants and properties of MGE are subject to the lien of its Indenture of Mortgage and Deed of Trust dated as of January 1, 1946, as amended and supplemented, under which MGE's first mortgage bonds are issued. As of December 31, 2018, there were $1.2 million of first mortgage bonds outstanding. See Footnote 10 of the Notes to Consolidated Financial Statements in this Report for additional information regarding MGE's first mortgage bonds.


MGE Power Elm Road has collaterally assigned its right to lease payments from MGE for the Elm Road Units in order to secure the repayment of $57.3 million of senior secured notes issued by MGE Power Elm Road. See Footnote 10 of the Notes to Consolidated Financial Statements in this Report for additional information regarding these senior notes.


MGE Power West Campus has collaterally assigned its right to lease payments from MGE for the WCCF in order to secure the repayment of $41.6 million of senior secured notes issued by MGE Power West Campus. See Footnote 10 of the Notes to Consolidated Financial Statements in this Report for additional information regarding these senior notes.


Item 3. Legal Proceedings.


MGE Energy and MGE


MGE Energy and its subsidiaries, including MGE, from time to time are involved in various legal proceedings that are handled and defended in the ordinary course of business.


See "Environmental" under Item 1. Business and Footnote 17.c. of the Notes to Consolidated Financial Statements in this Report for a description of several environmental proceedings involving MGE. See Footnote 17.d. of the Notes to Consolidated Financial Statements in this Report for a description of other legal matters.


Item 4. Mine Safety Disclosures.


MGE Energy and MGE


Not applicable.


22




 



PART II.


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


Market for Common Equity


MGE Energy


MGE Energy common stock is traded on Nasdaq under the symbol MGEE. On January 25, 2019, there were approximately 37,843 shareholders of record. For additional information regarding dividends and dividend restrictions, see Footnote 9 of the Notes to the Consolidated Financial Statements in this Report.


MGE


As of January 25, 2019, there were 17,347,894 outstanding shares of common stock, all of which were held by MGE Energy. There is no market for shares of common stock of MGE.


Issuer Purchases of Equity Securities


MGE Energy


 

Period

 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(a)

 

Maximum number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs(a)

 

 

October 1-31, 2018

 

10,111

$

63.86

 

-

 

-

 

 

November 1-30, 2018

 

6,467

 

62.92

 

-

 

-

 

 

December 1-31, 2018

 

44,048

 

68.12

 

-

 

-

 

 

Total

 

60,626

$

66.85

 

-

 

-

 


(a)

Under the MGE Energy, Inc. Direct Stock Purchase and Dividend Reinvestment Plan (Stock Plan), common stock shares deliverable to plan participants may be either newly issued shares or shares purchased on the open market, as determined from time to time by MGE Energy. MGE Energy's transfer agent uses open market purchases to provide shares to meet obligations to participants in the Stock Plan. The shares are purchased on the open market through the transfer agent's securities broker-dealer and then are reissued under the Stock Plan as needed to meet share delivery requirements. The volume and timing of share repurchases in the open market depends upon the level of dividend reinvestment and optional share purchases being made from time to time by plan participants. As a result, there is no specified maximum number of shares to be repurchased and no specified termination date for the repurchases. All shares issued through the Stock Plan, whether newly issued or reissued following open market purchases, are issued and sold pursuant to a registration statement that was filed with the SEC and is currently effective.


MGE


None.




23




 



Stock Performance Graph


The performance graph below illustrates a five-year comparison of cumulative total returns based on an initial investment of $1,000 in MGE Energy common stock, as compared with the Russell 2000 and the EEI Index for the period 2013 through 2018. The EEI Index reflects the consolidated performance of Edison Electric Institute investor-owned electric utilities.


Cumulative Five-Year Total Return Comparison

(assumes $1,000 invested on 12/31/2013 with dividends reinvested)


[f20181231_10k002.gif]


Value of Investment as of December 31,


 

 

 

2013

 

2014

 

2015

 

2016

 

2017

 

2018

 

 

MGEE

$

1,000

$

1,219

$

1,275

$

1,835

$

1,808

$

1,756

 

 

Russell 2000

 

1,000

 

1,049

 

1,003

 

1,216

 

1,394

 

1,241

 

 

EEI Index

 

1,000

 

1,289

 

1,239

 

1,455

 

1,625

 

1,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




24




 



Item 6. Selected Financial Data.


MGE Energy, Inc.

(In thousands, except per share amounts)


 

 

For the Years Ended December 31,

 

 

2018

 

2017

 

2016

 

2015

 

2014

Summary of Operations

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

    Electric

$

402,001

$

414,274

$

410,202

$

420,291

$

398,132

    Gas

 

157,767

 

148,825

 

134,543

 

143,737

 

221,720

        Total operating revenues

 

559,768

 

563,099

 

544,745

 

564,028

 

619,852

Operating expenses(a)

 

426,151

 

419,180

 

400,801

 

423,159

 

468,326

Other general taxes

 

19,410

 

19,294

 

20,062

 

19,879

 

19,652

Operating income

 

114,207

 

124,625

 

123,882

 

120,990

 

131,874

Other income, net(a)

 

17,055

 

14,399

 

14,057

 

11,878

 

16,303

Interest expense, net

 

(19,609)

 

(19,324)

 

(19,866)

 

(20,162)

 

(19,673)

    Income before taxes

 

111,653

 

119,700

 

118,073

 

112,706

 

128,504

Income tax provision(b)

 

(27,434)

 

(22,094)

 

(42,513)

 

(41,363)

 

(48,185)

    Net income

$

84,219

$

97,606

$

75,560

$

71,343

$

80,319

Average shares outstanding

 

34,668

 

34,668

 

34,668

 

34,668

 

34,668

    Basic and diluted earnings per share

$

2.43

$

2.82

$

2.18

$

2.06

$

2.32

    Dividends declared per share

$

1.32

$

1.26

$

1.21

$

1.16

$

1.11

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Electric

$

1,193,083

$

1,058,988

$

1,038,308

$

1,004,087

$

970,464

Gas

 

377,005

 

354,875

 

329,538

 

318,336

 

322,556

Nonregulated energy operations

 

265,301

 

270,384

 

271,277

 

277,858

 

280,542

Transmission investments(b)

 

66,366

 

61,783

 

74,535

 

69,470

 

67,697

All others

 

465,661

 

485,548

 

465,202

 

434,868

 

438,898

Eliminations

 

(378,798)

 

(376,396)

 

(377,800)

 

(378,216)

 

(390,636)

    Total assets

$

1,988,618

$

1,855,182

$

1,801,060

$

1,726,403

$

1,689,521

 

 

 

 

 

 

 

 

 

 

 

Capitalization including Short-Term Debt

 

 

 

 

 

 

 

 

 

 

Common shareholders' equity

$

816,644

$

778,187

$

724,088

$

690,458

$

659,401

Long-term debt(c)

 

497,896

 

422,613

 

387,124

 

391,010

 

394,775

Short-term debt

 

13,000

 

4,000

 

-

 

-

 

7,000

    Total capitalization and short-term debt

$

1,327,540

$

1,204,800

$

1,111,212

$

1,081,468

$

1,061,176


(a)

Reflects retrospective application of new accounting pronouncement related to pension and other postretirement benefits. See Footnote 2 of the Notes to Consolidated Financial Statements in this Report for further information.


(b)

In December 2017, a one-time tax impact, as a result of the Tax Act, decreased income tax provision and transmission investment $21.7 million and $20.4 million, respectively. See Footnote 12 of the Notes to Consolidated Financial Statements in this Report for further information.


(c)

Includes long-term debt due within one year, debt issuance costs, and unamortized discount.




25




 



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


General


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


·

Regulated electric utility operations, conducted through MGE,

·

Regulated gas utility operations, conducted through MGE,

·

Nonregulated energy operations, conducted through MGE Power and its subsidiaries,

·

Transmission investments, representing our equity investment in ATC and ATC Holdco, and

·

All other, which includes corporate operations and services.


Our principal subsidiary is MGE, which generates and distributes electric energy, distributes natural gas, and represents a majority portion of our assets, liabilities, revenues, and expenses. MGE generates and distributes electricity to approximately 153,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 161,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.


Our nonregulated energy operations own interests in electric generating capacity that is leased to MGE. The ownership/leasing structure was adopted under applicable state regulatory guidelines for MGE's participation in these generation facilities, consisting principally of a stable return on the equity investment in the new generation facilities over the term of the related leases. The nonregulated energy operations include an ownership interest in two coal-fired generating units in Oak Creek, Wisconsin and a partial ownership of a cogeneration project on the UW-Madison campus. A third party operates the units in Oak Creek, and MGE operates the cogeneration project. Due to the nature of MGE's participation in these facilities, the results of our nonregulated operations are also consolidated into MGE's consolidated financial position and results of operations under applicable accounting standards.


Executive Overview


Our primary focus today and for the foreseeable future is our core utility customers at MGE as well as creating long-term value for our shareholders. MGE continues to face the challenge of providing its customers with reliable power at competitive prices. MGE meets this challenge by investing in more efficient generation projects, including renewable energy sources. MGE continues to examine and pursue opportunities to reduce the proportion that coal generation represents in its generation mix, including the reduction in its ownership of Columbia and its growing ownership of renewable generation sources. MGE will continue to focus on growing earnings while controlling operating and fuel costs. MGE maintains safe and efficient operations in addition to providing customer value. We believe it is critical to maintain a strong credit standing consistent with financial strength in MGE as well as the parent company in order to accomplish these goals.


We earn our revenue and generate cash from operations by providing electric and natural gas utility services, including electric power generation and electric power and gas distribution. The earnings and cash flows from the utility business are sensitive to various external factors, including:


·

Weather, and its impact on customer sales,

·

Economic conditions, including current business activity and employment and their impact on customer demand,

·

Regulation and regulatory issues, and their impact on the timing and recovery of costs,

·

Energy commodity prices, including natural gas prices,

·

Equity price risk pertaining to pension related assets,

·

Credit market conditions, including interest rates and our debt credit rating,

·

Environmental laws and regulations, including adopted and pending environmental rule changes, and

·

Other factors listed in Item 1A. Risk Factors.


For the year ended December 31, 2018, MGE Energy's earnings were $84.2 million or $2.43 per share compared to $97.6 million or $2.82 per share for the same period in the prior year. MGE's earnings for the year ended December 31, 2018, were $56.5 million compared to $49.8 million for the same period in the prior year.




26




 



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


 

(In millions)

 

Year Ended December 31,

 

 

Business Segment:

 

2018

 

2017

 

2016

 

 

    Electric Utility

$

45.9

$

41.4

$

40.6

 

 

    Gas Utility

 

12.9

 

11.1

 

10.6

 

 

    Nonregulated Energy

 

20.2

 

40.5

 

19.1

 

 

    Transmission Investments

 

6.2

 

5.9

 

5.6

 

 

    All Others

 

(1.0)

 

(1.3)

 

(0.3)

 

 

    Net Income

$

84.2

$

97.6

$

75.6

 


Our net income during 2018 compared to 2017 primarily reflects the effects of the following factors:


Electric Utility

For 2018, electric operating income increased primarily as a result of more favorable weather conditions in the current year. Cooling degree days (a measure for determining the impact of weather during the cooling season) increased by 37.2% compared to 2017.


Gas Utility

For 2018, gas operating income increased primarily related to an increase in gas retail sales reflecting higher customer demand resulting from colder weather experienced compared to the same period in the prior year and an increase in retail customers. Heating degree days (a measure for determining the impact of weather during the heating season) increased by 11.2% compared to 2017.


Nonregulated Energy

Nonregulated Energy income decreased due to a $21.6 million one-time tax impact in 2017 as a result of lower federal income tax rates associated with the passage of the Tax Cuts and Jobs Act. See "Tax Reform" below for additional information.


Our net income during 2017 compared to 2016 primarily reflects the effects of the following factors:


Electric and Gas Utility

Electric and gas net income increased primarily related to a $1.5 million (pre-tax) gain on sale of property assets in 2017, customer growth, and cooler weather in the fourth quarter of 2017 compared to 2016.


Nonregulated Energy

Nonregulated Energy income increased due to a $21.6 million one-time tax impact in 2017 as a result of lower federal income tax rates associated with the passage of the Tax Cuts and Jobs Act. See "Tax Reform" below for additional information.


All Others

The decrease in all other income in 2017 primarily results from a $2 million (pre-tax) voluntary contribution to the Madison Gas and Electric Foundation.


During 2018, the following events occurred:


Tax Reform: On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Act made broad and complex changes to the U.S. tax code, including the reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018.


Customer rates approved for 2018 reflect an income tax rate of 35 percent. In January 2018, the PSCW issued an order directing Wisconsin investor-owned utilities to defer the over-collection of income tax expense as a result of the decrease in tax rate to 21 percent. The PSCW issued an order in May 2018 to return to customers the estimated 2018 over-collection of income tax expense. As of December 31, 2018, MGE returned $8.2 million to customers through bill credits. Any over/under recovery of the actual costs will be subject to the PSCW's review in a future rate case. As of December 31, 2018, MGE has deferred $3.1 million as a regulatory liability and recorded a corresponding reduction in operating revenues for over-collection of income tax expense (net of customer bill credits).




27




 



Saratoga Wind Farm: In December 2017, the PSCW authorized construction of a 66 MW wind farm, consisting of 33 turbines, located near Saratoga, Iowa. MGE received specific approval to recover 100% AFUDC on the project. As of December 31, 2018, MGE has incurred $95.8 million of capital expenditures. After tax, MGE has recognized $2.5 million in AFUDC equity related to this project for the year ended December 31, 2018. Construction of the project is expected to be completed in February 2019 for approximately $112 million.


Forward Wind: In April 2018, MGE, along with two other utilities, purchased the Forward Wind Energy Center, which consists of 86 wind turbines located in Wisconsin with a total capacity of 137.85 MW. The aggregate purchase price was approximately $174 million, of which MGE's proportionate share is 12.8%, or approximately $23 million. The purchase of the Forward Wind Energy Center replaced an existing purchase power agreement, under which MGE purchased 12.8% of the facility's energy output.


Columbia: MGE and WPL have negotiated an amendment to the existing Columbia joint operating agreement, effective January 1, 2017, under which MGE has reduced its obligation to pay certain capital expenditures (other than SCR-related expenditures) at Columbia in exchange for a proportional reduction in MGE's ownership in Columbia. On January 1 of each year from 2017 through 2019 and then on June 1, 2020, the ownership percentage is adjusted through a partial sale based on the amount of capital expenditures foregone. As of December 31, 2018 and 2017, MGE classified $3.1 million and $8.8 million, respectively, of Columbia assets as held-for-sale on the consolidated balance sheets. In January 2018, MGE reduced its ownership interest in Columbia from 20.4% to 19.4% as a result of the partial sale of plant assets to WPL.


Deferred Fuel Costs – Subject to Refund: As of December 31, 2018, MGE has deferred $9.5 million of 2018 fuel savings. These costs will be subject to the PSCW's annual review of 2018 fuel costs, expected to be completed in 2019.


Debt Issuance: MGE issued $40 million of long-term unsecured debt in July 2018 and $60 million of long-term unsecured debt in September 2018. The proceeds of these debt financings were used to assist with the financing of additional capital expenditures, such as the Saratoga Wind Farm, and refinanced $20 million of long-term debt which matured in September 2018. The covenants of these debt issues are substantially consistent with MGE's existing unsecured long-term debt.


2017 Annual Fuel Proceeding: In August 2018, the PSCW issued a final decision in the fuel rules proceedings for MGE to refund $4.2 million of additional fuel savings realized during 2017 to its retail electric customers which was returned over a one-month period in October 2018. There was no change to the refund in the fuel rules proceedings from the amount MGE deferred as of December 31, 2017.


During 2019, several items may affect us, including:


2019/2020 Rate Change Settlement: In December 2018, the PSCW approved the settlement agreement between MGE and intervening parties in the rate case. The settlement decreases electric rates by 2.24% or $9.2 million in 2019. MGE will maintain this rate level for 2020, with the exception that MGE will file a 2020 Fuel Cost Plan in 2019 and MGE's electric rates will be adjusted accordingly. The decrease reflects the ongoing tax impacts of the Tax Act and the addition of lower-cost renewable generation capacity. The settlement agreement increases gas rates by 1.06% or $1.7 million in 2019 and 1.46% or $2.4 million in 2020. The increase covers infrastructure costs. It also reflects the impacts of the Tax Act.


Tax Reform: Pursuant to the Tax Act, deferred income tax balances as of December 31, 2017, were remeasured to reflect the decrease in corporate tax rate. A $130.5 million regulatory liability was recorded given that changes in income taxes are generally passed through in customer rates for the regulated utility. The amount and timing of the cash impacts will depend on the period over which certain income tax benefits are provided to customers, which will be determined by the PSCW. A portion of the regulatory liability will be returned to customers using a normalization method of accounting.


Pension and Other Postretirement Benefit Costs: Costs for pension and other postretirement benefits are affected by actual investment returns on the assets held for those benefits and by the discount rate, which is sensitive to interest rates, used to calculate those benefits. Volatility in interest rates and investment returns could affect the value of the pension and postretirement benefit obligations. These changes may affect benefit costs in future years. As a result of lower investment returns in the fourth quarter of 2018, pension and postretirement benefit costs will increase in 2019. In December 2018, MGE filed a deferral request with the PSCW to defer the difference between estimated pension and other postretirement costs included in the 2019 and 2020 rate settlement and actual expense incurred. If approved, MGE expects to defer approximately $5.9 million in 2019 as a regulatory asset. The pension and other postretirement costs for 2020 are currently unknown. Any overcollection or undercollection of actual expense in 2020 will be netted with the



28




 



amount deferred in 2019. MGE expects that the deferred cost for employee benefit plans will be factored into future rate actions starting in 2021. A PSCW decision is expected in early 2019.


ATC Return on Equity: Several parties have filed complaints with the FERC seeking to reduce the ROE used by MISO transmission owners, including ATC. Any change to ATC's ROE could result in lower equity earnings and distributions from ATC in the future. We derived approximately 7.3% of our net income for the year ended December 31, 2018, from our investment in ATC. See "Other Matters" below for additional information concerning ATC.


Environmental Initiatives: There are proposed legislative rules and initiatives involving matters related to air emissions, water effluent, hazardous materials, and greenhouse gases, all of which affect generation plant capital expenditures and operating costs as well as future operational planning. At present, it is unclear how the changes in the Presidential, Congressional, and EPA administrations may affect existing, pending or new legislative or rulemaking proposals or regulatory initiatives. Such legislation and rulemaking could significantly affect the costs of owning and operating fossil-fueled generating plants, such as Columbia and the Elm Road Units, from which we derive approximately 43% of our electric generating capacity as of December 31, 2018. We would expect to seek and receive recovery of any such costs in rates; however, it is difficult to estimate the amount of such costs due to the uncertainty as to the timing and form of the legislation and rules, and the scope and time of the recovery of costs in rates, which may lag the incurrence of those costs.


EPA's Clean Power Plan: In October 2015, the EPA finalized its Clean Power Plan (CPP) rule with an effective date of December 2015, setting guidelines and approval criteria for states to use in developing plans to control GHG emissions from existing fossil fuel-fired electric generating units and systems. Implementation of the rule is currently stayed by order to the U.S. Supreme Court, however, if implemented, the CPP is expected to have a direct impact on existing coal and natural gas fired generating units, including possible changes in dispatch and additional operating costs. The rule is the subject of pending legal challenges. In August 2018, the EPA proposed the Affordable Clean Energy (ACE) rule which would replace the CPP, if successfully implemented. The proposed ACE as it is currently written has the potential to impact Blount, Columbia, and the Elm Road Units. Given the pending CPP legal proceedings and the proposed ACE rule, the nature and timing of any final requirements to control GHG emissions from existing fossil fuel-fired EGUs is subject to uncertainty. MGE is unable to determine with any certainty the impact of the CPP and proposed ACE rule on our operations. If an ACE rule is implemented substantially in the form of the CPP rule, it is expected to have a material impact on MGE. MGE will continue to monitor developments with the proposed ACE rule, the CPP rule, and related litigation.


Columbia: MGE will reduce its obligation to pay certain capital expenditures (other than SCR-related expenditures) at Columbia in exchange for a proportional reduction in MGE's ownership in Columbia. In January 2019, MGE reduced its ownership interest in Columbia from 19.4% to 19.1% as a result of the partial sale of plant assets to WPL. By June 2020, MGE's ownership in Columbia is forecasted to be approximately 19%, a decrease of 3% from the 22% ownership interest held by MGE on January 1, 2016.


Future Generation - Riverside: In 2016, MGE entered into an agreement with WPL under which MGE may acquire up to 50 MW of capacity in a gas-fired generating plant to be constructed by WPL at its Riverside Energy Center in Beloit, Wisconsin, during the five-year period following the in-service date of the plant. The plant is expected to be completed by early 2020.


Future Generation - Utility Solar: In May 2018, MGE and WPSC filed a joint application with the PSCW for the approval to acquire 300 MW of solar generating capacity from two separate solar projects in Wisconsin, Badger Hollow Solar Farm and Two Creeks Solar Farm. MGE's combined ownership share of the two projects is expected to be 100 MW. If approved by the PSCW, construction of the projects is expected to begin in 2019. MGE's share of the construction cost is expected to be approximately $130 million.


The following discussion is based on the business segments as discussed in Footnote 21 of the Notes to Consolidated Financial Statements in this Report.


Results of Operations


Results of operations include financial information prepared in accordance with GAAP and electric and gas margins, both which are non-GAAP measures. Electric margin (electric revenues less fuel for electric generation and purchase power costs) and gas margin (gas revenues less cost of gas sold) are non-GAAP measures because they exclude nonregulated operating revenues used in the calculation of the most comparable GAAP measure, operating income;



29




 



other operations and maintenance expense, depreciation and amortization expense, and other general taxes expense and thus are not measures determined in accordance with GAAP.


Management believes that electric and gas margins provide a meaningful basis for evaluating and managing utility operations since fuel for electric generation, purchase power costs, and cost of gas sold are passed through to customers in current rates. As a result, management uses electric and gas margins internally when assessing the operating performance of our segments. The presentation of utility electric and gas margins herein is intended to provide supplemental information for investors regarding operating performance. These electric and gas margins may not be comparable to how other entities calculate utility electric and gas margin or similar measures. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.


Year Ended December 31, 2018, Versus the Year Ended December 31, 2017


The following table provides a calculation of electric and gas margins (non-GAAP), along with a reconciliation to the most comparable GAAP measure, operating income:


 

 

 

Year Ended December 31,

 

 

(In millions)

 

2018

 

2017

 

$ Change

 

 

Electric revenues

$

400.9

$

413.9

$

(13.0)

 

 

Fuel for electric generation

 

56.2

 

53.0

 

3.2

 

 

Purchased power

 

50.8

 

58.7

 

(7.9)

 

 

    Total Electric Margins

 

293.9

 

302.2

 

(8.3)

 

 

 

 

 

 

 

 

 

 

 

Gas revenues

 

157.8

 

148.8

 

9.0

 

 

Cost of gas sold

 

85.0

 

76.6

 

8.4

 

 

    Total Gas Margins

 

72.8

 

72.2

 

0.6

 

 

 

 

 

 

 

 

 

 

 

Other operating revenues

 

1.1

 

0.3

 

0.8

 

 

Other operations and maintenance

 

177.8

 

177.7

 

0.1

 

 

Depreciation and amortization

 

56.4

 

53.1

 

3.3

 

 

Other general taxes

 

19.4

 

19.3

 

0.1

 

 

Operating Income

$

114.2

$

124.6

$

(10.4)

 


Electric sales and revenues


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


 

 

 

Revenues

 

Sales (kWh)

 

 

(In thousands, except cooling degree days)

 

2018

 

2017

 

% Change

 

2018

 

2017

 

% Change

 

 

Residential

$

138,566

$

136,168

 

1.8 %

 

860,246

 

793,337

 

8.4 %

 

 

Commercial

 

204,683

 

216,461

 

(5.4)%

 

1,867,418

 

1,825,922

 

2.3 %

 

 

Industrial

 

13,878

 

16,176

 

(14.2)%

 

180,151

 

196,629

 

(8.4)%

 

 

Other-retail/municipal

 

34,023

 

38,010

 

(10.5)%

 

381,610

 

421,360

 

(9.4)%

 

 

    Total retail

 

391,150

 

406,815

 

(3.9)%

 

3,289,425

 

3,237,248

 

1.6 %

 

 

Sales to the market

 

7,438

 

4,067

 

82.9 %

 

181,342

 

117,039

 

54.9 %

 

 

Other revenues

 

1,870

 

2,323

 

(19.5)%

 

-

 

-

 

-%

 

 

Adjustments to revenues

 

424

 

721

 

(41.2)%

 

-

 

-

 

-%

 

 

    Total

$

400,882

$

413,926

 

(3.2)%

 

3,470,767

 

3,354,287

 

3.5 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 677)

 

 

 

 

 

 

 

796

 

580

 

37.2 %

 




30




 



Electric margin, a non-GAAP measure, decreased $8.3 million during 2018 compared to 2017, due to the following:


 

(In millions)

 

 

 

 

Revenue subject to refund, net

$

(22.3)

 

 

Other

 

(1.8)

 

 

Increase in volume

 

8.4

 

 

Decreased fuel costs

 

7.4

 

 

Total

$

(8.3)

 


·

Revenue subject to refund. For cost recovery mechanisms, any over-collection of the difference between actual costs incurred and the amount of costs collected from customers is recorded as a reduction of revenue in the period incurred.


o

Tax Act. MGE received a PSCW order in January 2018 to defer the over-collection of income tax expense collected in customer rates as a result of the Tax Act reduction in federal income tax rate to 21 percent. During 2018, MGE recorded a $4.4 million reduction in retail electric revenues and recorded a corresponding regulatory liability. During 2018, MGE returned $6.3 million to electric customers through bill credits related to the tax credit.


o

Fuel-related costs. MGE's fuel-related costs subject to refund decreased revenue $5.3 million. MGE returned $4.2 million and $6.2 million of electric fuel-related savings in October 2018 and 2017, respectively. As of December 31, 2018 and 2017, MGE has deferred $9.5 million and $4.2 million, respectively, of fuel-related savings. Under fuel rules, MGE is required to defer electric fuel-related costs that fall outside a 2% cost tolerance band around the amount used in the most recent rate proceeding. Beginning in 2018, over-collection of fuel-related costs outside the tolerance band are reflected as a reduction of revenue in the period incurred. Under-collection of costs outside the tolerance band is reflected as a reduction of purchase power expense in the period incurred. Any potential recovery of excess fuel costs will be recorded in the period received. Prior to adoption of the new revenue recognition guidance, effective January 1, 2018, deferred fuel-related costs were reflected in purchased power expense, with potential refunds associated with fuel savings increasing that expense and potential recovery of excess fuel costs decreasing that expense.


o

Transmission. MGE's transmission costs subject to refund decreased revenue $2.2 million primarily related to a one-time refund received in June 2018.


o

Operating Costs. MGE's electric plant operating costs subject to refund decreased revenue $4.1 million primarily related to lower leased generation costs due to the reduction in tax rate.


·

Other. During 2018, other items affecting electric operating revenues decreased $1.8 million primarily attributable to a decrease in demand charges as a result of a large industrial customer relocating its operations out of state.


·

Volume. During 2018, there was an 8.4% increase in residential electric sales volumes compared to the same period in the prior year driven by favorable weather conditions. During 2018, there was a 8.4% decrease in industrial retail electric sales volumes compared to the same period in the prior year as a result of a large industrial customer relocating its operations out of state.


·

Fuel Costs. Fuel costs decreased during 2018, primarily as a result of a reduction in purchased power. The purchase of the Forward Wind Energy Center in April 2018 replaced an existing purchase power agreement that was previously recorded as purchased power expense in fuel costs.




31




 



Gas deliveries and revenues


The following table compares MGE's gas revenues and gas therms delivered by customer class during each of the years indicated:


 

(In thousands, except HDD and average rate per therm of retail customer)

 

Revenues

 

Therms Delivered

 

 

 

2018

 

2017

 

% Change

 

2018

 

2017

 

% Change

 

 

Residential

$

94,017

$

88,695

 

6.0 %

 

106,899

 

94,631

 

13.0 %

 

 

Commercial/Industrial

 

59,060

 

55,151

 

7.1 %

 

101,028

 

91,411

 

10.5 %

 

 

    Total retail

 

153,077

 

143,846

 

6.4 %

 

207,927

 

186,042

 

11.8 %

 

 

Gas transportation

 

4,283

 

4,561

 

(6.1)%

 

74,773

 

70,234

 

6.5 %

 

 

Other revenues

 

407

 

418

 

(2.6)%

 

-

 

-

 

-%

 

 

    Total

$

157,767

$

148,825

 

6.0 %

 

282,700

 

256,276

 

10.3 %

 

 

Heating degree days (normal 6,913)

 

 

 

 

 

 

 

7,306

 

6,569

 

11.2 %

 

 

Average rate per therm of retail customer

$

0.736

$

0.773

 

(4.8)%

 

 

 

 

 

 

 


Gas margin, a non-GAAP measure, increased $0.6 million during 2018 compared to 2017, due to the following:


 

(In millions)

 

 

 

 

Increase in volume

$

3.8

 

 

Other

 

0.2

 

 

Revenue subject to refund/tax credit

 

(3.4)

 

 

Total

$

0.6

 


·

Volume. For 2018, retail gas deliveries increased 11.8% compared to the same period in the prior year primarily related to customer growth and more favorable weather conditions in the current year.


·

Revenue subject to refund/tax credit. MGE received a PSCW order in January 2018 to defer the over-collection of income tax expense collected in customer rates as a result of the Tax Act reduction in federal income tax rate to 21 percent. Any over-collection of the difference between actual costs incurred and the amount of costs collected from customers is recorded as a reduction of revenue in the period incurred. For 2018, MGE recorded a $1.5 million reduction in retail gas revenues and recorded a corresponding regulatory liability. During 2018, MGE returned $1.9 million to gas customers through bill credits related to the tax credit.


Consolidated operations and maintenance expenses


For 2018, operations and maintenance expenses increased $0.1 million, compared to the same period in the prior year. The following contributed to the net change:


 

(In millions)

 

 

 

 

Increased customer accounts costs

$

0.9

 

 

Increased gas distribution costs

 

0.5

 

 

Increased electric distribution costs

 

0.4

 

 

Increased other costs

 

0.4

 

 

Decreased electric transmission costs

 

(2.1)

 

 

Total

$

0.1

 


For 2018, decreased electric transmission costs are primarily related to a decrease in transmission rates as a result of a one-time refund received in June 2018. The lower transmission rate is reflected in customer revenue as revenue subject to refund.


Consolidated depreciation expense


Electric depreciation expense increased $2.3 million and gas depreciation expense increased $1.0 million for 2018, compared to the same period in the prior year primarily related to an increase in depreciable assets and change in estimated useful lives of capitalized software assets affected by the technology corporate initiative.




32




 



Nonregulated Energy Operations - MGE Energy and MGE


The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF), which have been formed to own and lease electric generating capacity to assist MGE. For 2018 and 2017, net income at the nonregulated energy operations segment was $20.2 million and $40.5 million, respectively. The decrease in net income is attributable to a $21.6 million one-time tax impact in 2017 as a result of the Tax Act. The Tax Act reduced the federal tax rate from 35% to 21%. The decrease in tax rate lowered lease revenues and income tax expense in 2018. Income tax expense is a factor used in the formula to calculate lease rates. See Footnote 12 of the Notes to Consolidated Financial Statements in this Report.


Transmission Investment Operations - MGE Energy and MGE


For 2018 and 2017, other income at the transmission investment segment was $8.6 million and $9.8 million, respectively. The decrease in tax rate from 35% to 21%, effective January 1, 2018, lowered earnings from ATC and income tax expense for 2018. Income tax expense is a factor used in the calculation of ATC's transmission rates. The transmission investment segment holds our interest in ATC and ATC Holdco, and its income reflects our equity in the earnings of the investments. ATC Holdco was formed in December 2016. In the near term, it is expected that ATC Holdco will be pursuing transmission development opportunities that typically have long development and investment lead times before becoming operational. See Footnote 6 of the Notes to Consolidated Financial Statements in this Report and "Other Matters" below for additional information concerning ATC and summarized financial information regarding ATC.


Consolidated Income Taxes - MGE Energy and MGE


Although effective tax rates have been lowered as a result of the Tax Act, regulated revenues have been affected as tax expense is a factor in the determination of rates for electric and gas service, and rates relating to our investment in transmission. See Footnote 12 of the Notes to Consolidated Financial Statements in this Report for details of effective income tax rates for continuing operations.


Noncontrolling Interest, Net of Tax - MGE


The noncontrolling interest, net of tax, reflects the accounting required for MGE Energy's interest in MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF). MGE Energy owns 100% of MGE Power Elm Road and MGE Power West Campus; however, due to the contractual agreements for these projects with MGE, the entities are considered VIEs with respect to MGE and their results are consolidated with those of MGE, the primary beneficiary of the VIEs. The following table shows MGE Energy's noncontrolling interest, net of tax, reflected on MGE's consolidated statement of income:


 

 

 

Year Ended December 31,

 

 

(In millions)

 

2018

 

2017

 

 

MGE Power Elm Road(a)

$

15.4

$

29.3

 

 

MGE Power West Campus(a)

$

7.2

$

13.9

 


(a)

In 2017, there was a $21.6 million one-time tax impact as a result of the Tax Act. The Tax Act reduced the federal tax rate from 35% to 21%. See Footnote 12 of the Notes to Consolidated Financial Statements in this Report for additional information.




33




 



Results of Operations


Year Ended December 31, 2017, Versus the Year Ended December 31, 2016


Electric Utility Operations - MGE Energy and MGE


Electric sales and revenues


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


 

 

 

Revenues

 

Sales (kWh)

 

 

(In thousands, except cooling degree days)

 

2017

 

2016

 

% Change

 

2017

 

2016

 

% Change

 

 

Residential

$

136,168

$

136,792

 

(0.5)%

 

793,337

 

828,887

 

(4.3)%

 

 

Commercial

 

216,461

 

213,101

 

1.6 %

 

1,825,922

 

1,866,035

 

(2.1)%

 

 

Industrial

 

16,176

 

17,589

 

(8.0)%

 

196,629

 

232,854

 

(15.6)%

 

 

Other-retail/municipal

 

38,010

 

35,559

 

6.9 %

 

421,360

 

395,662

 

6.5 %

 

 

    Total retail

 

406,815

 

403,041

 

0.9 %

 

3,237,248

 

3,323,438

 

(2.6)%

 

 

Sales to the market

 

4,067

 

6,135

 

(33.7)%

 

117,039

 

183,195

 

(36.1)%

 

 

Return of fuel savings

 

-

 

(423)

 

(100.0)%

 

-

 

-

 

-%

 

 

Other revenues

 

2,323

 

1,906

 

21.9 %

 

-

 

-

 

-%

 

 

Adjustments to revenues

 

721

 

(1,653)

 

n.m.%

 

-

 

-

 

-%

 

 

    Total

$

413,926

$

409,006

 

1.2 %

 

3,354,287

 

3,506,633

 

(4.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 659)

 

 

 

 

 

 

 

580

 

780

 

(25.6)%

 


n.m.: not meaningful


Electric operating revenues increased $4.9 million or 1.2% during 2017, due to the following:


 

(In millions)

 

 

 

 

Deferral of fuel savings/fuel credit

$

17.9

 

 

Adjustments to revenues

 

2.4

 

 

Other

 

0.3

 

 

Volume

 

(9.6)

 

 

Rate changes

 

(4.0)

 

 

Sales to the market

 

(2.1)

 

 

Total

$

4.9

 


·

Deferral of fuel savings/fuel credit. During 2017, customers received a fuel credit on their bill related to accumulated fuel savings of $6.2 million, which decreased electric revenues. During 2016, customers received a fuel credit on their bill related to the fuel savings of $23.7 million, which decreased electric revenues in the prior year. In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs as a result of continued lower projected fuel costs in 2016.


·

Adjustments to Revenue. MGE leases electric generating capacity from MGE Power Elm Road. MGE collects in rates the lease payments associated with the electric generating capacity as authorized by the PSCW. Any differential between estimated lease payments collected in rates and actual lease payments paid to MGE Power Elm Road are included in adjustments to revenues.


·

Volume. During 2017, there was a 15.6% decrease in industrial retail sales volumes compared to the same period in 2016 as a result of a large industrial customer relocating its operations out of state. During 2017, there was a 4.3% decrease in residential sales volumes compared to the same period in 2016 driven by decreased customer demand due, at least in part, to less favorable weather conditions, as evidenced by the lower number of cooling degree days.


·

Rate Changes. In December 2016, the PSCW authorized MGE to decrease 2017 rates for retail electric customers by 0.8% or $3.3 million on an annual basis.


Rates charged to retail customers for 2017, were 2.2% or $4.0 million lower than those charged during the same period in 2016.



34




 



·

Sales to the Market. Sales to the market represent wholesale sales made to third parties who are not ultimate users of the electricity. These sales may include spot market transactions on the markets operated by MISO and PJM. These sales may also include bilateral sales to other utilities or power marketers. Generating units are dispatched by MISO based on cost considerations as well as reliability of the system. Sales to the market typically occur when MGE has more generation and purchases online than are needed for its own system demand. The excess electricity is then sold to others in the market. For 2017, market volumes decreased compared to the same period in 2016, reflecting decreased opportunities for sales, and those sales were made at lower market prices. The revenue generated from these sales is included in fuel rules monitored costs. See fuel rules discussion in Footnote 8.b. of the Notes to Consolidated Financial Statements in this Report.


Electric fuel and purchased power


Electric fuel and purchased power costs reflect a decrease in internal generation volumes partially offset by an increase in the volume of purchased power when compared to 2016. Adjustments related to the regulatory recovery for fuel costs, known as fuel rules, increased purchased power expense. These items are explained below.


Fuel for electric generation

The expense for fuel for internal electric generation decreased $7.7 million during 2017 compared to 2016 due to the following:


 

(In millions)

 

 

 

 

Decrease in volume

$

(4.7)

 

 

Decrease in per-unit cost

 

(3.0)

 

 

Total

$

(7.7)

 


This decrease in expense reflects an 8.1% decrease in internal generation volume delivered to the system primarily as a result of decreased generation at WCCF based on market prices and a 5.0% decrease in per-unit cost of internal electric generation.


Purchased power

Purchased power expense increased $2.4 million during 2017 compared to 2016 due to the following:


 

(In millions)

 

 

 

 

Increase in volume

$

2.9

 

 

Decrease in per-unit cost

 

(2.2)

 

 

Change in fuel rule adjustments, net of recoveries

 

1.7

 

 

Total

$

2.4

 


The increase in expense (before fuel rules adjustments) reflects a 4.9% increase in the volume of power purchased from third parties, partially offset by a 3.5% decrease in the per-unit cost of purchased power.


Under fuel rules, MGE is required to defer electric fuel-related costs that fall outside a 2% cost tolerance band around the amount used in the most recent rate proceeding. Any fuel rules adjustments are reflected in purchased power expense, with potential refunds associated with fuel savings increasing that expense and potential recovery of excess fuel costs decreasing that expense.


Electric operating and maintenance expenses


Electric operating and maintenance expenses increased $3.9 million during 2017 compared to 2016. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased transmission costs

$

5.2

 

 

Increased customer accounts costs

 

1.7

 

 

Increased other costs

 

0.1

 

 

Decreased production costs

 

(2.3)

 

 

Decreased administrative and general costs

 

(0.8)

 

 

Total

$

3.9

 




35




 



For 2017, increased transmission costs are primarily due to an increase in transmission reliability enhancements and increased customer accounts costs are primarily related to technology improvements, partially offset by decreased production costs at Columbia and the Elm Road Units.


Electric depreciation expense


Electric depreciation expense increased $7.5 million during 2017 compared to 2016 as a result of new depreciation rates for Columbia, as approved by the PSCW.


Other electric income


Other electric income increased $1.0 million during 2017 compared to 2016 primarily due to the gain on sale of property assets.


Gas Utility Operations - MGE Energy and MGE


Gas deliveries and revenues


The following table compares MGE's gas revenues and gas therms delivered by customer class during each of the years indicated:


 

(In thousands, except HDD and average rate per therm of retail customer)

 

Revenues

 

Therms Delivered

 

 

 

2017

 

2016

 

% Change

 

2017

 

2016

 

% Change

 

 

Residential

$

88,695

$

81,014

 

9.5 %

 

94,631

 

91,791

 

3.1 %

 

 

Commercial/Industrial

 

55,151

 

48,497

 

13.7 %

 

91,411

 

86,641

 

5.5 %

 

 

    Total retail

 

143,846

 

129,511

 

11.1 %

 

186,042

 

178,432

 

4.3 %

 

 

Gas transportation

 

4,561

 

4,635

 

(1.6)%

 

70,234

 

72,922

 

(3.7)%

 

 

Other revenues

 

418

 

397

 

5.3 %

 

-

 

-

 

-%

 

 

    Total

$

148,825

$

134,543

 

10.6 %

 

256,276

 

251,354

 

2.0 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating degree days (normal 6,916)

 

 

 

 

 

 

 

6,569

 

6,417

 

2.4 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average rate per therm of retail customer

$

0.773

$

0.726

 

6.5 %

 

 

 

 

 

 

 


Gas revenues increased $14.3 million or 10.6% during 2017. These changes are related to the following factors:


 

(In millions)

 

 

 

 

Rate/PGA changes

$

10.1

 

 

Volume

 

4.2

 

 

Total

$

14.3

 


·

Rate/PGA changes. In December 2016, the PSCW authorized MGE to increase 2017 rates for retail gas customers by 1.9% or $3.1 million on an annual basis.


MGE recovers the cost of natural gas in its gas segment through the purchased gas adjustment clause (PGA). Under the PGA, MGE is able to pass through to its gas customers the cost of gas. Changes in PGA recoveries affect revenues but do not impact net income.


The average retail rate per therm for 2017 increased 6.5% compared to 2016, reflecting a $6.5 million increase in natural gas commodity costs (recovered through the PGA). Additionally, there was an increase in fixed rate charges.


·

Volume. For 2017, retail gas deliveries increased 4.3% compared to 2016. The increase in volume is primarily related to customer growth and cooler weather in the fourth quarter of 2017 compared to 2016.


Cost of gas sold


For 2017, cost of gas sold increased by $9.9 million, compared to 2016. The cost per therm of natural gas increased 9.2%, which resulted in $6.5 million of increased expense. The volume of gas purchased increased 5.1%, which resulted in $3.4 million of increased expense.




36




 



Gas operating and maintenance expenses


Gas operating and maintenance expenses increased $1.6 million for 2017 compared to 2016. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased customer accounts costs

$

1.6

 

 

Increased customer service costs

 

0.9

 

 

Increased other costs

 

0.2

 

 

Decreased administrative and general costs

 

(1.1)

 

 

Total

$

1.6

 


For 2017, increased customer accounts costs are primarily related to technology improvements. Increased customer service costs are due to higher Focus on Energy payments. Focus on Energy is Wisconsin's statewide energy efficiency and renewable resource program to promote energy efficiency on customer's premises. Decreased administrative and general costs are primarily related to a decrease in payroll expense.


Nonregulated Energy Operations - MGE Energy and MGE


The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF), which have been formed to own and lease electric generating capacity to assist MGE. For 2017 and 2016, net income at the nonregulated energy operations segment was $40.5 million and $19.1 million, respectively. The increase in net income is attributable to a $21.6 million one-time tax impact as a result of the Tax Act. The Tax Act reduced the federal tax rate from 35% to 21%. See Footnote 12 of the Notes to Consolidated Financial Statements in this Report.


Transmission Investment Operations - MGE Energy and MGE


For 2017 and 2016, other income at the transmission investment segment was $9.8 million and $8.4 million, respectively. The transmission investment segment holds our interest in ATC and ATC Holdco, and its income reflects our equity in the earnings of the investments. ATC Holdco was formed in December 2016. In the near term, it is expected that ATC Holdco will be pursuing transmission development opportunities that typically have long development and investment lead times before becoming operational. See Footnote 6 of the Notes to Consolidated Financial Statements in this Report and "Other Matters" below for additional information concerning ATC and summarized financial information regarding ATC.


All Other Operations - MGE Energy and MGE


Other income


The decrease in all other income primarily results from a $2 million (pre-tax) voluntary contribution to the Madison Gas and Electric Foundation.


Consolidated Income Taxes - MGE Energy and MGE


MGE Energy's effective income tax rate for 2017 and 2016 was 18.5% and 36.0%, respectively. MGE's effective income tax rate for 2017 and 2016 was 17.0% and 35.9%, respectively. The decrease in the effective tax rate for both MGE Energy and MGE in 2017 was primarily related to the Tax Act, which was signed into law on December 22, 2017. Pursuant to the Tax Act, deferred income tax balances as of December 31, 2017, were remeasured to reflect the decrease in the corporate income tax rate from 35 percent to 21 percent beginning January 1, 2018. See Footnote 12 of the Notes to Consolidated Financial Statements in this Report for details of effective income tax rates for continuing operations.


Noncontrolling Interest, Net of Tax - MGE


The noncontrolling interest, net of tax, reflects the accounting required for MGE Energy's interest in MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF). MGE Energy owns 100% of MGE Power Elm Road and MGE Power West Campus; however, due to the contractual agreements for these projects with MGE, the entities are considered VIEs with respect to MGE and their results are consolidated with those of MGE, the primary beneficiary of the VIEs. Also included in noncontrolling interest, net of tax, for 2016 is MGE Energy's interest in MGE Transco, which holds our investment in ATC.



37




 



The following table shows MGE Energy's noncontrolling interest, net of tax, reflected on MGE's consolidated statement of income:


 

 

 

Year Ended December 31,

 

 

(In millions)

 

2017

 

2016

 

 

MGE Power Elm Road(a)

$

29.3

$

14.8

 

 

MGE Power West Campus(a)

$

13.9

$

7.2

 

 

MGE Transco(b)

$

-

$

1.4

 


(a)

In 2017, there was a $21.6 million one-time tax impact as a result of the Tax Act. The Tax Act reduced the federal tax rate from 35% to 21%. See Footnote 12 of the Notes to Consolidated Financial Statements in this Report for additional information.


(b)

MGE Transco holds an ownership interest in ATC. In July 2016, MGE's ownership interest in MGE Transco declined below a majority, resulting in MGE Energy's investment in MGE Transco being deconsolidated from MGE's consolidated financial statements. See Footnote 20 of the Notes to Consolidated Financial Statements in this Report for further discussion of noncontrolling interest. In December 2016, MGE's ownership interest in MGE Transco was transferred to MGE Energy. See Footnote 6 of the Notes to Consolidated Financial Statements in this Report for additional information.


Liquidity and Capital Resources


MGE Energy and MGE have adequate liquidity to fund operations and capital expenditures over the next twelve months. Available resources include cash and cash equivalents, operating cash flows, liquid assets, borrowing capacity under revolving credit facilities, and access to equity and debt capital markets.


Cash Flows


The following summarizes cash flows for MGE Energy and MGE during 2018, 2017, and 2016:


 

 

 

MGE Energy

 

MGE

 

 

(In thousands)

 

2018

 

2017

 

2016

 

 

2018

 

2017

 

2016

 

 

Cash provided by/(used for):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Operating activities

$

153,040

$

131,373

$

147,864

 

$

147,994

$

124,120

$

146,852

 

 

    Investing activities

 

(218,328)

 

(116,275)

 

(86,813)

 

 

(213,302)

 

(106,572)

 

(85,635)

 

 

    Financing activities

 

38,123

 

(4,637)

 

(46,112)

 

 

61,885

 

(23,897)

 

(76,845)

 


Cash Provided by Operating Activities


MGE Energy


MGE Energy's consolidated net cash provided by operating activities is derived mainly from the electric and gas operations of its principal subsidiary, MGE.


2018 vs. 2017


Cash provided by operating activities for 2018 was $153.0 million, an increase of $21.7 million when compared to the prior year.


MGE Energy's net income decreased $13.4 million for 2018 when compared to the prior year primarily related to a $21.6 million one-time 2017 noncash tax impact of the Tax Act from the nonregulated energy segment.


MGE Energy's federal and state taxes paid decreased $14.6 million during 2018, when compared to the prior year, reflecting the reduction in tax rates effected by the Tax Act.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $10.5 million in cash provided by operating activities for 2018, primarily due to increased current liabilities, decreased unbilled revenues, and decreased inventories, partially offset by decreased accounts payable and increased receivables.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $12.7 million in cash used for operating activities for 2017, primarily due to decreased accounts payable, increased receivables, increased inventories, and increased unbilled revenues, partially offset by increased current liabilities.




38




 



A decrease in pension contribution resulted in an additional $5.7 million in cash provided by operating activities for 2018, when compared to the prior year. Pension contributions reflect amounts required by law and discretionary amounts.


2017 vs. 2016


Cash provided by operating activities for 2017 was $131.4 million, a decrease of $16.5 million when compared to 2016.


MGE Energy's net income increased $22.0 million for 2017 when compared to 2016 primarily related to a $21.6 million one-time 2017 noncash tax impact of the Tax Act from the nonregulated energy segment.


In 2016, MGE received a $10.0 million refund from the IRS for the 2015 tax year. Excluding the 2016 refund, MGE Energy's federal and state taxes paid increased $5.3 million during 2017, when compared to 2016.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $12.7 million in cash used for operating activities for 2017, primarily due to decreased accounts payable, increased receivables, increased inventories, and increased unbilled revenues, partially offset by increased current liabilities.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $7.7 million in cash provided by operating activities for 2016, primarily due to increased accounts payable, decreased inventories, and decreased receivable margin, partially offset by increased unbilled revenues, increased receivables, and decreased current liabilities. The decrease in current liabilities includes a fuel credit, approved in August 2015, of $8.3 million that customers received on their bill throughout 2016 and a one-time fuel credit, approved in July 2016, of $15.5 million that customers received on their bill in September 2016.


A decrease in pension contribution resulted in an additional $3.2 million in cash provided by operating activities for 2017, when compared to 2016. Pension contributions reflect amounts required by law and discretionary amounts.


MGE


2018 vs. 2017


Cash provided by operating activities for 2018 was $148.0 million, an increase of $23.9 million when compared to the prior year.


Net income decreased $14.0 million for 2018, when compared to the prior year primarily related to a $21.6 million one-time 2017 noncash tax impact of the Tax Act from the nonregulated energy segment.


MGE's federal and state taxes paid decreased $14.7 million during 2018, when compared to the prior year, reflecting the reduction in tax rates effected by the Tax Act.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $10.1 million in cash provided by operating activities for 2018, primarily due to increased current liabilities, decreased unbilled revenues, and decreased inventories, partially offset by decreased accounts payable and increased accounts receivable.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $14.2 million in cash used for operating activities for 2018, primarily due to decreased accounts payable, increased receivables, increased inventories, and increased unbilled revenues, partially offset by increased current liabilities.


A decrease in pension contribution resulted in an additional $5.7 million in cash provided by operating activities for 2018, when compared to the prior year. Pension contributions reflect amounts required by law and discretionary amounts.


2017 vs. 2016


Cash provided by operating activities for 2017 was $124.1 million, a decrease of $22.7 million when compared to 2016.


Net income increased $18.5 million for 2017, when compared to 2016 primarily related to a $21.6 million one-time 2017 noncash tax impact of the Tax Act from the nonregulated energy segment.




39




 



In 2016, MGE received a $10.0 million refund from the IRS for the 2015 tax year. Excluding the 2016 refund, MGE's federal and state taxes paid to MGE Energy increased $5.2 million during 2017, when compared to 2016.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $14.2 million in cash used for operating activities for 2017, primarily due to decreased accounts payable, increased receivables, increased inventories, and increased unbilled revenues, partially offset by increased current liabilities.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $7.8 million in cash provided by operating activities for 2016, primarily due to increased accounts payable, decreased inventories, and decreased receivable margin, partially offset by increased receivables, increased unbilled revenues, and decreased current liabilities. The decrease in current liabilities includes a fuel credit, approved in August 2015, of $8.3 million that customers received on their bill throughout 2016 and a one-time fuel credit, approved in July 2016, of $15.5 million that customers received on their bill in September 2016.


A decrease in pension contribution resulted in an additional $3.2 million in cash provided by operating activities for 2017, when compared to 2016. Pension contributions reflect amounts required by law and discretionary amounts.


In 2016, MGE received dividends of $5.0 million from ATC. In December 2016, MGE's ownership interest in MGE Transco was transferred to MGE Energy.


Capital Requirements and Investing Activities


MGE Energy


2018 vs. 2017


MGE Energy's cash used for investing activities increased $102.1 million for 2018 when compared to the prior year.


Capital expenditures for 2018 were $212.2 million. This amount represents an increase of $104.1 million from the expenditures made in the prior year. This increase primarily reflects increased expenditures on the construction of the Saratoga wind project and the purchase of Forward Wind.


Capital contributions in ATC and other investments decreased $5.2 million for 2018 when compared to the prior year.


MGE Energy received $2.8 million in proceeds from the sales of property in 2017.


2017 vs. 2016


MGE Energy's cash used for investing activities increased $29.5 million for 2017 when compared to 2016.


Capital expenditures for 2017 were $108.1 million. This amount represents an increase of $24.5 million from the expenditures made in 2016. This increase primarily reflects increased expenditures on electric assets.


Capital contributions in ATC and other investments increased $8.1 million for 2017 when compared to 2016.


MGE Energy received $2.8 million in proceeds from the sales of property in 2017.


MGE


2018 vs. 2017


MGE's cash used for investing activities increased $106.7 million for 2018 when compared to the prior year.


Capital expenditures for 2018 were $212.2 million. This amount represents an increase of $104.1 million from the expenditures made in the prior year. This increase primarily reflects increased expenditures on the construction of the Saratoga wind project and the purchase of Forward Wind.


MGE received $1.7 million in proceeds from the sales of property in 2017.




40




 



2017 vs. 2016


MGE's cash used for investing activities increased $20.9 million for 2017 when compared to 2016.


Capital expenditures for 2017 were $108.1 million. This amount represents an increase of $24.5 million from the expenditures made in 2016. This increase primarily reflects increased expenditures on electric assets.


Capital contributions in ATC and other investments decreased $1.6 million in 2017, when compared to 2016. In December 2016, MGE transferred its ownership interest in ATC to MGE Energy. See Footnote 6 of the Notes to Consolidated Financial Statements in this Report for further details.


MGE received $1.7 million in proceeds from the sales of property in 2017.


Capital expenditures


The following table shows MGE Energy's actual capital expenditures for both 2018 and 2017, forecasted capital expenditures for 2019, and annual average forecasted capital expenditures for the years 2020 through 2022:


 

 

 

Actual

 

Forecasted

 

 

(In thousands)

 

 

 

 

 

 

 

(Annual Average)

 

 

For the years ended December 31,

2017

 

2018

2019

2020-2022

 

 

Electric

$

77,353

$

176,399

$

100,696

$

90,118

 

 

Gas

 

26,847

 

30,497

 

38,620

 

43,092

 

 

    Utility plant total

 

104,200

 

206,896

 

139,316

 

133,210

 

 

Nonregulated

 

3,931

 

5,301

 

5,517

 

3,066

 

 

    MGE Energy total

$

108,131

$

212,197

$

144,833

$

136,276

 


The Saratoga Wind Farm began construction in 2018. This project accounts for $95.8 million of the capital expenditures for 2018.


MGE Energy used funds received as dividend payments from MGE Power West Campus and MGE Power Elm Road, internally generated cash, and long-term and short-term external financing to meet its 2018 capital requirements and cash obligations, including dividend payments. External financing included short-term financing under existing lines of credit.


The forecasted capital expenditures are based upon management's assumptions with respect to future events, including the timing and amount of expenditures associated with compliance with environmental compliance initiatives, load growth, and the timing and adequacy of rate recovery. Actual events may differ materially from those assumptions and result in material changes to those forecasted amounts.


In May 2018, MGE and WPSC filed a joint application with the PSCW for the approval to acquire 300 MW of solar generating capacity from two separate solar projects in Wisconsin, Badger Hollow Solar Farm and Two Creeks Solar Farm. MGE's combined ownership share of the two projects is expected to be 100 MW. If approved by the PSCW, construction of the projects is expected to begin in 2019. MGE's share of the construction cost is expected to be approximately $130 million. The application is pending approval by the PSCW and is excluded from the forecasted capital expenditures noted above.


Financing Activities


MGE Energy


2018 vs. 2017


Cash provided by MGE Energy's financing activities was $38.1 million for 2018, compared to $4.6 million of cash used for 2017.


For 2018, cash dividends paid were $45.8 million compared to $43.7 million in the prior year. This increase was a result of a higher dividend per share ($1.32 vs. $1.26).




41




 



During 2018, MGE issued $100.0 million of senior unsecured notes, which was used to refinance $20.0 million of maturing long-term notes and assist with financing additional capital expenditures. The increase in long-term debt primarily reflects expenditures on the construction of the Saratoga wind project. During 2017, MGE issued $70.0 million of senior unsecured notes, which was used to refinance $30.0 million of medium-term notes and assist with financing additional capital expenditures.


For 2018, net short-term debt borrowings were $9.0 million compared to $4.0 million in the prior year.


2017 vs. 2016


Cash used for MGE Energy's financing activities was $4.6 million for 2017, compared to $46.1 million of cash used for 2016.


For 2017, cash dividends paid were $43.7 million compared to $41.8 million in 2016. This increase was a result of a higher dividend per share $1.26 vs. $1.21).


During 2017, MGE issued $70.0 million of senior unsecured notes, which was used to refinance $30.0 million of medium-term notes and assist with financing additional capital expenditures.


For 2017, short-term debt borrowings were $4.0 million. There were no short-term borrowings for 2016.


MGE


2018 vs. 2017


During 2018, cash provided by MGE's financing activities was $61.9 million, compared to $23.9 million of cash used for MGE's financing activities in the prior year.


Cash dividends paid from MGE to MGE Energy were $45.0 million in the prior year. There were no cash dividends paid from MGE to MGE Energy for 2018.


Distributions to parent (MGE Energy) from noncontrolling interest, which represent distributions from MGE Power Elm Road and MGE Power West Campus, were $22.0 million for 2018, compared to $18.0 million in the prior year.


During 2018, MGE issued $100.0 million of senior unsecured notes, which was used to refinance $20.0 million of maturing long-term notes and assist with financing additional capital expenditures. The increase in long-term debt primarily reflects expenditures on the construction of the Saratoga wind project. During 2017, MGE issued $70.0 million of senior unsecured notes, which was used to refinance $30.0 million of medium-term notes and assist with financing additional capital expenditures.


For 2018, net short-term debt borrowings were $9.0 million compared to $4.0 million in the prior year.


2017 vs. 2016


During 2017, cash used for MGE's financing activities was $23.9 million, compared to $76.8 million of cash used for MGE's financing activities in 2016.


Cash dividends paid from MGE to MGE Energy were $45.0 million for 2017, compared to $50.0 million in 2016.


Distributions to parent (MGE Energy) from noncontrolling interest, which represent distributions from MGE Power Elm Road and MGE Power West Campus, were $18.0 million for 2017, compared to $24.1 million in 2016.


For 2016, equity contributions received from noncontrolling interest, which represent contributions by MGE Energy to MGE Transco, were $1.6 million. There were no equity contributions received from noncontrolling interest, which represent contributions to MGE Transco for 2017, as MGE Transco was a wholly-owned subsidiary of MGE Energy during 2017.


During 2017, MGE issued $70.0 million of senior unsecured notes, which was used to refinance $30.0 million of medium-term notes and assist with financing additional capital expenditures.


For 2017, short-term borrowings were $4.0 million. There were no short-term borrowings for 2016.




42




 



Dividend Restrictions


Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a lesser degree, MGE's first mortgage bonds. The PSCW order restricts any dividends, above the PSCW authorized amount of $70.8 million, that MGE may pay MGE Energy if its common equity ratio, calculated in the manner used in the rate proceeding, is less than 55%. MGE's thirteen month rolling average common equity ratio as of December 31, 2018, is 56.3%, as determined under the calculation used in the rate proceeding. This restriction did not impact MGE's payment of dividends in 2018. Cash dividends of $45.0 million were paid by MGE to MGE Energy in 2017. No cash dividends were paid by MGE to MGE Energy in 2018. The rate proceeding calculation includes as indebtedness imputed amounts for MGE's outstanding purchase power capacity payments and other PSCW adjustments but does not include the indebtedness associated with MGE Power Elm Road and MGE Power West Campus, which are consolidated into MGE's financial statements but are not direct obligations of MGE.


MGE has covenanted with the holders of its first mortgage bonds not to declare or pay any dividend or make any other distribution on or purchase any shares of its common stock unless, after giving effect thereto, the aggregate amount of all such dividends and distributions and all amounts applied to such purchases, after December 31, 1945, shall not exceed the earned surplus (retained earnings) accumulated subsequent to December 31, 1945. As of December 31, 2018, approximately $400.0 million was available for the payment of dividends under this covenant.


Credit Facilities


As of December 31, 2018, MGE Energy and MGE had the following aggregate bank commitments and available capacity under their credit agreements:


Borrower

 

Aggregate Bank Commitments

 

Outstanding Commercial Paper

 

Outstanding Borrowings

 

Available Capacity

 

Expiration Date(a)

 

 

(Dollars in millions)

 

 

MGE Energy

$

50.0

$

-

$

-

$

50.0

 

June 1, 2020

 

 

 

 

 

 

 

 

 

 

 

MGE

$

100.0

$

13.0

$

-

$

87.0

 

June 1, 2020


(a)

On February 7, 2019, MGE Energy and MGE amended and restated the credit agreements to extend the initial term expiration date to February 7, 2024.


Borrowings under the Credit Agreements may bear interest at a rate based upon either a "floating rate" or a "Eurodollar Rate" adjusted for statutory reserve requirements, plus an adder based upon the credit ratings assigned to MGE's senior unsecured long-term debt securities. The "floating rate" is calculated on a daily basis as the highest of a prime rate, a Federal Funds effective rate plus 0.5% per annum, or a Eurodollar Rate for a one-month interest period plus 1%. The "floating rate" adder ranges from zero to 0.125%. The "Eurodollar Rate" is calculated as provided in the Credit Agreements. The "Eurodollar Rate" adder ranges from 0.625% to 1.125%.


The credit agreements require the borrower to maintain a ratio of consolidated debt to consolidated total capitalization not to exceed a maximum of 65%. The ratio calculation excludes assets, liabilities, revenues, and expenses included in MGE's financial statements as a result of the consolidation of VIEs, such as MGE Power Elm Road and MGE Power West Campus. As of December 31, 2018, the ratio of consolidated debt to consolidated total capitalization for each of MGE Energy and MGE, as calculated under the credit agreements' covenant, were 38.5% and 43.0%, respectively. See Footnote 11 of the Notes to Consolidated Financial Statements in this Report for additional information regarding the credit facilities.


Capitalization Ratios


MGE Energy's capitalization ratios were as follows:


 

 

MGE Energy

 

 

 

2018

 

2017

 

 

Common shareholders' equity

61.5 %

 

64.6 %

 

 

Long-term debt(a)

37.5 %

 

35.1 %

 

 

Short-term debt

1.0 %

 

0.3 %

 


(a)

Includes the current portion of long-term debt.




43




 



Credit Ratings


MGE Energy's and MGE's access to the capital markets, including, in the case of MGE, the commercial paper market, and their respective financing costs in those markets, may depend on the credit ratings of the entity that is accessing the capital markets.


None of MGE Energy's or MGE's borrowing is subject to default or prepayment as a result of a downgrading of credit ratings, although a downgrading of MGE's credit ratings could increase fees and interest charges under both MGE Energy's and MGE's credit agreements.


Contractual Obligations and Commercial Commitments for MGE Energy and MGE


MGE Energy's and MGE's contractual obligations as of December 31, 2018, representing cash obligations that are considered to be firm commitments, are as follows:


 

 

 

 

Payment Due Within:

 

Due After

(In thousands)

 

Total

 

1 Year

 

2-3 Years

 

4-5 Years

 

5 Years

MGE Energy

 

 

 

 

 

 

 

 

 

 

Long-term debt(a)

$

502,431

$

4,553

$

24,430

$

39,903

$

433,545

Short-term debt(b)

 

13,000

 

13,000

 

-

 

-

 

-

Repurchase-to-maturity transactions - loans(c)

 

2,181

 

396

 

799

 

864

 

122

Interest expense(d)

 

419,617

 

22,689

 

44,137

 

42,373

 

310,418

Operating leases(e)

 

28,783

 

1,646

 

2,466

 

1,964

 

22,707

Purchase obligations(f)

 

352,688

 

95,479

 

113,491

 

68,599

 

75,119

Other obligations(g)

 

30,815

 

22,696

 

2,454

 

1,968

 

3,697

Total MGE Energy contractual obligations

$

1,349,515

$

160,459

$

187,777

$

155,671

$

845,608

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Long-term debt(a)

$

502,431

$

4,553

$

24,430

$

39,903

$

433,545

Short-term debt(b)

 

13,000

 

13,000

 

-

 

-

 

-

Repurchase-to-maturity transactions - loans(c)

 

2,181

 

396

 

799

 

864

 

122

Interest expense(d)

 

419,617

 

22,689

 

44,137

 

42,373

 

310,418

Operating leases(e)

 

28,783

 

1,646

 

2,466

 

1,964

 

22,707

Purchase obligations(f)

 

352,688

 

95,479

 

113,491

 

68,599

 

75,119

Other obligations(g)

 

18,888

 

10,769

 

2,454

 

1,968

 

3,697

Total MGE contractual obligations

$

1,337,588

$

148,532

$

187,777

$

155,671

$

845,608


(a)

Long-term debt consisting of secured first mortgage bonds, unsecured medium-term notes, and Industrial Development Revenue Bonds issued by MGE, and private placement debt issued by MGE, MGE Power Elm Road, and MGE Power West Campus.


(b)

Short-term debt consisting of commercial paper for MGE. See Footnote 11 of the Notes to Consolidated Financial Statements in this Report.


(c)

Chattel paper agreements. See Footnote 1.g. of the Notes to Consolidated Financial Statements in this Report.


(d)

Amount represents interest expense on long-term debt. See Footnote 10 of the Notes to Consolidated Financial Statements in this Report for further discussion of the long-term debt outstanding as of December 31, 2018.


(e)

Operating leases. See Footnote 17.b. of the Notes to Consolidated Financial Statements in this Report.


(f)

Purchase obligations for MGE Energy and MGE consist primarily of the purchase of electricity and natural gas, electric transmission, natural gas storage capacity, natural gas pipeline transportation, and the purchase and transport of coal. See Footnote 17.a. of the Notes to Consolidated Financial Statements in this Report.


(g)

Other obligations are primarily related to investment commitments, easements, environmental projects, fuel credit, and uncertain tax positions.


The above amounts do not include any contributions for MGE's pension and postretirement plans. MGE does not expect to need to make any required contributions to the qualified plans for 2019 or 2020. The contributions for years after 2020 are not yet currently estimated. Due to uncertainties in the future economic performance of plan assets, discount rates, and other key assumptions, estimated contributions are subject to change. MGE may also elect to make additional discretionary contributions to the plans.


The above amounts do not include future capital calls by ATC and ATC Holdco. In January 2019, MGE Transco made a $0.2 million capital contribution to ATC, and MGEE Transco made a $0.1 million capital contribution to ATC Holdco. The amount and timing of future capital calls to these entities is uncertain and primarily dependent on the operations and expansion of ATC and ATC Holdco.



44




 



MGE Energy's and MGE's commercial commitments as of December 31, 2018, representing commitments triggered by future events and including financing arrangements to secure obligations of MGE Energy and MGE, are as follows:


 

 

 

 

 

Expiration Within:

 

Due After

 

 

(In thousands)

 

Total

 

1 Year

 

2-3 Years

 

4-5 Years

 

5 Years

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

 

 

Available lines of credit(a)(c)

$

150,000

$

-

$

150,000

$

-

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

 

 

Available lines of credit(b)(c)

$

100,000

$

-

$

100,000

$

-

$

-

 


(a)

Amount includes the facilities discussed in (b) plus an additional line of credit. MGE Energy has available at any time a $50 million committed revolving credit agreement, expiring in June 2020. As of December 31, 2018, MGE Energy had no borrowings outstanding under this credit facility.


(b)

Amount includes two committed revolving credit agreements totaling $100 million expiring in June 2020. These credit facilities are used to support commercial paper issuances. As of December 31, 2018, MGE had no borrowings outstanding under these facilities. On that date, MGE had $13.0 million of commercial paper outstanding.


(c)

On February 7, 2019, MGE Energy and MGE amended and restated the credit agreements to extend the initial term expiration date to February 7, 2024.


Other Matters


ATC


In 2013, several parties filed a complaint with the FERC seeking to reduce the base return on equity (ROE) used by MISO transmission owners, including ATC, "due to changes in the capital markets." The complaint alleged that the MISO ROE should not exceed 9.15%, the equity components of hypothetical capital structures should be restricted to 50%, and the relevant incentive ROE adders should be discontinued. At the time, MISO's base ROE was 12.38% and ATC's base ROE was 12.2%. In February 2015, a second complaint was filed for the period February 2015 through May 2015 with the FERC requesting a reduction in the base ROE used by MISO transmission owners, including ATC, to 8.67%, with a refund effective date retroactive to the filing date of the complaint. In June 2016, an administrative law judge issued an initial decision for the second complaint that would reduce the transmission owner's base ROE to 9.7%. The initial decision will be reviewed by FERC. It is anticipated FERC will issue an order on this issue in 2019. On September 28, 2016, FERC issued an order on the first complaint, for the period November 2013 through February 2015, reducing the base ROE to 10.32%. This base ROE also became effective September 28, 2016, and will apply to future periods until FERC rules in the second complaint, at which time the base ROE ordered by FERC in the second complaint will prospectively become the authorized base ROE. Any change to ATC's ROE could result in lower equity earnings and distributions from ATC in the future.


In January 2015, FERC accepted the transmission owner's request for a 50 basis-point incentive ROE adder for participating in MISO. The adder became effective January 6, 2015.


Our share of ATC's earnings reflects a pre-tax adjustment of $0.5 million and $1.9 million for 2017 and 2016, respectively, recorded by ATC for these matters representing its estimate of its refund liability. There was not a pre-tax expense for 2018. We derived approximately 7.3%, 6.2%, and 6.8% of our net income for 2018, 2017, and 2016, respectively, from our investment in ATC.


Critical Accounting Estimates - MGE Energy and MGE


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to unbilled revenues, allowance for doubtful accounts, pension obligations, income taxes, derivatives, and regulatory assets and liabilities. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Those values may differ from these estimates under different assumptions or conditions. We believe the following critical accounting estimates affect our more significant judgments used in the preparation of our consolidated financial statements.




45




 



Unbilled Revenues


Revenues from the sale of electricity and gas to customers are recorded when electricity/gas is delivered to those customers. The quantity of those sales is measured by customers' meters. Due to the large volume of those meters, it is impractical to read all of them at month end. Meters are read on a systematic basis throughout the month based on established meter-reading schedules. Consequently, at the end of any month, there exists a quantity of electricity and gas that has been delivered to customers but has not been captured by the meter readings. As a result, management must estimate revenue related to electricity and gas delivered to customers between their meter-read dates and the end of the period. These estimates include:


·

The amount of electricity expected to be lost in the process of its transmission and distribution to customers (line loss) and the amount of electricity actually delivered to customers.


·

The amount of gas expected to be lost in the process of its distribution to customers and the amount of gas actually delivered to customers.


·

The mix of sales between customer rate classes, which is based upon historical utilization assumptions.


MGE monitors the reasonableness of the unbilled revenue estimate through the review of ratios such as unbilled electric consumption compared to billed electric sales. In the case of unbilled gas, the estimated unbilled consumption is compared to various other statistics, including percent of gas available for sale, change in unbilled month to month and change in unbilled compared to the prior year in order to confirm its reasonableness.


Allowance for Doubtful Accounts


MGE maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. It determines the allowance based on historical write-off experience, regional economic data, and review of the accounts receivable aging. MGE reviews its allowance for doubtful accounts monthly. Although management believes that the allowance for doubtful accounts is MGE's best estimate of the amount of probable credit losses, if the financial condition of MGE's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.


Pension and Other Postretirement Benefit Plans


MGE provides employees with certain retirement (pension) and postretirement (health care and life insurance) benefits. In order to measure the expense and obligations associated with these benefits, management must make a variety of estimates, including discount rates used to value certain liabilities, the expected return on plan assets set aside to fund these costs, the rate of compensation increase, employee turnover rates, retirement rates, health care trends, mortality rates, and other factors. These accounting estimates bear the risk of change due to the uncertainty attached to the estimate as well as the fact that these estimates are difficult to measure. Different estimates used by us could result in recognizing different amounts of expense over different periods of time. Recovery in rates is expected.


MGE uses third-party specialists to assist us in evaluating our assumptions as well as appropriately measure the costs and obligations associated with these retirement benefits. The discount rate and expected return on plan assets are based primarily on available investment yields and the historical performance of our plan assets. They are critical accounting estimates because they are subject to management's judgment and can materially affect net income.


·

Assumed return on assets. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested (or to be invested) to provide for the benefits included in the projected benefit obligation. For 2018, MGE used an assumed return on assets of 7.40% for pension and 6.94% for other postretirement benefits. In 2019, the pension asset assumption will decrease to 7.20% and the postretirement benefit assumption will decrease to 6.72%. The annual expected rate of return is based on projected long-term equity and bond returns, maturities and asset allocations. Holding other assumptions constant, for every 1% reduction in the expected rate of return on plan assets, annual pension and other postretirement cost would increase by approximately $4.0 million, before taxes.


·

Discount rate. The discount rate represents the rate at which pension obligations could effectively be settled on a present-value basis. MGE uses high-grade bond yields as a benchmark for determining the appropriate discount rate. MGE uses individual spot rates, instead of a weighted average of the yield curve spot rates, for measuring the service cost and interest cost components for net periodic benefit cost. Holding other assumptions constant, a 0.5%



46




 



reduction in the discount rate on the obligation balance as of December 31, 2018, would increase annual pension and other postretirement cost by approximately $2.6 million, before taxes.


·

Medical trend assumptions. The health care cost trend rate is the assumed rate of increase in per-capita health care charges.


·

Mortality rate assumption. Expected mortality rates are used in the valuation to determine the expected duration of future benefit payments to the plan participants. MGE utilizes mortality tables and projection scales developed by a third-party actuary that were updated in 2018.


See Footnote 13 of the Notes to Consolidated Financial Statements in this Report for additional discussion of these plans.


Income Tax Provision


MGE Energy's and MGE's income tax provisions, including both current and deferred components, are based on estimates, assumptions, calculations, and interpretation of tax statutes for the current and future years. Determination of current-year federal and state income tax will not be settled for years.


Management regularly makes assessments of tax return outcomes relative to financial statement tax provisions and adjusts the tax provisions in the period when facts become final.


Additionally, in determining our current income tax provision, we assess temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our balance sheets. When we maintain deferred tax assets, we assess the likelihood that these assets will be recovered through adjustments to future taxable income. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. A valuation allowance is recorded for those benefits that do not meet this criterion. We record an allowance reducing the asset to a value we believe will be recoverable based on our expectation of future taxable income. We believe the accounting estimate related to the valuation allowance is a critical accounting estimate because it is highly susceptible to change from period to period as it requires management to make assumptions about our future income over the lives of the deferred tax assets, and the impact of increasing or decreasing the valuation allowance is potentially material to our results of operations.


On December 22, 2017, President Trump signed the Tax Act into law. The passing of the law significantly lowers MGE's corporate tax rates and triggered a remeasurement of deferred taxes. We reflected estimates of the impact of the Tax Act in our year-end 2017 financial results. In accordance with Staff Accounting Bulletin 118, any subsequent adjustment to these amounts would be recorded in 2018 when the analysis is complete. No material adjustments have been recorded during 2018. Furthermore, while regulation allows us to incorporate changes in tax law into the rate-setting process, there will likely be timing delays before realization of the changes.


Accounting for uncertainty in income taxes applies to all tax positions and requires a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. The threshold is defined for recognizing tax return positions in the financial statements as "more likely than not" that the position is sustainable, based on its merits. Subsequent recognition, derecognition, and measurement is based on management's best judgment given the facts, circumstances and information available at the reporting date.


Accounting for Derivative Instruments


MGE accounts for derivative financial instruments, except those qualifying for the normal purchase normal sale exception, at their fair value on the balance sheet. Fair value is determined using current quoted market prices, except for the PPA, which is valued utilizing an internally-developed pricing model. This model includes observable and unobservable inputs.


MGE received approval from the PSCW to establish a regulatory asset or liability for the deferral of the effects of mark-to-market accounting on contracts related to commodity hedging in MGE's regulated operations.




47




 



Regulatory Assets/Liabilities


Regulatory assets represent costs that have been deferred to future periods when it is probable that the regulator will allow future recovery of those costs through rates. MGE bases its assessment of recovery on precedents established by the regulatory body. Regulatory liabilities represent previous collections from customers that are expected to be refunded to customers in future periods. Regulatory assets and regulatory liabilities typically include deferral of energy costs, the normalization of income taxes, the deferral of certain operating expenses, and non-ARO removal costs. The accounting for these regulatory assets and liabilities is in accordance with regulatory accounting standards.


MGE continually assesses whether the regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. This assessment considers factors such as changes in the regulatory environment, recent rate orders to other regulated entities under the same jurisdiction, and the status of any pending or potential deregulation legislation. If future recovery of costs becomes no longer probable, the assets and liabilities would be recognized as current-period revenues or expenses.


Amortization of regulatory assets and liabilities is provided over the recovery or deferral period as allowed in the related regulatory agreement.


Adoption of Accounting Principles and Recently Issued Accounting Pronouncements - MGE Energy and MGE


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


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


MGE Energy and MGE are potentially exposed to market risk associated with interest rates, commodity prices, and equity returns. MGE currently has no exposure to foreign currency risk. MGE manages some risk exposure through risk management policies and the use of derivative instruments. MGE's risk management policy prohibits speculative trading transactions.


Commodity Price Risk


MGE has commodity price risk exposure with respect to the price of natural gas, electricity, coal, emission credits, and oil. MGE's electric operations burn natural gas in several of its peaking power plants and, in many cases, the cost of purchased power is tied to the cost of natural gas. MGE employs established policies and procedures to reduce the market risks associated with changing commodity prices. MGE's commodity risks are somewhat mitigated by the current ratemaking process in place for recovering electric fuel cost, purchased energy costs, and the cost of natural gas.


MGE's electric fuel costs are subject to fuel rules established by the PSCW. The fuel rules require the PSCW and Wisconsin utilities to defer electric fuel-related costs that fall outside a symmetrical cost tolerance band. Any over/under recovery of the actual costs in a year outside of the symmetrical cost tolerance band is determined in the following year and is then reflected in future billings to electric retail customers. Under the electric fuel rules, MGE is required to defer the benefit of lower costs if the actual electric fuel costs fall outside the lower end of the range and is required to defer costs, less any excess revenues, if the actual electric fuel costs exceed the upper end of the range. 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 range is defined by the PSCW and has been modified throughout the years based on market conditions and other relevant factors. Currently, MGE is subject to a plus or minus 2% range. MGE assumes the risks and benefits of variances that are within the cost tolerance band. For 2019, fuel and purchased power costs included in MGE's fuel monitoring level rates are $77.3 million. See Footnote 8 of the Notes to Consolidated Financial Statements in this Report for additional information.


MGE recovers the cost of natural gas in its gas utility segment through the purchased gas adjustment clause (PGA). Under the PGA, MGE is able to pass through to its gas customers the cost of gas.


MGE also reduces price risk caused by market fluctuations via physical contracts and financial derivative contracts, including futures, swaps, options, forwards, and other contractual commitments. The maximum length of time over which cash flows related to energy commodities can be hedged under applicable PSCW approvals is four years.


MGE has financial gas and electric commodity contracts to hedge commodity price risk in the gas and electric utility segments. These contracts are primarily comprised of exchange-traded option and future contracts. MGE also holds



48




 



financial transmission rights (FTRs), which are used to hedge the risk of increased transmission congestion charges. As of December 31, 2018, the fair value of these instruments exceeded their cost basis by $0.7 million. Under the PGA clause and electric fuel rules, MGE may include the costs and benefits of the aforementioned fuel price risk management tools in the costs of fuel (natural gas or power). Because these costs/benefits are recoverable, the related unrealized loss/gain has been deferred on the consolidated balance sheets as a regulatory asset/liability.


MGE has also entered into a purchased power agreement that provides MGE with firm capacity and energy that began on June 1, 2012, and ends on May 31, 2022 (the "base term"). The agreement also allows MGE an option to extend the contract after the base term. The agreement is considered a derivative contract and is recognized at its fair value on the consolidated balance sheets. However, the derivative qualifies for regulatory deferral and is recognized with a corresponding regulatory asset or liability depending on whether the fair value is in a loss or gain position. The fair value of the contract as of December 31, 2018, reflects a loss position of $32.5 million.


Interest Rate Risk


Both MGE Energy and MGE may have short term borrowings at varying interest rates. MGE issues commercial paper for its short-term borrowings, while MGE Energy draws from its current credit facility to meet its short-term borrowing needs. Borrowing levels vary from period to period depending upon capital investments and other factors. Future short-term interest expense and payments will reflect both future short-term interest rates and borrowing levels. MGE Energy and MGE manage interest rate risk by limiting their variable rate exposure and continually monitoring the effects of market changes on interest rates. MGE is not exposed to changes in interest rates on a substantial portion of its long-term debt until that debt matures and is refinanced at market rates. Assuming the current level of variable rate borrowings and assuming a 1% change in the 2018 average interest rate under those borrowings, it is estimated that our 2018 interest expense and net income would have changed $0.1 million for both MGE Energy and MGE.


Equity Price Risk - Pension-Related Assets


MGE currently funds its liabilities related to employee benefits through trust funds. These funds, which include investments in debt and equity securities, are managed by various investment managers. Changes in market value of these investments can have an impact on the future expenses related to these liabilities. Holding other assumptions constant, for every 1% reduction in the expected rate of return on plan assets, annual pension and other postretirement cost would increase by approximately $4.0 million, before taxes. MGE's risk of expense and annuity payments, as a result of changes in the market value of the trust funds, is mitigated in part through future rate actions by the PSCW. The value of employee benefit plans trusts' assets have decreased in value by approximately 7.01% and increased in value by approximately 18.36% during the years ended December 31, 2018 and 2017, respectively.


Credit Risk - Counterparty


Credit risk is the loss that may result from counterparty nonperformance. MGE is exposed to credit risk primarily through its merchant energy business. MGE uses credit policies to manage its credit risk, which include utilizing an established credit approval process, monitoring counterparty limits, employing credit mitigation measures such as collateral or prepayment arrangements, and using netting agreements.


Due to the possibility of extreme volatility in the prices of energy commodities and derivatives, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If such a counterparty were then to fail to perform its obligations under its contract (for example, fail to deliver the electricity MGE originally contracted for), MGE could sustain a loss that could have a material impact on its financial results.


Additionally, if a counterparty were to default and MGE were to liquidate all contracts with that entity, MGE's credit loss would include the loss in value of mark-to-market contracts; the amount owed for settled transactions; and additional payments, if any, to settle unrealized losses. As of December 31, 2018, no counterparties have defaulted.


MGE is obligated to provide service to all electric and gas customers within its respective franchised territories. MGE's franchised electric territory includes a 264 square-mile area in Dane County, Wisconsin, and MGE's franchised gas territory includes a service area covering 1,684 square miles in Wisconsin. Based on results for the year ended December 31, 2018, no one customer constituted more than 10% of total operating revenues for MGE Energy and MGE. Credit risk for electric and gas is managed by MGE's credit and collection policies, which are consistent with state regulatory requirements.




49




 



Cash, cash equivalents, and customer accounts receivable are the financial instruments that potentially subject MGE Energy and MGE to concentrations of credit risk. MGE Energy and MGE place their cash and cash equivalents with high credit-quality financial institutions. MGE has limited concentrations of credit risk from customer accounts receivable because of the large number of customers and relatively strong economy in its service territory.


Item 8. Financial Statements and Supplementary Data.


MGE Energy


Management's Report on Internal Control Over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in the Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2018.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


The effectiveness of MGE Energy's internal control over financial reporting as of December 31, 2018, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.


February 22, 2019


MGE


Management's Report on Internal Control Over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in the Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2018.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


February 22, 2019




50




 



Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders of MGE Energy, Inc.:


Opinions on the Financial Statements and Internal Control over Financial Reporting


We have audited the accompanying consolidated balance sheets of MGE Energy, Inc. and its subsidiaries (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, cash flows and common equity for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.


Basis for Opinions


The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.


Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


Definition and Limitations of Internal Control over Financial Reporting


A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of



51




 



management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

February 22, 2019


We have served as the Company's auditor since 1993.



52




 



Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholder of Madison Gas and Electric Company:


Opinion on the Financial Statements


We have audited the accompanying consolidated balance sheets of Madison Gas and Electric Company and its subsidiaries (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.


Basis for Opinion


These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.


Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

February 22, 2019


We have served as the Company's auditor since 1993.



53




 




MGE Energy, Inc.

 

Consolidated Statements of Income

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

For the Years Ended December 31,

 

 

 

2018

 

2017

 

2016

 

Operating Revenues:

 

 

 

 

 

 

 

    Electric revenues

$

402,001

$

414,274

$

410,202

 

    Gas revenues

 

157,767

 

148,825

 

134,543

 

        Total Operating Revenues

 

559,768

 

563,099

 

544,745

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

    Fuel for electric generation

 

56,141

 

53,029

 

60,736

 

    Purchased power

 

50,807

 

58,690

 

56,313

 

    Cost of gas sold

 

84,968

 

76,644

 

66,771

 

    Other operations and maintenance

 

177,823

 

177,740

 

172,335

 

    Depreciation and amortization

 

56,412

 

53,077

 

44,646

 

    Other general taxes

 

19,410

 

19,294

 

20,062

 

        Total Operating Expenses

 

445,561

 

438,474

 

420,863

 

Operating Income

 

114,207

 

124,625

 

123,882

 

 

 

 

 

 

 

 

 

Other income, net

 

17,055

 

14,399

 

14,057

 

Interest expense, net

 

(19,609)

 

(19,324)

 

(19,866)

 

    Income before income taxes

 

111,653

 

119,700

 

118,073

 

Income tax provision

 

(27,434)

 

(22,094)

 

(42,513)

 

Net Income

$

84,219

$

97,606

$

75,560

 

 

 

 

 

 

 

 

 

Earnings Per Share of Common Stock

 

 

 

 

 

 

 

(basic and diluted)

$

2.43

$

2.82

$

2.18

 

 

 

 

 

 

 

 

 

Dividends per share of common stock

$

1.32

$

1.26

$

1.21

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

 

 (basic and diluted)

 

34,668

 

34,668

 

34,668

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.

 


MGE Energy, Inc.

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

 

 

 

 

 

 

For the Years Ended December 31,

 

 

 

2018

 

2017

 

2016

 

Net Income

$

84,219

$

97,606

$

75,560

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

    Unrealized gain (loss) on available-for-sale securities, net of

 

 

 

 

 

 

 

    tax ($-, $(117), and $104)

 

-

 

175

 

(155)

 

Comprehensive Income

$

84,219

$

97,781

$

75,405

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.

 



54




 




MGE Energy, Inc.

Consolidated Statements of Cash Flows

(In thousands)

 

 

For the Years Ended December 31,

 

 

2018

 

2017

 

2016

Operating Activities:

 

 

 

 

 

 

    Net income

$

84,219

$

97,606

$

75,560

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

56,412

 

53,077

 

44,646

        Deferred income taxes

 

3,749

 

(4,082)

 

22,421

        Provision for doubtful receivables

 

1,366

 

1,016

 

1,196

        Employee benefit plan (credit) cost

 

(2,002)

 

831

 

295

        Equity earnings in ATC

 

(8,821)

 

(10,125)

 

(8,428)

        Gain on sale of property

 

-

 

(1,547)

 

-

        Other items

 

(814)

 

641

 

2,462

    Changes in working capital items:

 

 

 

 

 

 

        Trade and other receivables

 

(2,235)

 

(4,502)

 

(3,594)

        Inventories

 

2,724

 

(2,568)

 

7,273

        Unbilled revenues

 

3,157

 

(1,554)

 

(4,838)

        Prepaid taxes

 

10,320

 

101

 

8,616

        Other current assets

 

251

 

(2,786)

 

15

        Accounts payable

 

(4,855)

 

(5,290)

 

9,881

        Other current liabilities

 

11,957

 

3,948

 

(1,738)

    Dividends from ATC

 

6,958

 

8,803

 

5,854

    Cash contributions to pension and other postretirement plans

 

(5,584)

 

(11,304)

 

(14,452)

    Other noncurrent items, net

 

(3,762)

 

9,108

 

2,695

            Cash Provided by Operating Activities

 

153,040

 

131,373

 

147,864

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(212,197)

 

(108,131)

 

(83,659)

    Capital contributions to investments

 

(5,926)

 

(11,081)

 

(2,958)

    Proceeds from sale of property

 

-

 

2,819

 

-

    Other

 

(205)

 

118

 

(196)

            Cash Used for Investing Activities

 

(218,328)

 

(116,275)

 

(86,813)

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid on common stock

 

(45,762)

 

(43,682)

 

(41,775)

    Repayment of long-term debt

 

(24,453)

 

(34,358)

 

(4,267)

    Issuance of long-term debt

 

100,000

 

70,000

 

-

    Proceeds from short-term debt

 

9,000

 

4,000

 

-

    Other

 

(662)

 

(597)

 

(70)

            Cash Provided by (Used for) Financing Activities

 

38,123

 

(4,637)

 

(46,112)

    Change in cash, cash equivalents, and restricted cash

 

(27,165)

 

10,461

 

14,939

    Cash, cash equivalents, and restricted cash at beginning of period

 

112,094

 

101,633

 

86,694

    Cash, cash equivalents, and restricted cash at end of period

$

84,929

$

112,094

$

101,633


 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

    Interest paid

$

20,018

$

19,176

$

19,415

    Income taxes paid

$

12,597

$

27,149

$

21,831

    Income taxes received

$

(59)

$

-

$

(10,000)

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

11,129

$

16,602

$

16,376

 

 

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.



55




 




MGE Energy, Inc.

Consolidated Balance Sheets

(In thousands)

 

 

As of December 31,

ASSETS

 

2018

 

2017

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

83,102

$

107,952

    Accounts receivable, less reserves of $2,614 and $2,840, respectively

 

43,593

 

42,299

    Other accounts receivable, less reserves of $540 and $335, respectively

 

6,262

 

9,440

    Unbilled revenues

 

28,243

 

31,400

    Materials and supplies, at average cost

 

24,093

 

22,614

    Fuel for electric generation, at average cost

 

6,599

 

8,256

    Stored natural gas, at average cost

 

11,303

 

12,923

    Prepaid taxes

 

16,215

 

26,535

    Regulatory assets - current

 

9,477

 

7,888

    Assets held for sale

 

3,080

 

8,817

    Other current assets

 

8,593

 

12,507

        Total Current Assets

 

240,560

 

290,631

Other long-term receivables

 

2,709

 

4,788

Regulatory assets

 

145,424

 

142,567

Pension and other postretirement benefit asset

 

-

 

7,336

Other deferred assets and other

 

12,488

 

731

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

1,369,766

 

1,283,313

    Construction work in progress

 

139,671

 

58,044

        Total Property, Plant, and Equipment

 

1,509,437

 

1,341,357

Investments

 

78,000

 

67,772

        Total Assets

$

1,988,618

$

1,855,182

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

4,553

$

24,452

    Short-term debt

 

13,000

 

4,000

    Accounts payable

 

46,158

 

47,645

    Accrued interest and taxes

 

7,384

 

5,602

    Accrued payroll related items

 

13,044

 

12,244

    Regulatory liabilities - current

 

13,826

 

5,633

    Derivative liabilities

 

8,550

 

8,180

    Other current liabilities

 

14,113

 

18,758

        Total Current Liabilities

 

120,628

 

126,514

Other Credits:

 

 

 

 

    Deferred income taxes

 

231,952

 

225,130

    Investment tax credit - deferred

 

818

 

918

    Regulatory liabilities

 

165,638

 

154,153

    Accrued pension and other postretirement benefits

 

67,483

 

69,088

    Derivative liabilities

 

23,980

 

33,990

    Other deferred liabilities and other

 

68,132

 

69,041

        Total Other Credits

 

558,003

 

552,320

Capitalization:

 

 

 

 

    Common shareholders' equity:

 

 

 

 

        Common Stock - $1 par value - 75,000 shares authorized;

 

 

 

 

        34,668 shares issued and outstanding

 

34,668

 

34,668

        Additional paid-in capital

 

316,268

 

316,268

        Retained earnings

 

465,708

 

426,874

        Accumulated other comprehensive income, net of tax

 

-

 

377

        Total Common Shareholders' Equity

 

816,644

 

778,187

    Long-term debt

 

493,343

 

398,161

        Total Capitalization

 

1,309,987

 

1,176,348

Commitments and contingencies (see Footnote 17)

 

 

 

 

        Total Liabilities and Capitalization

$

1,988,618

$

1,855,182

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.



56




 




 

MGE Energy, Inc.

 

 

Consolidated Statements of Common Equity

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Income/(Loss)

 

Total

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2015

34,668

$

34,668

$

316,268

$

339,165

$

357

$

690,458

 

 

Net income

 

 

 

 

 

 

75,560

 

 

 

75,560

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

(155)

 

(155)

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($1.21 per share)

 

 

 

 

 

 

(41,775)

 

 

 

(41,775)

 

 

Ending balance - December 31, 2016

34,668

$

34,668

$

316,268

$

372,950

$

202

$

724,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

97,606

 

 

 

97,606

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

175

 

175

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($1.26 per share)

 

 

 

 

 

 

(43,682)

 

 

 

(43,682)

 

 

Ending balance - December 31, 2017

34,668

$

34,668

$

316,268

$

426,874

$

377

$

778,187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of new accounting principle

 

 

 

 

 

 

377

 

(377)

 

-

 

 

Beginning balance - Adjusted

 

 

 

 

 

 

427,251

 

-

 

778,187

 

 

Net income

 

 

 

 

 

 

84,219

 

 

 

84,219

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($1.32 per share)

 

 

 

 

 

 

(45,762)

 

 

 

(45,762)

 

 

Ending balance - December 31, 2018

34,668

$

34,668

$

316,268

$

465,708

$

-

$

816,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.

 



57




 




Madison Gas and Electric Company

 

Consolidated Statements of Income

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

For the Years Ended December 31,

 

 

 

2018

 

2017

 

2016

 

Operating Revenues:

 

 

 

 

 

 

 

    Electric revenues

$

402,001

$

414,277

$

410,226

 

    Gas revenues

 

157,767

 

148,834

 

134,572

 

        Total Operating Revenues

 

559,768

 

563,111

 

544,798

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

    Fuel for electric generation

 

56,141

 

53,031

 

60,745

 

    Purchased power

 

50,807

 

58,692

 

56,327

 

    Cost of gas sold

 

84,968

 

76,652

 

66,800

 

    Other operations and maintenance

 

176,762

 

176,729

 

171,423

 

    Depreciation and amortization

 

56,412

 

53,077

 

44,622

 

    Other general taxes

 

19,410

 

19,294

 

20,062

 

    Income tax provision

 

25,098

 

18,280

 

39,616

 

        Total Operating Expenses

 

469,598

 

455,755

 

459,595

 

Operating Income

 

90,170

 

107,356

 

85,203

 

 

 

 

 

 

 

 

 

Other Income and Deductions:

 

 

 

 

 

 

 

    AFUDC - equity funds

 

3,284

 

1,222

 

1,207

 

    Equity earnings in MGE Transco

 

-

 

-

 

6,366

 

    Income tax provision

 

(363)

 

(710)

 

(2,175)

 

    Other income, net

 

7,142

 

5,228

 

4,129

 

        Total Other Income and Deductions

 

10,063

 

5,740

 

9,527

 

    Income before interest expense

 

100,233

 

113,096

 

94,730

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

    Interest on long-term debt

 

21,967

 

20,273

 

20,351

 

    Other interest, net

 

338

 

163

 

182

 

    AFUDC - borrowed funds

 

(1,108)

 

(412)

 

(395)

 

        Net Interest Expense

 

21,197

 

20,024

 

20,138

 

Net Income

$

79,036

$

93,072

$

74,592

 

Less Net Income Attributable to Noncontrolling Interest, net of tax

 

(22,552)

 

(43,237)

 

(23,358)

 

Net Income Attributable to MGE

$

56,484

$

49,835

$

51,234

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.

 


Madison Gas and Electric Company

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

 

 

 

 

 

 

For the Years Ended December 31,

 

 

 

2018

 

2017

 

2016

 

Net Income

$

79,036

$

93,072

$

74,592

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

    Unrealized loss on available-for-sale securities, net of

 

 

 

 

 

 

 

    tax ($-, $31, and $2)

 

-

 

(47)

 

(4)

 

Comprehensive Income

$

79,036

$

93,025

$

74,588

 

    Less: Comprehensive Income Attributable to Noncontrolling

 

 

 

 

 

 

 

    Interest, net of tax

 

(22,552)

 

(43,237)

 

(23,358)

 

Comprehensive Income Attributable to MGE

$

56,484

$

49,788

$

51,230

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.

 



58




 




Madison Gas and Electric Company

Consolidated Statements of Cash Flows

(In thousands)

 

 

For the Years Ended December 31,

 

 

2018

 

2017

 

2016

Operating Activities:

 

 

 

 

 

 

    Net income

$

79,036

$

93,072

$

74,592

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

56,412

 

53,077

 

44,622

        Deferred income taxes

 

(69)

 

(7,760)

 

20,876

        Provision for doubtful receivables

 

1,366

 

1,016

 

1,196

        Employee benefit plan (credit) cost

 

(2,002)

 

831

 

295

        Equity earnings in MGE Transco

 

-

 

-

 

(6,366)

        Gain on sale of property

 

-

 

(1,547)

 

-

        Other items

 

(107)

 

1,408

 

2,990

    Changes in working capital items:

 

 

 

 

 

 

        Trade and other receivables

 

(2,160)

 

(4,113)

 

(3,583)

        Inventories

 

2,724

 

(2,568)

 

7,273

        Unbilled revenues

 

3,157

 

(1,554)

 

(4,838)

        Prepaid taxes

 

9,283

 

725

 

8,481

        Other current assets

 

255

 

(2,788)

 

14

        Accounts payable

 

(4,817)

 

(5,312)

 

9,941

        Accrued interest and taxes

 

4,761

 

118

 

419

        Other current liabilities

 

9,685

 

1,941

 

(2,137)

    Dividends from MGE Transco

 

-

 

-

 

5,032

    Cash contributions to pension and other postretirement plans

 

(5,584)

 

(11,304)

 

(14,452)

    Other noncurrent items, net

 

(3,946)

 

8,878

 

2,497

            Cash Provided by Operating Activities

 

147,994

 

124,120

 

146,852

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(212,197)

 

(108,131)

 

(83,659)

    Capital contributions to investments

 

-

 

-

 

(1,598)

    Proceeds from sale of property

 

-

 

1,721

 

-

    Other

 

(1,105)

 

(162)

 

(378)

            Cash Used for Investing Activities

 

(213,302)

 

(106,572)

 

(85,635)

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid to parent by MGE

 

-

 

(45,000)

 

(50,000)

    Distributions to parent from noncontrolling interest

 

(22,000)

 

(18,000)

 

(24,113)

    Equity contribution received by noncontrolling interest

 

-

 

-

 

1,598

    Repayment of long-term debt

 

(24,453)

 

(34,358)

 

(4,267)

    Issuance of long-term debt

 

100,000

 

70,000

 

-

    Proceeds from short-term debt

 

9,000

 

4,000

 

-

    Other

 

(662)

 

(539)

 

(63)

            Cash Provided by (Used for) Financing Activities

 

61,885

 

(23,897)

 

(76,845)

    Change in cash, cash equivalents, and restricted cash

 

(3,423)

 

(6,349)

 

(15,628)

    Cash, cash equivalents, and restricted cash at beginning of period

 

10,093

 

16,442

 

32,070

    Cash, cash equivalents, and restricted cash at end of period

$

6,670

$

10,093

$

16,442


 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

    Interest paid

$

20,018

$

19,176

$

19,415

    Income taxes paid

$

-

$

1

$

29

    Income taxes received

$

(59)

$

-

$

-

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

11,129

$

16,602

$

16,376

        Dividend in kind to parent

$

-

$

-

$

15,822

 

 

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.



59




 




Madison Gas and Electric Company

Consolidated Balance Sheets

(In thousands)

 

 

As of December 31,

ASSETS

 

2018

 

2017

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

4,843

$

5,951

    Accounts receivable, less reserves of $2,614 and $2,840, respectively

 

43,593

 

42,299

    Affiliate receivables

 

621

 

668

    Other accounts receivable, less reserves of $540 and $335, respectively

 

6,111

 

6,984

    Unbilled revenues

 

28,243

 

31,400

    Materials and supplies, at average cost

 

24,093

 

22,614

    Fuel for electric generation, at average cost

 

6,599

 

8,256

    Stored natural gas, at average cost

 

11,303

 

12,923

    Prepaid taxes

 

15,790

 

25,073

    Regulatory assets - current

 

9,477

 

7,888

    Assets held for sale

 

3,080

 

8,817

    Other current assets

 

8,541

 

12,484

        Total Current Assets

 

162,294

 

185,357

Affiliate receivable long-term

 

3,177

 

3,707

Regulatory assets

 

145,424

 

142,567

Pension and other postretirement benefit asset

 

-

 

7,336

Other deferred assets and other

 

14,142

 

3,280

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

1,369,795

 

1,283,341

    Construction work in progress

 

139,671

 

58,044

        Total Property, Plant, and Equipment

 

1,509,466

 

1,341,385

Investments

 

388

 

409

        Total Assets

$

1,834,891

$

1,684,041

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

4,553

$

24,452

    Short-term debt

 

13,000

 

4,000

    Accounts payable

 

46,165

 

47,614

    Accrued interest and taxes

 

10,319

 

5,558

    Accrued payroll related items

 

13,044

 

12,244

    Regulatory liabilities - current

 

13,826

 

5,633

    Derivative liabilities

 

8,550

 

8,180

    Other current liabilities

 

11,614

 

16,749

        Total Current Liabilities

 

121,071

 

124,430

Other Credits:

 

 

 

 

    Deferred income taxes

 

204,616

 

201,486

    Investment tax credit - deferred

 

818

 

918

    Regulatory liabilities

 

165,638

 

154,153

    Accrued pension and other postretirement benefits

 

67,483

 

69,088

    Derivative liabilities

 

23,980

 

33,990

    Other deferred liabilities and other

 

68,132

 

69,041

        Total Other Credits

 

530,667

 

528,676

Capitalization:

 

 

 

 

    Common shareholder's equity:

 

 

 

 

        Common Stock - $1 par value - 50,000 shares authorized; 17,348 shares outstanding

 

17,348

 

17,348

        Additional paid-in capital

 

192,417

 

192,417

        Retained earnings

 

338,591

 

282,135

        Accumulated other comprehensive loss, net of tax

 

-

 

(28)

         Total Common Shareholder's Equity

 

548,356

 

491,872

    Noncontrolling interest

 

141,454

 

140,902

        Total Equity

 

689,810

 

632,774

    Long-term debt

 

493,343

 

398,161

        Total Capitalization

 

1,183,153

 

1,030,935

Commitments and contingencies (see Footnote 17)

 

 

 

 

        Total Liabilities and Capitalization

$

1,834,891

$

1,684,041

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.



60




 




 

Madison Gas and Electric Company

 

 

Consolidated Statements of Equity

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Non-

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

Comprehensive

Controlling

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

Income/(Loss)

Interest

 

Total

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2015

17,348

$

17,348

$

192,417

$

291,888

$

23

$

140,308

$

641,984

 

 

Net income

 

 

 

 

 

 

51,234

 

 

 

23,358

 

74,592

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

(4)

 

 

 

(4)

 

 

Cash dividends paid to parent by MGE

 

 

 

 

 

 

(50,000)

 

 

 

 

 

(50,000)

 

 

Dividend in kind to parent

 

 

 

 

 

 

(15,822)

 

 

 

 

 

(15,822)

 

 

Equity contribution received by

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

1,598

 

1,598

 

 

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(24,113)

 

(24,113)

 

 

Deconsolidation of noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(25,486)

 

(25,486)

 

 

Ending balance - December 31, 2016

17,348

$

17,348

$

192,417

$

277,300

$

19

$

115,665

$

602,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

49,835

 

 

 

43,237

 

93,072

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

(47)

 

 

 

(47)

 

 

Cash dividends paid to parent by MGE

 

 

 

 

 

 

(45,000)

 

 

 

 

 

(45,000)

 

 

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(18,000)

 

(18,000)

 

 

Ending balance - December 31, 2017

17,348

$

17,348

$

192,417

$

282,135

$

(28)

$

140,902

$

632,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of new accounting principle

 

 

 

 

 

 

(28)

 

28

 

 

 

-

 

 

Beginning balance - adjusted

 

 

 

 

 

 

282,107

 

-

 

 

 

632,774

 

 

Net income

 

 

 

 

 

 

56,484

 

 

 

22,552

 

79,036

 

 

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(22,000)

 

(22,000)

 

 

Ending balance - December 31, 2018

17,348

$

17,348

$

192,417

$

338,591

$

-

$

141,454

$

689,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.

 




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Notes to Consolidated Financial Statements

December 31, 2018, 2017, and 2016


This report is a combined report of MGE Energy and MGE. The notes to the consolidated financial statements that follow include consolidated MGE Energy footnotes and certain footnotes related to MGE as signified below.


1.

Summary of Significant Accounting Policies.


a.

Basis of Presentation - MGE Energy and MGE.


The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), which give recognition to the rate making accounting policies for regulated operations prescribed by the regulatory authorities having jurisdiction, principally the PSCW and FERC. MGE's accounting records conform to the FERC uniform system of accounts.


b.

Principles of Consolidation - MGE Energy and MGE.


MGE, a wholly owned subsidiary of MGE Energy, is a regulated electric and gas utility headquartered in Madison, Wisconsin. MGE Energy and MGE consolidate all majority owned subsidiaries in which they have a controlling influence.


Additional wholly owned subsidiaries of MGE Energy include CWDC, MAGAEL, MGE Power, MGE State Energy Services, MGE Services, MGE Transco, and MGEE Transco. CWDC owns 100% of North Mendota, a subsidiary created to serve as a development entity for property. MGE Power owns 100% of MGE Power Elm Road and MGE Power West Campus. MGE Power and its subsidiaries are part of MGE Energy's nonregulated energy operations, which were formed to own and lease electric generation projects to assist MGE. MGE Transco and MGEE Transco are nonregulated entities formed to manage the investments in ATC and ATC Holdco, respectively. On December 1, 2016, MGE's ownership interest in MGE Transco was transferred to MGE Energy. See Footnote 6 for further discussion of the transfer of MGE's investment in MGE Transco.


MGE Energy and MGE consolidate variable interest entities (VIEs) for which it is the primary beneficiary. Variable interest entities are legal entities that possess any of the following characteristics: equity investors who have an insufficient amount of equity at risk to finance their activities, equity owners who do not have the power to direct the significant activities of the entity (or have voting rights that are disproportionate to their ownership interest), or equity holders who do not receive expected losses or returns significant to the VIE. If MGE Energy or MGE is not the primary beneficiary and an ownership interest is held, the VIE is accounted for under the equity method of accounting. When assessing the determination of the primary beneficiary, all relevant facts and circumstances are considered, including: the power, through voting or similar rights, to direct the activities of the VIE that most significantly impact the VIE's economic performance and the obligation to absorb the expected losses and/or the right to receive the expected returns of the VIE. Ongoing reassessments of all VIEs are performed to determine if the primary beneficiary status has changed. MGE has consolidated MGE Power Elm Road and MGE Power West Campus. Both entities are VIEs. MGE is considered the primary beneficiary of these entities as a result of contractual agreements. See Footnote 3 for more discussion of these entities.


Prior to December 1, 2016, MGE Transco was jointly owned by MGE Energy and MGE. MGE's ownership interest in MGE Transco declined below a majority in July 2016. As a result of the change in majority ownership, MGE deconsolidated MGE Energy's proportionate share of the equity in MGE Transco. See Footnote 20 for further discussion regarding the deconsolidation of noncontrolling interest.


The consolidated financial statements reflect the application of certain accounting policies described in this note. All intercompany accounts and transactions have been eliminated in consolidation.


c.

Use of Estimates - MGE Energy and MGE.


In order to prepare consolidated financial statements in conformity with GAAP, management must make estimates and assumptions. These estimates could affect reported amounts of assets, liabilities, and disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from management's estimates.




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d.

Cash, Cash Equivalents, and Restricted Cash – MGE Energy and MGE.


The following table presents the components of total cash, cash equivalents, and restricted cash on the consolidated balance sheets.


 

(In thousands)

 

MGE Energy

 

MGE

 

 

As of December 31,

 

2018

 

2017

 

2018

 

2017

 

 

Cash and cash equivalents

$

83,102

$

107,952

$

4,843

$

5,951

 

 

Restricted cash

 

634

 

1,635

 

634

 

1,635

 

 

Receivable - margin account

 

1,193

 

2,507

 

1,193

 

2,507

 

 

Cash, cash equivalents, and restricted cash

$

84,929

$

112,094

$

6,670

$

10,093

 


Cash Equivalents

MGE Energy and MGE consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.


Restricted Cash

MGE has certain cash accounts that are restricted to uses other than current operations and designated for a specific purpose. MGE's restricted cash accounts include cash held by trustees for certain employee benefits and cash deposits held by third parties. These are included in "Other current assets" on the consolidated balance sheets.


Receivable – Margin Account

Cash amounts held by counterparties as margin collateral for certain financial transactions are recorded as Receivable – margin account in "Other current assets" on the consolidated balance sheets. The costs being hedged are fuel for electric generation, purchased power, and cost of gas sold.


Retrospective adjustments to cash flow amounts on MGE Energy's and MGE's consolidated statements of cash flows in accordance with the adoption of ASU 2016-18, Restricted Cash for the years ended December 31, were as follows:


 

(In thousands)

 

2017

 

2016

 

 

Cash provided by operating activities

$

(1,618)

$

351

 

 

Cash used for investing activities

 

86

 

13

 

 

Change in cash, cash equivalents, and restricted cash

 

(1,532)

 

364

 

 

Cash, cash equivalents, and restricted cash at beginning of period

 

5,674

 

5,310

 

 

Cash, cash equivalents, and restricted cash at end of period

$

4,142

$

5,674

 


e.

Trade Receivables, Allowance for Doubtful Accounts, and Concentration Risk - MGE Energy and MGE.


Trade accounts receivable are recorded at the invoiced amount and do not bear interest. However, a 1% late payment charge is recorded on all receivables unpaid after the due date. The allowance for doubtful accounts associated with these receivables represents our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine our allowance for doubtful accounts based on historical write-off experience, regional economic data, and review of the accounts receivable aging. MGE manages this concentration and the related credit risk through its credit and collection policies, which are consistent with state regulatory requirements.


f.

Inventories - MGE Energy and MGE.


Inventories consist of natural gas in storage, fuel for electric generation, materials and supplies, and renewable energy credits (RECs). MGE values natural gas in storage, fuel for electric generation, and materials and supplies using average cost.


REC allowances are included in "Materials and supplies" on the consolidated balance sheets and are recorded based on specific identification. These allowances are charged to purchase power expense as they are used in operations. MGE's REC allowance balance as of December 31, 2018 and 2017, was $0.7 million and $0.5 million, respectively.




63




 



g.

Chattel Paper Agreements - MGE Energy and MGE.


MGE makes available to qualifying customers a financing program for the purchase and installation of energy-related equipment that will provide more efficient use of utility service at the customer's property. The energy-related equipment installed at the customer sites is used to secure the customer loans. MGE is a party to a chattel paper purchase agreement with a financial institution under which MGE can sell, transfer, and assign to the financial institution an undivided interest with recourse, in up to $10.0 million of the financing program receivables, until July 31, 2019. The length of the MGE guarantee to the financial institution varies from one to ten years depending on the term of the underlying customer loan. The loan balances outstanding as of December 31, 2018, approximates the fair value of the energy-related equipment acting as collateral. MGE accounts for these agreements as secured borrowings.


As of December 31, 2018, the remaining contractual maturities of the chattel paper agreements were as follows:


 

(In thousands)

 

2019

 

2020

 

2021

 

2022

 

2023

 

Thereafter

 

 

Repurchase-to-Maturity Transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Loans

$

396

$

407

$

392

$

354

$

510

$

122

 


h.

Regulatory Assets and Liabilities - MGE Energy and MGE.


Regulatory assets and regulatory liabilities are recorded consistent with regulatory treatment. Regulatory assets represent costs which are deferred due to the probable future recovery from customers through regulated rates. Regulatory liabilities represent the excess recovery of costs or accrued credits which were deferred because MGE believes it is probable such amounts will be returned to customers through future regulated rates. Regulatory assets and liabilities are amortized in the consolidated statements of income consistent with the recovery or refund included in customer rates. MGE believes that it is probable that its recorded regulatory assets and liabilities will be recovered and refunded, respectively, in future rates. See Footnote 7 for further information.


i.

Debt Issuance Costs - MGE Energy and MGE.


Premiums, discounts, and expenses incurred with the issuance of outstanding long-term debt are amortized over the life of the debt issue. Any call premiums or unamortized expenses associated with refinancing higher-cost debt obligations used to finance utility-regulated assets and operations are amortized consistent with regulatory treatment of those items. These costs are included as a direct reduction to the related debt liability on the consolidated balance sheets.


j.

Property, Plant, and Equipment - MGE Energy and MGE.


Property, plant, and equipment is recorded at original cost. Cost includes indirect costs consisting of payroll taxes, pensions, postretirement benefits, other fringe benefits, and administrative and general costs. Also, included in the cost is AFUDC for utility property and capitalized interest for nonregulated property. Additions for significant replacements of property are charged to property, plant, and equipment at cost; and minor items are charged to maintenance expense. Depreciation rates on utility property are approved by the PSCW, based on the estimated economic lives of property, and include estimates for salvage value and removal costs. Removal costs of utility property, less any salvage value, are adjusted through regulatory liabilities. Depreciation rates on nonregulated property are based on the estimated economic lives of the property. See Footnote 4 for further information.


Provisions at composite straight-line depreciation rates approximate the following percentages for the cost of depreciable property:


 

 

2018

 

2017

 

2016

 

 

 

Electric(a)(b)

2.9 %

 

3.0 %

 

2.5 %

 

 

 

Gas(a)

2.1 %

 

2.1 %

 

2.1 %

 

 

 

Nonregulated

2.3 %

 

2.3 %

 

2.3 %

 

 


(a)

In December 2015, the PSCW approved new depreciation rates, which were implemented and became effective as of January 1, 2016.


(b)

In September 2016, the PSCW approved new depreciation rates for Columbia effective January 1, 2017.




64




 



k.

Asset Retirement Obligations - MGE Energy and MGE.


A liability is recorded for the fair value of an asset retirement obligation (ARO) to be recognized in the period in which it is incurred if it can be reasonably estimated. The offsetting associated asset retirement costs are capitalized as a long-lived asset and depreciated over the asset's useful life. The expected present value technique used to calculate the fair value of ARO liabilities includes assumptions about costs, probabilities, settlement dates, interest accretion, and inflation. Revisions to the assumptions, including the timing or amount of expected asset retirement costs, could result in increases or decreases to the AROs. All asset retirement obligations are recorded as "Other long-term liabilities" on the consolidated balance sheets. MGE has regulatory treatment and recognizes regulatory assets or liabilities for the timing differences between when it recovers legal AROs in rates and when it would recognize these costs. See Footnote 18 for further information.


l.

Repairs and Maintenance Expense - MGE Energy and MGE.


MGE utilizes the direct expensing method for planned major maintenance projects. Under this method, MGE expenses all costs associated with major planned maintenance activities as incurred.


m.

Purchased Gas Adjustment Clause - MGE Energy and MGE.


MGE's natural gas rates are subject to a fuel adjustment clause designed to recover or refund the difference between the actual cost of purchased gas and the amount included in rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective monthly adjustments to rates. As of December 31, 2018 and 2017, MGE had over collected $1.2 million and $1.4 million, respectively. These amounts are included in "Regulatory liabilities – current" on the consolidated balance sheets.


n.

Revenue Recognition - MGE Energy and MGE.


Operating revenues are recorded as service is rendered or energy is delivered to customers. Meters are read on a systematic basis throughout the month based on established meter-reading schedules. At the end of the month, MGE accrues an estimate for the unbilled amount of energy delivered to customers. The unbilled revenue estimate is based on daily system demand volumes, weather factors, estimated line losses, estimated customer usage by class, and applicable customer rates. See Footnote 19 for further information.


o.

Utility Cost Recovery - MGE Energy and MGE.


MGE's tariff rates include a provision for fuel cost recovery. The PSCW allows Wisconsin utilities to defer electric fuel-related costs, less excess revenues, that fall outside a symmetrical cost tolerance band. Any over/under recovery of the actual costs in a given year is determined in the following year and is then reflected in future billings to electric retail customers. Over-collection of fuel-related costs that are outside the approved range will be recognized as a reduction of revenue. Prior to adoption of the new revenue recognition guidance, effective January 1, 2018, over-collected fuel-related costs were reflected in "Purchased power" expense. Under-collection of these costs will continue to be recognized in "Purchased power" expense in the consolidated statements of income of MGE Energy and MGE. The cumulative effects of these deferred amounts will be recorded in "Regulatory assets" or "Regulatory liabilities" on the consolidated balance sheets of MGE Energy and MGE until they are reflected in future billings to customers. See Footnote 8.b. for further information.


p.

Regional Transmission Organizations - MGE Energy and MGE.


MGE reports on a net basis transactions on the MISO markets in which it buys and sells power within the same hour to meet electric energy delivery requirements. This treatment resulted in a $90.3 million, a $87.9 million, and a $77.2 million reduction to sales to the market and purchase power expense for MISO markets for the years ended December 31, 2018, 2017, and 2016, respectively.


q.

Allowance for Funds Used During Construction - MGE Energy and MGE.


Allowance for funds used during construction is included in utility plant accounts and represents the cost of borrowed funds used during plant construction and a return on shareholder's capital used for construction purposes. In the consolidated income statements, the cost of borrowed funds (AFUDC-debt) is presented as



65




 



an offset to "Interest expense" and the return on shareholder's capital (AFUDC-equity funds) is shown as an item within "Other income." For both 2018 and 2017, as approved by the PSCW, MGE capitalized AFUDC-debt and equity on 50% of applicable average construction work in progress at 7.87%. For 2016, as approved by the PSCW, MGE capitalized AFUDC-debt and equity on 50% of applicable average construction work in progress at 7.93%. For 2018, 2017, and 2016, MGE received specific approval to recover 100% AFUDC on certain environmental costs for Columbia. For 2018 and 2017, MGE received specific approval to recover 100% AFUDC on certain costs for the Saratoga Wind Farm project. These amounts are recovered under the ratemaking process over the service lives of the related properties.


r.

Investments - MGE Energy and MGE.


Investments in limited liability companies that have specific ownership accounts in which MGE Energy or MGE's ownership interest is more than minor and are considered to have significant influence are accounted for using the equity method. All other investments are carried at fair value, with changes in fair value recognized through net income. See Footnote 6 for further information.


s.

Capitalized Software Costs - MGE Energy and MGE.


Property, plant, and equipment includes the net book value of capitalized costs of internal use software totaling $15.1 million and $11.1 million as of December 31, 2018 and 2017, respectively. During 2018, 2017, and 2016, MGE recorded $4.7 million, $3.3 million, and $3.0 million, respectively, of amortization expense related to these costs. These costs are amortized on a straight-line basis over the estimated useful lives of the assets. For internal use software, the useful lives range from five to fifteen years.


t.

Capitalized Software Assets – Hosting Arrangements – MGE Energy and MGE.


The FASB issued authoritative guidance of accounting for software in a hosted arrangement. MGE Energy and MGE adopted the authoritative guidance as of September 30, 2018. See Footnote 2 for further information.


The net book value of capitalized costs of internal use software incurred in a hosting arrangement was $9.2 million and $0.5 million as of December 31, 2018 and 2017, respectively. During 2018, MGE implemented an enterprise resource planning platform which was placed in service as of January 1, 2019. As of December 31, 2018, accumulated amortization expense was $0.1 million. There was no accumulated amortization expense as of December 31, 2017. Capitalized software assets for hosted arrangements and the related accumulated amortization expense are recorded in "Other deferred assets and other" on the consolidated balance sheets.


During 2018, MGE recorded $0.1 million of amortization expense related to software assets for hosted arrangements. During 2017 and 2016, no amortization expense was recorded. These costs are recognized in "Other operations and maintenance" expense in the consolidated statements of income and are amortized on a straight-line basis over the estimated useful lives of the assets. Software assets for hosted arrangements have useful lives ranging from five to ten years.


u.

Impairment of Long-Lived Assets - MGE Energy and MGE.


MGE reviews plant and equipment and other property for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. MGE's policy for determining when long-lived assets are impaired is to recognize an impairment loss if the sum of the expected future cash flows (undiscounted and without interest charges) from an asset are less than the carrying amount of that asset. If an impairment loss is recognized, the amount that will be recorded will be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. There was no impairment of long-lived assets as of December 31, 2018, 2017, and 2016.


v.

Income Taxes and Excise Taxes - MGE Energy and MGE.


Income taxes

Under the liability method, income taxes are deferred for all temporary differences between pretax financial and taxable income and between the book and tax basis of assets and liabilities using the tax rates scheduled by law to be in effect when the temporary differences reverse. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. A valuation allowance is recorded for those benefits that do not meet this criterion.




66




 



Accounting for uncertainty in income taxes applies to all tax positions and requires a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. The threshold is defined for recognizing tax return positions in the financial statements as "more likely than not" that the position is sustainable, based on its merits. Subsequent recognition, derecognition, and measurement is based on management's best judgment given the facts, circumstances, and information available at the reporting date.


Regulatory and accounting principles have resulted in a regulatory liability related to income taxes. Excess deferred income taxes result from past taxes provided at rates higher than current rates. The income tax regulatory liability and deferred investment tax credit reflect the revenue requirement associated with the return of these tax benefits to customers.


Investment tax credits from regulated operations are amortized over related property service lives.


Excise taxes

MGE Energy, through its utility operations, pays a state license fee tax in lieu of property taxes on property used in utility operations. License fee tax is calculated as a percentage of adjusted operating revenues of the prior year. The electric tax rate is 3.19% for retail sales and 1.59% for sales of electricity for resale by the purchaser. The tax rate on sales of natural gas is 0.97%. The tax is required to be estimated and prepaid in the year prior to its computation and expensing. License fee tax expense, included in "Other general taxes," was $14.4 million, $14.1 million, and $14.5 million for the years ended December 31, 2018, 2017, and 2016, respectively.


Operating income taxes, including tax credits and license fee tax, are included in rates for utility related items.


w.

Share-Based Compensation - MGE Energy and MGE.


Under two separate incentive plans, eligible participants, including employees and non-employee directors, may receive performance units that entitle the holder to receive a cash payment equal to the value of a designated number of shares of MGE Energy's common stock, plus dividend equivalent payments thereon, at the end of the set performance period set in the award. Under the plans, these awards are subject to a prescribed vesting schedule and must be settled in cash. Accordingly, no new shares of common stock are issued in connection with the plans.


On the grant, date the cost of the employee or director services received in exchange for a performance unit award is measured based on the current market value of MGE Energy common stock. The fair value of the awards is re-measured quarterly through the settlement date. Changes in fair value as well as the original grant are recognized as compensation cost.


See Footnote 16 for additional information regarding the plans.


x.

Derivative and Hedging Instruments - MGE Energy and MGE.


As part of regular operations, MGE enters into contracts, including options, swaps, futures, forwards, and other contractual commitments, to manage its exposure to commodity prices. MGE recognizes all derivatives in the consolidated balance sheets at fair value, with changes in the fair value of derivative instruments to be recorded in current earnings or deferred in accumulated other comprehensive income (loss), depending on whether a derivative is designated as, and is effective as, a hedge and on the type of hedge transaction. Derivative activities are in accordance with the company's risk management policy.


If the derivative qualifies for regulatory deferral, the derivatives are marked to fair value and are offset with a corresponding regulatory asset or liability. Cash flows from such derivative instruments are classified on a basis consistent with the nature of the underlying hedged item.




67




 



2.

New Accounting Standards - MGE Energy and MGE.


a.

Recently Adopted


Revenue from Contracts with Customers.


The FASB issued authoritative guidance within the codification's Revenue Recognition topic that provides guidance on the recognition, measurement, and disclosure of revenue from contracts with customers. The new standard establishes a five-step model for recognizing and measuring revenue from contracts with customers and replaces existing guidance on revenue recognition. The underlying principle is that an entity will recognize revenue to present the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.


This authoritative guidance became effective January 1, 2018, and MGE Energy and MGE adopted the standard upon the effective date. Adoption of this standard was permitted under one of two methods: the full retrospective method or the modified retrospective method. MGE Energy and MGE implemented the standard using the modified retrospective method. The cumulative impact of this guidance on our financial statements is not material, except for additional footnote disclosures. See Footnote 19 for further information.


Financial Instruments.


In January 2016, the FASB issued authoritative guidance within the codification's Financial Instruments topic that provides guidance on the recognition and measurement of financial instruments. This authoritative guidance became effective January 1, 2018, and required equity investments to be measured at fair value with changes in fair value recognized in net income rather than in other comprehensive income. As a result of this guidance, MGE Energy and MGE will no longer have other comprehensive income related to equity investments. This standard was applied using a modified retrospective approach, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of the fiscal year of adoption. As of January 1, 2018, MGE Energy recorded a $0.4 million increase in retained earnings and a corresponding decrease in accumulated other comprehensive income related to equity investments within the scope of this standard. As of January 1, 2018, MGE recorded less than a $0.1 million decrease in retained earnings and a corresponding increase in accumulated other comprehensive income related to equity investments within the scope of this standard.


Restricted Cash.


In November 2016, the FASB issued authoritative guidance within the codification's Statement of Cash Flows topic that provides guidance on the classification and presentation of changes in restricted cash within the statement of cash flows. Under the new guidance, reporting entities are required to explain the changes in the total of restricted and unrestricted cash and cash equivalents when reconciling the beginning and ending balances on the statement of cash flows. Prior to the authoritative guidance, changes in restricted cash were presented as either cash flows from operating, investing, or financing activities within the statement of cash flows based on the nature of the restriction. Reporting entities are now also required to provide a reconciliation from the balance sheet to the statement of cash flows and disclose the nature of the restrictions of cash. This authoritative guidance became effective January 1, 2018. Upon the effective date, MGE Energy and MGE changed the presentation of restricted cash on the consolidated statements of cash flows to reflect the new accounting guidance retrospectively for all periods presented. See Footnote 1.d. for further information.


Pension and Other Postretirement Benefits.


In March 2017, the FASB issued authoritative guidance within the codification's Compensation – Retirement Benefits topic that provides guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost (together, net benefit cost). This authoritative guidance became effective January 1, 2018. Under the new guidance, the service cost component of net benefit cost is required to be recorded in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of income from operations. A practical expedient within the standard permits an employer to use the amounts disclosed in its pension



68




 



and other postretirement benefit plan footnote for prior comparative periods as the estimation basis for applying the retrospective presentation requirements. MGE Energy and MGE have elected to apply the practical expedient. Upon the effective date, MGE Energy and MGE changed the presentation of net benefit cost on the consolidated statements of income to reflect the new accounting guidance retrospectively to all periods presented. For both MGE Energy and MGE, "Other operations and maintenance expense" increased and "Other income, net" increased $4.1 million and $4.3 million for the years ended December 31, 2017 and 2016, respectively. The standard also only allows the service cost component to be eligible for capitalization prospectively from the effective date of the pronouncement (whereas under previous GAAP all components of net benefit cost were eligible for capitalization). See Footnote 13 for further information.


Internal-Use Software – Hosting Arrangements.


In August 2018, the FASB issued amended authoritative guidance within the codification's Intangibles – Goodwill and Other – Internal-Use Software topic. The amended authoritative guidance aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement (hosting arrangement) that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangement that include an internal-use software license). Costs for implementation activities in the development stage are capitalized depending on the nature of the costs and presented in the same line item on the balance sheet as amounts prepaid for the hosted service. Costs incurred during the preliminary and postimplementation stages are expensed as the activities are performed. The costs capitalized as part of implementation stage should be expensed over the term of the hosting contract, which includes any renewable option periods, and presented in the same line on the income statement as the fees for the associated hosted service.


This amended authoritative guidance will become effective January 1, 2020. Early adoption of the amendment is permitted, including adoption in any interim period. Entities can choose to adopt the new guidance either prospectively, for eligible costs incurred on or after the date this guidance is first applied, or retrospectively. MGE Energy and MGE early adopted these amendments retrospectively as of September 30, 2018. The cumulative impact of this guidance on our financial statement was not material, except for additional footnote disclosures. See Footnote 1.t. for disclosures required under this standard.


b.

Recently Issued


Leases.


In February 2016, the FASB issued authoritative guidance within the codification's Leases topic that provides guidance on the classification, recognition, measurement, and disclosure of leases. The new leasing standard establishes that a lease conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Under the new guidance, lessees will be required to recognize all leases with terms greater than one year, including operating leases, on the balance sheet by recording a right-of-use asset and lease liability. Prior to the authoritative guidance, only capital leases were recognized on the balance sheet by lessees. The new accounting guidance, as applied by lessors, is materially consistent with current GAAP. In January 2018, the FASB issued authoritative guidance which provided an optional practical expedient to grandfather the accounting for existing and expired land easements not accounted for as a lease under the new authoritative guidance. MGE Energy and MGE adopted this practical expedient.


Management has completed a bottoms-up approach to analyze the impact of the standard on our lease portfolio. MGE Energy and MGE have reviewed current accounting policies and procedures to identify potential differences in accounting treatment that would result from applying the requirements of the new standard to our existing lease portfolio. In addition, we identified appropriate changes to our business processes, systems, and controls to support recognition and disclosure requirements under the new standard. This authoritative guidance became effective January 1, 2019. MGE Energy and MGE adopted the standard upon the effective date. In compliance with authorized transition guidance, MGE Energy and MGE began applying the new standard on January 1, 2019, but will continue to present periods prior to that date according to the previous authoritative standard. MGE Energy and MGE expect to recognize approximately $15-$17 million additional lease assets and liabilities under the new standard. We do not expect that it will have a material impact on our consolidated net income or cash flows.




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3.

Variable Interest Entities - MGE Energy and MGE.


a.

Consolidated Variable Interest Entities.


MGE Power Elm Road and MGE Power West Campus are not subsidiaries of MGE; but, they have been consolidated in the financial statements of MGE. MGE Power Elm Road and MGE Power West Campus were created for the purpose of owning new generating assets. Power Elm Road's sole principal asset is an undivided ownership interest in two coal-fired generating plants (the Elm Road Units) located in Oak Creek, Wisconsin, which it leases to MGE pursuant to long-term leases. Power West Campus's sole principal asset is the WCCF, which it leases to MGE pursuant to a long-term lease. Based on the nature and terms of the contractual agreements, MGE is expected to absorb a majority of the expected losses or residual value associated with its ownership of MGE Power Elm Road and Power West Campus and therefore holds a variable interest despite the absence of an equity interest.


In accordance with applicable accounting guidance, MGE Energy and MGE consolidate VIEs of which they are the primary beneficiary. MGE has the power to direct the activities that most significantly impact both the Elm Road Units' and the WCCF's economic performance and is also the party most closely associated with MGE Power Elm Road and MGE Power West Campus. As a result, MGE is the primary beneficiary. As of December 31, MGE has included the following significant accounts on its consolidated balance sheets related to its interest in these VIEs:


 

 

 

MGE Power Elm Road

 

 

MGE Power West Campus

 

 

(In thousands)

 

2018

 

2017

 

 

2018

 

2017

 

 

Property, plant, and equipment, net

$

173,464

$

176,002

 

$

81,273

$

80,282

 

 

Construction work in progress

 

530

 

1,225

 

 

478

 

610

 

 

Affiliate receivables

 

-

 

-

 

 

3,707

 

4,236

 

 

Deferred income taxes

 

30,595

 

29,256

 

 

14,222

 

13,795

 

 

Long-term debt(a)

 

56,806

 

59,416

 

 

41,496

 

43,262

 

 

Noncontrolling interest

 

97,519

 

97,635

 

 

43,935

 

43,267

 


(a)

MGE Power Elm Road's long-term debt includes debt issuance costs of $0.5 million and $0.6 million as of December 31, 2018 and 2017, respectively. The debt is secured by a collateral assignment of lease payments that MGE makes to MGE Power Elm Road for use of the Elm Road Units pursuant to the related long-term leases. MGE Power West Campus's long-term debt includes debt issuance costs of $0.1 million as of December 31, 2018 and 2017. The debt is secured by a collateral assignment of lease payments that MGE makes to MGE Power West Campus for use of the cogeneration facility pursuant to the long-term lease. See Footnote 10 for further information on the long-term debt securities.


MGE has been and will continue to recover lease payments made to MGE Power Elm Road and MGE Power West Campus in rates.


b.

Other Variable Interest Entities.


MGE has a variable interest in entities through purchase power agreements relating to purchased energy from the facilities covered by the agreements. As of December 31, 2018 and 2017, MGE had 11 megawatts and 61 megawatts, respectively, of capacity available under these agreements. MGE evaluated the variable interest entities for possible consolidation. The interest holder is considered the primary beneficiary of the entity and is required to consolidate the entity if the interest holder has the power to direct the activities that most significantly impact the economics of the variable interest entity. MGE examined qualitative factors such as the length of the remaining term of the contracts compared with the remaining lives of the plants, who has the power to direct the operations and maintenance of the facilities, and other factors, and determined MGE is not the primary beneficiary of the variable interest entities. There is not a significant potential exposure to loss as a result of involvement with these variable interest entities.




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4.

Property, Plant, and Equipment - MGE Energy and MGE.


Property, plant, and equipment consisted of the following as of December 31:


 

 

 

MGE Energy

 

 

MGE

 

 

(In thousands)

 

2018

 

2017

 

 

2018

 

2017

 

 

Utility:

 

 

 

 

 

 

 

 

 

 

 

Electric(a)(b)

$

1,310,421

$

1,209,336

 

$

1,310,438

$

1,209,353

 

 

Gas

 

442,581

 

415,542

 

 

442,593

 

415,553

 

 

Total utility plant

 

1,753,002

 

1,624,878

 

 

1,753,031

 

1,624,906

 

 

Less: Accumulated depreciation and amortization(a)(b)

 

639,486

 

599,469

 

 

639,486

 

599,469

 

 

In-service utility plant, net

 

1,113,516

 

1,025,409

 

 

1,113,545

 

1,025,437

 

 

Nonregulated:

 

 

 

 

 

 

 

 

 

 

 

Nonregulated

 

322,855

 

319,611

 

 

322,855

 

319,611

 

 

Less: Accumulated depreciation and amortization

 

66,605

 

61,707

 

 

66,605

 

61,707

 

 

In-service nonregulated plant, net

 

256,250

 

257,904

 

 

256,250

 

257,904

 

 

Construction work in progress:

 

 

 

 

 

 

 

 

 

 

 

Utility construction work in progress(a)(c)

 

138,663

 

56,208

 

 

138,663

 

56,208

 

 

Nonregulated construction work in progress

 

1,008

 

1,836

 

 

1,008

 

1,836

 

 

Total property, plant, and equipment

$

1,509,437

$

1,341,357

 

$

1,509,466

$

1,341,385

 


(a)

As of December 31, 2018 and 2017, MGE has classified $3.1 million and $8.8 million, respectively, of Columbia assets as held-for-sale on the consolidated balance sheets related to the partial sale of plant assets to WPL. See Footnote 5.a. for further discussion.


(b)

In April 2018, MGE, along with two other utilities, purchased the Forward Wind Energy Center (Forward Wind), which consists of 86 wind turbines located in Wisconsin. The aggregate purchase price was approximately $174 million, of which MGE's proportionate share is 12.8%, or approximately $23 million.


(c)

In December 2017, the PSCW authorized construction of a 66 MW wind farm, consisting of 33 turbines, located near Saratoga, Iowa. MGE received specific approval to recover 100% AFUDC on the project. As of December 31, 2018, MGE has incurred $95.8 million of capital expenditures. After tax, MGE has recognized $2.5 million in AFUDC equity related to this project for the year ended December 31, 2018. Construction of the project is expected to be completed in February 2019.


MGE's utility plant is subject to the lien of its Indenture of Mortgage and Deed of Trust. As of December 31, 2018 and 2017, there was $1.2 million of bonds outstanding under that indenture. See Footnote 10 for further discussion of the mortgage indenture.


5.

Joint Plant Ownership - MGE Energy and MGE.


a.

Columbia.


MGE and two other utilities jointly own Columbia, a coal-fired generating facility located in Portage, Wisconsin, which, as of December 31, 2018, accounts for 29% (219 MW) of MGE's net summer rated capacity. Power from this facility is shared in proportion to each company's ownership interest. As of December 31, 2018, MGE had a 19.4% ownership interest in Columbia. The other owners are WPL, which operates Columbia, and WPSC. MGE's share of fuel, operating, and maintenance expenses for Columbia was $36.5 million, $36.2 million, and $39.5 million for the years ended December 31, 2018, 2017, and 2016, respectively.


Each owner provides its own financing and reflects its respective portion of facilities and operating costs in its financial statements. MGE's interest in Columbia's gross utility plant in service, and the related accumulated depreciation reserves as of December 31 were as follows:


 

(In thousands)

 

2018

 

2017

 

 

Utility plant

$

292,157

$

274,450

 

 

Accumulated depreciation

 

(94,766)

 

(87,144)

 

 

Property, plant, and equipment, net

 

197,391

 

187,306

 

 

Construction work in progress

 

2,021

 

20,382

 

 

Total property, plant, and equipment

$

199,412

$

207,688

 


In 2016, MGE and WPL negotiated an amendment to the existing Columbia joint operating agreement that has been approved by the PSCW. Under the terms of the amendments, MGE has reduced its obligation to pay certain capital expenditures (other than SCR-related expenditures) at Columbia in exchange for a



71




 



proportional reduction in MGE's ownership in Columbia. On January 1 of each year from 2017 through 2019 and then on June 1, 2020, the ownership percentage is adjusted through a partial sale based on the amount of capital expenditures foregone. In June 2017, the FERC approved the ownership transfer in Columbia, effective January 1, 2017.


During 2018 and 2017, MGE accrued $3.1 million and $8.8 million, respectively, of foregone capital expenditures as part of the ownership transfer agreement with WPL. As of December 31, 2018 and 2017, MGE classified $3.1 million and $8.8 million, respectively, of Columbia assets as held-for-sale on the consolidated balance sheets. In January 2018, MGE reduced its ownership interest in Columbia from 20.4% to 19.4% and in January 2019, MGE further reduced its ownership to 19.1% through the partial sale of plant assets to WPL.


b.

Elm Road.


MGE Power Elm Road owns an 8.33% ownership interest in each of two 615 MW coal-fired generating units in Oak Creek, Wisconsin, which, as of December 31, 2018, accounts for 14% (106 MW) of MGE's net summer rated capacity. Unit 1 entered commercial operation on February 2, 2010. Unit 2 entered commercial operation on January 12, 2011. MGE Power Elm Road's sole principal asset is that ownership interest in those generating units. MGE Power Elm Road's interest in the Elm Road Units is leased to MGE pursuant to long-term leases.


The remainder of the ownership interest in the Elm Road Units is held by two other entities, one of which is also responsible for the Units' operation. Each owner provides its own financing and reflects its respective portion of the facility and costs in its financial statements. MGE's share of fuel, operating, and maintenance expenses for the Elm Road Units was $17.6 million, $17.3 million, and $21.2 million for the years ended December 31, 2018, 2017, and 2016, respectively.


MGE Power Elm Road's interest in the portion of the Elm Road Units in-service and the related accumulated depreciation reserves as of December 31 were as follows:


 

(In thousands)

 

2018

 

2017

 

 

Nonregulated plant

$

207,361

$

206,063

 

 

Accumulated depreciation

 

(33,897)

 

(30,061)

 

 

Property, plant, and equipment, net

 

173,464

 

176,002

 

 

Construction work in progress

 

530

 

1,225

 

 

Total property, plant, and equipment

$

173,994

$

177,227

 


c.

Forward Wind.


In April 2018, MGE, along with two other utilities, purchased the Forward Wind Energy Center (Forward Wind), which consists of 86 wind turbines located in Wisconsin. The aggregate purchase price was approximately $174 million, of which MGE's proportionate share is 12.8%, or approximately $23 million. The purchase of Forward Wind replaced an existing purchase power agreement, under which MGE purchased 12.8% of the facility's energy output. MGE's proportionate share of Forward Wind's total capacity is 18 MW.


Each owner provides its own financing and reflects its respective portion of facilities and operating costs in its financial statements. MGE's share of operating and maintenance expenses for Forward Wind was $0.5 million for the year ended December 31, 2018, which was deferred in a regulatory asset account and will be recovered in future rates. MGE's interest in the portion of Forward Wind's utility plant in service and the related accumulated depreciation reserves as of December 31 were as follows:


 

(In thousands)

 

2018

 

 

Nonregulated plant

$

33,929

 

 

Accumulated depreciation

 

(12,530)

 

 

Property, plant, and equipment, net

 

21,399

 

 

Construction work in progress

 

67

 

 

Total property, plant, and equipment

$

21,466

 




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d.

WCCF.


MGE Power West Campus and the UW jointly own the West Campus Cogeneration Facility (WCCF) located on the UW campus in Madison, Wisconsin. MGE Power West Campus owns 55% of the facility and the UW owns 45% of the facility. The UW owns a controlling interest in the chilled-water and steam plants, which are used to meet the growing needs for air-conditioning and steam-heat capacity for the UW campus. MGE Power West Campus owns a controlling interest in the electric generation plant, which is leased and operated by MGE.


Each owner provides its own financing and reflects its respective portion of the facility and operating costs in its financial statements. MGE Power West Campus' interest in WCCF and the related accumulated depreciation reserves as of December 31 were as follows:


 

(In thousands)

 

2018

 

2017

 

 

Nonregulated plant

$

113,328

$

111,386

 

 

Accumulated depreciation

 

(32,055)

 

(31,104)

 

 

Property, plant, and equipment, net

 

81,273

 

80,282

 

 

Construction work in progress

 

478

 

610

 

 

Total property, plant, and equipment

$

81,751

$

80,892

 


Operating charges are allocated to the UW based on formulas contained in the operating agreement. Under the provisions of this arrangement, the UW is required to reimburse MGE for their allocated portion of fuel and operating expenses. For the years ended December 31, 2018, 2017, and 2016, the UW allocated share of fuel and operating costs was $6.3 million, $5.3 million, and $5.5 million, respectively.


6.

Investments - MGE Energy and MGE.


a.

Equity Securities, Equity Method Investments, and Other Investments.


 

 

 

MGE Energy

 

 

MGE

 

 

(In thousands)

 

2018

 

2017

 

 

2018

 

2017

 

 

Equity securities(a)

$

9,363

$

7,291

 

$

388

$

409

 

 

Equity method investments:

 

 

 

 

 

 

 

 

 

 

 

    ATC and ATC Holdco(b)

 

66,313

 

59,298

 

 

-

 

-

 

 

    Other

 

26

 

1,128

 

 

-

 

-

 

 

Total equity method investments

 

66,339

 

60,426

 

 

-

 

-

 

 

Other investments

 

2,298

 

55

 

 

-

 

-

 

 

Total

$

78,000

$

67,772

 

$

388

$

409

 


(a)

Reflects modified retrospective application of new authoritative guidance related to Financial Instruments as described in Footnote 2. Prior to January 1, 2018, investments were considered available for sale securities. As of December 31, 2017, MGE Energy had available for sale securities with a cost basis of $6.7 million, gross unrealized gains of $0.7 million, and gross unrealized losses of less than $0.1 million. As of December 31, 2017, MGE had available for sale securities with a cost basis of $0.5 million and gross unrealized losses of less than $0.1 million.


(b)

In December 2017, there was a $20.4 million one-time tax impact related to ATC as a result of the Tax Act. See Footnote 12 for further information.


MGE Energy's and MGE's equity securities represent publicly traded securities and private equity investments in common stock of companies in various industries.


During the years ended December 31, 2018, 2017, and 2016, certain investments were liquidated. As a result of these liquidations, MGE Energy and MGE received the following:


 

 

 

MGE Energy

 

MGE

 

 

(In thousands)

 

2018

 

2017

 

2016

 

2018

 

2017

 

2016

 

 

Cash proceeds

$

960

$

677

$

408

$

3

$

-

$

16

 

 

Gain (loss) on sale

 

476

 

522

 

121

 

3

 

-

 

(8)

 




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b.

ATC and ATC Holdco.


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, which, since December 1, 2016, is owned by MGE Energy. ATC Holdco was formed by several members of ATC, including MGE Energy, to pursue electric transmission development and investments outside of Wisconsin. The ownership interest in ATC Holdco is held by MGEE Transco, a wholly-owned subsidiary of MGE Energy.


MGE Transco and MGEE Transco have accounted for their investment in ATC and ATC Holdco, respectively, under the equity method of accounting. For the years ended December 31, 2018, 2017, and 2016, MGE Transco recorded the following:


 

(In thousands)

 

2018

 

2017

 

2016

 

 

Equity earnings from investment in ATC

$

8,821

$

10,125

$

8,670

 

 

Dividends received from ATC(a)

 

4,611

 

9,078

 

7,926

 

 

Capital contributions to ATC

 

2,841

 

3,551

 

2,486

 


(a)

MGE Transco recorded a $2.3 million and a $2.1 million dividend receivable from ATC as of December 31, 2017 and 2016, respectively. A cash dividend was received in January of each of the proceeding years.


ATC Holdco was formed in December 2016. In the near term, it is expected that ATC Holdco will be pursuing transmission development opportunities that typically have long development and investment lead times before becoming operational. In 2018 and 2017, MGEE Transco recorded capital contributions of $0.3 million and $2.9 million, respectively, to ATC Holdco.


As of December 31, 2018 and 2017, MGE Transco held a 3.6% ownership interest in ATC. As of December 31, 2018 and 2017, MGEE Transco held a 4.4% ownership interest in ATC Holdco.


In June 2016, the PSCW required MGE to transfer its interest in ATC to MGE Energy, which was to be completed by December 31, 2022. The requirement arose in the context of requests for regulatory approvals by several owners of ATC in connection with a reorganization of ATC. MGE's ownership interest in ATC, held through MGE Transco, was transferred net of deferred tax liabilities to MGE Energy by way of a dividend in kind of $15.8 million as of December 1, 2016. As a result of the transfer, MGE's ownership interest in MGE Transco was completely eliminated in favor of MGE Energy. The change had no effect on MGE Energy's consolidated financial statements.


ATC's summarized financial data is as follows:


 

(In thousands)

 

 

 

 

 

 

 

 

Income statement data for the year ended December 31,

 

2018

 

2017

 

2016

 

 

Operating revenues

$

690,510

$

721,672

$

650,806

 

 

Operating expenses

 

(358,703)

 

(346,308)

 

(323,947)

 

 

Other income

 

2,405

 

7,402

 

5,361

 

 

Interest expense, net

 

(110,725)

 

(110,138)

 

(99,464)

 

 

Earnings before members' income taxes

$

223,487

$

272,628

$

232,756

 


 

Balance sheet data as of December 31,

 

2018

 

2017

 

 

Current assets

$

87,250

$

87,730

 

 

Noncurrent assets

 

4,928,793

 

4,598,919

 

 

Total assets

$

5,016,043

$

4,686,649

 

 

 

 

 

 

 

 

 

Current liabilities

$

640,040

$

767,248

 

 

Long-term debt

 

2,013,997

 

1,790,590

 

 

Other noncurrent liabilities

 

295,281

 

240,286

 

 

Members' equity

 

2,066,725

 

1,888,525

 

 

Total members' equity and liabilities

$

5,016,043

$

4,686,649

 


During 2018, 2017, and 2016, MGE recorded $29.0 million, $29.2 million, and $29.1 million, respectively, for transmission services received from ATC. MGE also provides a variety of operational, maintenance, and project management work for ATC, which is reimbursed by ATC. As of December 31, 2018 and 2017, MGE had a receivable due from ATC of $0.1 million and $0.2 million, respectively.



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7.

Regulatory Assets and Liabilities - MGE Energy and MGE.


The following regulatory assets and liabilities are reflected in MGE's consolidated balance sheets as of December 31:


 

(In thousands)

 

 

2018

 

 

2017

 

 

Regulatory Assets

 

 

 

 

 

 

 

 

Asset retirement obligation

 

$

9,199

 

$

8,328

 

 

Conservation costs

 

 

81

 

 

222

 

 

Debt related costs

 

 

9,288

 

 

9,749

 

 

Derivatives

 

 

31,830

 

 

41,958

 

 

Tax recovery related to AFUDC equity

 

 

6,482

 

 

5,497

 

 

Unfunded pension and other postretirement liability

 

 

96,030

 

 

84,342

 

 

Other

 

 

1,991

 

 

359

 

 

    Total Regulatory Assets

 

$

154,901

 

$

150,455

 

 

Regulatory Liabilities

 

 

 

 

 

 

 

 

Deferred fuel savings

 

$

9,504

 

$

4,229

 

 

Elm Road

 

 

2,515

 

 

931

 

 

Income taxes

 

 

135,449

 

 

131,689

 

 

Non-ARO removal costs

 

 

19,891

 

 

18,536

 

 

Pension and other postretirement service costs

 

 

3,669

 

 

-

 

 

Purchased gas adjustment

 

 

1,186

 

 

1,404

 

 

Renewable energy credits

 

 

700

 

 

454

 

 

Transmission

 

 

5,476

 

 

1,967

 

 

Other

 

 

1,074

 

 

576

 

 

    Total Regulatory Liabilities

 

$

179,464

 

$

159,786

 


MGE expects to recover its regulatory assets and return its regulatory liabilities through rates charged to customers based on PSCW decisions made during the ratemaking process or based on PSCW long-standing policies and guidelines. The adjustments to rates for these regulatory assets and liabilities will occur over the periods either specified by the PSCW or over the corresponding period related to the asset or liability. Management believes it is probable that MGE will continue to recover from customers the regulatory assets described above based on prior and current ratemaking treatment for such costs. All regulatory assets for which a cash outflow had been made are earning a return.


Asset Retirement Obligation

See Footnote 18 for further discussion.


Conservation Costs

MGE has received regulatory treatment for certain conservation expenditures. The expenditures are used for Focus on Energy programs, which is Wisconsin's statewide energy efficiency and renewable resource program, to promote energy efficiency on the customer's premises. Costs for Focus on Energy programs are estimated in MGE's rates utilizing escrow accounting. The escrow accounting allows the utility to true-up its actual costs incurred and reflect the amount of the true-up in its next rate case filing.


Debt Related Costs

This balance includes debt issuance costs of extinguished debt and other debt related expenses, including make-whole premiums. The PSCW has allowed rate recovery on unamortized issuance costs for extinguished debt facilities. When the facility replacing the old facility is deemed by the PSCW to be more favorable for the ratepayers, the PSCW will allow rate recovery of any unamortized issuance costs related to the old facility. These amounts are recovered over the term of the new facility.


Derivatives

MGE has physical and financial contracts that are accounted for as derivatives. The amounts recorded for the net mark-to-market value of the commodity based contracts is offset with a corresponding regulatory asset or liability because these transactions are part of the PGA or fuel rules clause authorized by the PSCW. A significant portion of the recorded amount is related to a purchased power agreement that provides MGE with firm capacity and energy during a base term that began on June 1, 2012, and ends on May 31, 2022. See Footnote 14 for further discussion.




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Tax Recovery Related to AFUDC Equity

AFUDC equity represents the after-tax equity cost associated with utility plant construction and results in a temporary difference between the book and tax basis of such plant. It is probable under PSCW regulation that MGE will recover in future rates the future increase in taxes payable represented by the deferred income tax liability. The amounts will be recovered in rates over the depreciable life of the asset for which AFUDC was applied. Tax recovery related to AFUDC equity represents the revenue requirement related to recovery of these future taxes payable, calculated at current statutory tax rates.


Unfunded Pension and Other Postretirement Liability

MGE is required to recognize the unfunded status of defined benefit pension and other postretirement pension plans as a net liability or asset on the balance sheet with an offset to a regulatory asset or liability. The unfunded status represents future expenses that are expected to be recovered in rates. See Footnote 13 for further discussion.


Deferred Fuel Savings

The fuel rules require the PSCW and Wisconsin utilities to defer electric fuel-related costs that fall outside a symmetrical cost tolerance band. Any over/under recovery of the actual costs is determined on an annual basis and is adjusted in future billings to electric retail customers. See Footnote 8.b. for further discussion.


Elm Road

Costs associated with Elm Road are estimated in MGE's rates utilizing escrow accounting and include costs for lease payments, management fees, community impact mitigation, and operating costs. Costs are collected in rates over a one to two year period.


Income Taxes

Excess deferred income taxes result from past taxes provided at rates higher than current rates. The regulatory liability and deferred investment tax credit reflects the revenue requirement associated with the return of these tax benefits to customers.


Changes in income taxes are generally passed through in customer rates for the regulated utility. The one-time 2017 impact on timing differences related to income taxes passed through to customer rates of the Tax Act was recorded as a regulatory liability. The amount and timing of the cash impacts will depend on the period over which certain income tax benefits are provided to customers, which will be subject to review by the PSCW. A portion of the regulatory liability will be returned to customers based on a mandated timeframe dictated by applicable tax laws. See Footnote 12 for further information.


Non-ARO Removal Costs

In connection with accounting for asset retirement obligations, companies are required to reclassify cumulative collections for non-ARO removal costs as a regulatory liability, with an offsetting entry to accumulated depreciation. Under the current rate structure, these removal costs are being recovered as a component of depreciation expense.


Pension and Other Postretirement Service Costs

The FASB issued authoritative guidance within the codification's Compensation-Retirement Benefits topic that, beginning January 1, 2018, only allows the service cost component of net periodic benefit cost to be eligible for capitalization within the consolidated balance sheets. Under the current rate structure, non-service cost components of net periodic benefit cost are being recovered as a component of depreciation expense. MGE has regulatory treatment and recognizes regulatory assets or liabilities for timing differences between when net periodic benefit costs are recovered and when costs are recognized. See Footnote 13 for further discussion.


Purchased Gas Adjustment

MGE's natural gas rates are subject to a fuel adjustment clause designed to recover or refund the difference between the actual cost of purchased gas and the amount included in rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective monthly adjustments to rates.


Renewable Energy Credits

MGE receives renewable energy credits from certain purchase power agreements. The value of the credits are recorded as inventory and expensed when the credit is redeemed or expired. A regulatory liability has been established for the value of the renewable energy credits included in inventory. In Wisconsin, renewable energy credits expire four years after the year of acquisition.




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Transmission Costs

The current accounting treatment for transmission costs allows MGE to reflect any differential between transmission costs reflected in rates and actual costs incurred in its next rate filing.


8.

Rate Matters - MGE Energy and MGE.


a.

Rate Proceedings.


In December 2018, the PSCW approved the settlement agreement between MGE and intervening parties in the rate case. The settlement decreases electric rates by 2.24% or $9.2 million in 2019. MGE will maintain this rate level for 2020, with the exception that MGE will file a 2020 Fuel Cost Plan in 2019 and MGE's electric rates will be adjusted accordingly. The decrease reflects the ongoing tax impacts of the Tax Act and the addition of lower-cost renewable generation capacity. The settlement agreement increases gas rates by 1.06% or $1.7 million in 2019 and 1.46% or $2.4 million in 2020. The gas increase covers infrastructure costs. It also reflects the impacts of the Tax Act. The return on common stock equity for 2019 and 2020 is 9.8% based on a capital structure consisting of 56.6% common equity in 2019 and 56.1% common equity in 2020.


In December 2016, the PSCW authorized MGE, effective January 1, 2017, to decrease 2017 rates for retail electric customers by 0.8% or $3.3 million on an annual basis and to increase rates for retail gas customers by 1.9% or $3.1 million on an annual basis. The decrease in retail electric rates was attributable to declining fuel and purchased power costs. The increase in retail gas rates covered costs associated with MGE's natural gas system infrastructure improvements. The authorized return on common stock equity for 2017 was 9.8% based on a capital structure consisting of 57.2% common equity.


MGE did not file a base rate case for 2018 and 2016.


b.

Fuel Rules.


Fuel rules require the PSCW and 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/under recovery of the actual costs is determined in the following year and is then reflected in future billings to electric retail customers. The fuel rules bandwidth is currently set at plus or minus 2%. Under fuel rules, MGE would defer costs, less any excess revenues, if its actual electric fuel costs exceeded 102% of the electric fuel costs allowed in its latest rate order. 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. Conversely, MGE is required to defer the benefit of lower costs if actual electric fuel costs were less than 98% of the electric fuel costs allowed in that order. These costs will be subject to the PSCW's annual review of fuel costs completed in the year following the deferral.


In August 2015, the PSCW approved a $0.00256/kWh fuel credit that began on September 1, 2015, and continued throughout 2016. MGE returned $8.3 million of electric fuel-related savings during the year ended December 31, 2016.


The PSCW issued final decisions in the fuel rules proceedings for MGE to refund additional fuel savings incurred to its retail electric customers over a one-month period. MGE returned $4.2 million, $6.2 million, and $15.5 million of electric fuel-related savings in October 2018, October 2017, and September 2016, respectively. There was no change to the refund in the fuel rules proceedings from the amount MGE deferred in the previous respective years.


In December 2017, the PSCW approved a surcharge for 2018 electric fuel-related costs. The surcharge increased electric retail revenue in 2018 by $0.5 million or 0.13%.


As of December 31, 2018, MGE has deferred $9.5 million of 2018 fuel-related savings. These costs will be subject to the PSCW's annual review of 2018 fuel costs, expected to be completed in 2019.




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9.

Common Equity.


a.

Common Stock - MGE Energy and MGE.


MGE Energy sells shares of its common stock through its Stock Plan. Those shares may be newly issued shares or shares that MGE Energy has purchased in the open market for resale to participants in the Stock Plan. All sales under the Stock Plan are covered by a shelf registration statement that MGE Energy filed with the SEC. For the years ended December 31, 2018 and 2017, MGE Energy did not issue any new shares of common stock under the Stock Plan.


MGE Energy's transfer agent purchases shares on the open market to provide shares to meet obligations to participants in the Stock Plan. The shares are purchased on the open market through their securities broker-dealer and then are reissued under the Stock Plan as needed to meet share delivery requirements. The volume and timing of share repurchases in the open market depends upon the level of dividend reinvestment and optional share purchases being made from time to time by plan participants. As a result, there is no specific maximum number of shares to be repurchased and no specified termination date for the repurchases.


During the years ended December 31, 2018 and 2017, MGE Energy paid $45.8 million (or $1.32 per share) and $43.7 million (or $1.26 per share), respectively, in cash dividends on its common stock. Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a lesser degree, MGE's first mortgage bonds. The PSCW order restricts any dividends, above the PSCW authorized amount that MGE may pay MGE Energy if its common equity ratio, calculated in the manner used in the rate proceeding, is less than 55%. This restriction did not impact MGE's payment of dividends in 2018. See Footnote 10 for further discussion of the mortgage indenture covenants. During the year ended December 31, 2017, MGE paid $45.0 million in cash dividends to MGE Energy. MGE paid no dividends to MGE Energy during the year ended December 31, 2018.


b.

Dilutive Shares Calculation - MGE Energy.


MGE Energy has not issued any dilutive securities.




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10.

Long-Term Debt - MGE Energy and MGE.


a.

Long-Term Debt.


 

 

 

December 31,

 

 

(In thousands)

 

2018

 

2017

 

 

First Mortgage Bonds:(a)

 

 

 

 

 

 

    7.70%, 2028 Series

$

1,200

$

1,200

 

 

Tax Exempt Debt:

 

 

 

 

 

 

    3.45%, 2027 Series,

 

 

 

 

 

 

    Industrial Development Revenue Bonds

 

19,300

 

19,300

 

 

Medium-Term Notes:(b)

 

 

 

 

 

 

    6.12%, due 2028

 

20,000

 

20,000

 

 

    7.12%, due 2032

 

25,000

 

25,000

 

 

    6.247%, due 2037

 

25,000

 

25,000

 

 

        Total Medium-Term Notes

 

70,000

 

70,000

 

 

Other Long-Term Debt:(d)

 

 

 

 

 

 

    5.59%, due 2018(c)(e)

 

-

 

20,000

 

 

    3.38%, due 2020(e)

 

15,000

 

15,000

 

 

    3.09%, due 2023(e)

 

30,000

 

30,000

 

 

    3.29%, due 2026(e)

 

15,000

 

15,000

 

 

    3.11%, due 2027(e)

 

30,000

 

30,000

 

 

    5.68%, due 2033(f)

 

25,064

 

26,121

 

 

    5.19%, due 2033(f)

 

16,561

 

17,290

 

 

    5.26%, due 2040(e)

 

15,000

 

15,000

 

 

    5.04%, due 2040(g)

 

35,139

 

36,806

 

 

    4.74%, due 2041(g)

 

22,167

 

23,166

 

 

    4.38%, due 2042(e)

 

28,000

 

28,000

 

 

    4.42%, due 2043(e)

 

20,000

 

20,000

 

 

    4.47%, due 2048(e)

 

20,000

 

20,000

 

 

    3.76%, due 2052(e)

 

40,000

 

40,000

 

 

    4.19%, due 2048(c)(e)

 

60,000

 

-

 

 

    4.24%, due 2053(c)(e)

 

20,000

 

-

 

 

    4.34%, due 2058(c)(e)

 

20,000

 

-

 

 

        Total Other Long-Term Debt

 

411,931

 

336,383

 

 

    Long-term debt due within one year

 

(4,553)

 

(24,452)

 

 

    Unamortized discount and debt issuance costs

 

(4,535)

 

(4,270)

 

 

        Total Long-Term Debt

$

493,343

$

398,161

 


(a)

MGE's utility plant is subject to the lien of its Indenture of Mortgage and Deed of Trust, under which its first mortgage bonds are issued. The Mortgage Indenture provides that dividends or any other distribution or purchase of shares may not be made if the aggregate amount thereof since December 31, 1945, would exceed the earned surplus (retained earnings) accumulated subsequent to December 31, 1945. As of December 31, 2018, approximately $400.0 million was available for the payment of dividends under this covenant.


(b)

The indenture under which MGE's Medium-Term notes are issued provides that those notes will be entitled to be equally and ratably secured in the event that MGE issues any additional first mortgage bonds.


(c)

In July 2018, MGE issued a total of $40 million of new long-term unsecured debt. In September 2018, MGE issued $60 million of new long-term unsecured debt. MGE used the net proceeds from these debt financings to assist with financing capital expenditures, such as the Saratoga Wind Farm, and to refinance $20 million of long-term debt which matured in September 2018.


(d)

Unsecured notes issued pursuant to various Note Purchase Agreements with one or more purchasers. The notes are not issued under, or governed by, MGE's Indenture dated as of September 1, 1998, which governs MGE's Medium-Term Notes.


(e)

Issued by MGE. Under that Note Purchase Agreement: (i) note holders have the right to require MGE to repurchase their notes at par in the event of an acquisition of beneficial ownership of 30% or more of the outstanding voting stock of MGE Energy, (ii) MGE must maintain a ratio of its consolidated indebtedness to consolidated total capitalization not to exceed a maximum of 65%, and (iii) MGE cannot issue "Priority Debt" in an amount exceeding 20% of its consolidated assets. Priority Debt is defined as any indebtedness of MGE secured by liens other than specified liens permitted by the Note Purchase Agreement and certain unsecured indebtedness of certain subsidiaries. As of December 31, 2018, MGE was in compliance with the covenant requirements.


(f)

Issued by MGE Power West Campus. The Note Purchase Agreements require it to maintain a projected debt service coverage ratio of not less than 1.25 to 1.00, and debt to total capitalization ratio of not more than 0.65 to 1.00. The notes are secured by a collateral assignment of lease payments that MGE is making to MGE Power West Campus for use of its ownership interest in the WCCF pursuant to a long-term lease. As of December 31, 2018, MGE Power West Campus was in compliance with the covenant requirements.




79




 



(g)

Issued by MGE Power Elm Road. The Note Purchase Agreement requires MGE Power Elm Road to maintain a projected and actual debt service coverage ratio at the end of any calendar quarter of not less than 1.25 to 1.00 for the trailing 12-month period. The notes are secured by a collateral assignment of lease payments that MGE is making to MGE Power Elm Road for use of its ownership interest in the Elm Road Units pursuant to long-term leases. As of December 31, 2018, MGE Power Elm Road was in compliance with the covenant requirements.


b.

Long-Term Debt Maturities.


Below is MGE Energy's and MGE's aggregate maturities for all long-term debt for years following December 31, 2018.


 

(In thousands)

 

2019

 

2020

 

2021

 

2022

 

2023

 

Thereafter

 

 

Long-term debt maturities

$

4,553

$

19,659

$

4,771

$

4,889

$

35,014

$

433,545

 


MGE includes long-term debt held by MGE Power Elm Road and MGE Power West Campus in the consolidated financial statements (see Footnote 3 for further information).


11.

Notes Payable to Banks, Commercial Paper, and Lines of Credit.


a.

MGE Energy.


As of December 31, 2018, MGE Energy had an unsecured, committed revolving line of credit of $50 million expiring June 1, 2020. As of December 31, 2018, no borrowings were outstanding under this facility. On February 7, 2019, MGE Energy amended and restated the credit agreement to extend the initial term expiration date to February 7, 2024.


The agreement requires MGE Energy to maintain a ratio of its consolidated indebtedness to consolidated total capitalization not to exceed a maximum of 65%. A change in control constitutes a default under the agreement. Change in control events are defined as (i) a failure by MGE Energy to hold 100% of the outstanding voting equity interest in MGE or (ii) the acquisition of beneficial ownership of 30% or more of the outstanding voting stock of MGE Energy by one person or two or more persons acting in concert. As of December 31, 2018, MGE Energy was in compliance with the covenant requirements.


b.

MGE.


For short-term borrowings, MGE generally issues commercial paper (issued at the prevailing discount rate at the time of issuance), which is supported by unused committed bank lines of credit. As of December 31, 2018, MGE had two unsecured, committed revolving lines of credit for a total of $100 million expiring June 1, 2020. As of December 31, 2018, no borrowings were outstanding under these facilities; however there was $13.0 million in commercial paper outstanding. On February 7, 2019, MGE amended and restated the credit agreements to extend the initial term expiration date to February 7, 2024.


The agreements require MGE to maintain a ratio of consolidated debt to consolidated total capitalization not to exceed a maximum of 65%. The ratio calculation excludes assets, liabilities, revenues, and expenses included in MGE's financial statements as the result of the consolidation of VIEs, such as MGE Power West Campus and MGE Power Elm Road. A change in control constitutes a default under the agreements. Change in control events are defined as (i) a failure by MGE Energy to hold 100% of the outstanding voting equity interest in MGE or (ii) the acquisition of beneficial ownership of 30% or more of the outstanding voting stock of MGE Energy by one person or two or more persons acting in concert. As of December 31, 2018, MGE was in compliance with the covenant requirements.




80




 



c.

Short-Term Borrowings - MGE Energy and MGE.


Information concerning short-term borrowings is shown below:


 

(In thousands)

 

MGE Energy(a)

 

MGE

 

 

As of December 31,

 

2018

 

2017

 

2018

 

2017

 

 

    Available lines of credit

$

150,000

$

150,000

$

100,000

$

100,000

 

 

    Short-term debt outstanding

$

13,000

$

4,000

$

13,000

$

4,000

 

 

    Weighted-average interest rate

 

2.55%

 

1.55%

 

2.55%

 

1.55%

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

    Maximum short-term borrowings

$

31,500

$

7,500

$

31,500

$

7,500

 

 

    Average short-term borrowings

$

9,211

$

304

$

9,211

$

304

 

 

    Weighted-average interest rate

 

1.92%

 

1.18%

 

1.92%

 

1.18%

 


(a)

MGE Energy short-term borrowings include MGE Energy and MGE lines of credit and MGE commercial paper.


12.

Income Taxes.


a.

MGE Energy and MGE Income Taxes.


MGE Energy files a consolidated federal income tax return that includes the operations of all subsidiary companies. The subsidiaries calculate their respective federal income tax provisions as if they were separate taxable entities.


On a consolidated and separate company basis, the income tax provision consists of the following provision (benefit) components for the years ended December 31:


 

 

MGE Energy

 

MGE

(In thousands)

 

2018

 

2017

 

2016

 

2018

 

2017

 

2016

Current payable:

 

 

 

 

 

 

 

 

 

 

 

 

    Federal

$

18,622

$

21,125

$

16,908

$

19,926

$

21,512

$

17,521

    State

 

5,163

 

5,129

 

3,287

 

5,704

 

5,316

 

3,497

Net-deferred:

 

 

 

 

 

 

 

 

 

 

 

 

    Federal

 

120

 

(8,346)

 

17,571

 

(2,563)

 

(11,195)

 

16,391

    State

 

3,629

 

4,264

 

4,850

 

2,494

 

3,435

 

4,485

Amortized investment tax credits

 

(100)

 

(78)

 

(103)

 

(100)

 

(78)

 

(103)

Total income tax provision

$

27,434

$

22,094

$

42,513

$

25,461

$

18,990

$

41,791


The consolidated income tax provision differs from the amount computed by applying the statutory federal income tax rate to income before income taxes, as follows:


 

 

MGE Energy

 

MGE

 

 

 

2018

 

2017

 

2016

 

2018

 

2017

 

2016

 

 

Statutory federal income tax rate

21.0%

 

35.0%

 

35.0%

 

21.0%

 

35.0%

 

35.0%

 

 

State income taxes, net of federal benefit

6.3%

 

5.1%

 

5.1%

 

6.2%

 

5.1%

 

5.1%

 

 

Amortized investment tax credits

(0.1)%

 

-%

 

(0.1)%

 

(0.1)%

 

-%

 

(0.1)%

 

 

Credit for electricity from wind energy

(0.3)%

 

(1.6)%

 

(1.6)%

 

(0.4)%

 

(1.7)%

 

(1.7)%

 

 

Domestic manufacturing deduction

-%

 

(1.4)%

 

(1.3)%

 

-%

 

(1.5)%

 

(1.3)%

 

 

AFUDC equity, net

(0.6)%

 

(0.2)%

 

(0.2)%

 

(0.5)%

 

(0.2)%

 

(0.2)%

 

 

Federal income tax rate reduction

-%

 

(18.1)%

 

-%

 

-%

 

(19.3)%

 

-%

 

 

Amortization of utility excess deferred tax(a)

(1.8)%

 

-%

 

-%

 

(2.0)%

 

-%

 

-%

 

 

Other, net, individually insignificant

0.1 %

 

(0.3)%

 

(0.9)%

 

0.2 %

 

(0.4)%

 

(0.9)%

 

 

Effective income tax rate

24.6 %

 

18.5 %

 

36.0 %

 

24.4 %

 

17.0 %

 

35.9 %

 


(a)

Included are impacts of the Tax Act for the regulated utility for excess deferred taxes recognized using a normalization method of accounting.




81




 



The significant components of deferred tax liabilities (assets) that appear on the consolidated balance sheets as of December 31 are as follows:


 

 

 

MGE Energy

 

MGE

 

 

(In thousands)

 

2018

 

2017

 

2018

 

2017

 

 

Deferred tax assets

 

 

 

 

 

 

 

 

 

 

Investment in ATC

 

23,638

 

24,781

 

-

 

-

 

 

Accrued expenses

 

15,385

 

15,135

 

15,385

 

15,135

 

 

Pension and other postretirement benefits

 

34,914

 

32,196

 

34,914

 

32,196

 

 

Deferred tax regulatory account

 

37,121

 

36,124

 

37,121

 

36,124

 

 

Derivatives

 

8,861

 

11,525

 

8,861

 

11,525

 

 

Other

 

15,137

 

12,790

 

15,185

 

12,831

 

 

Gross deferred income tax assets

 

135,056

 

132,551

 

111,466

 

107,811

 

 

Less valuation allowance

 

(86)

 

(86)

 

(86)

 

(86)

 

 

Net deferred income tax assets

 

134,970

 

132,465

 

111,380

 

107,725

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

 

 

 

 

 

 

 

 

Property-related

$

244,114

$

238,437

$

244,114

$

238,544

 

 

Investment in ATC

 

50,771

 

48,324

 

-

 

-

 

 

Bond transactions

 

765

 

832

 

765

 

832

 

 

Pension and other postretirement benefits

 

47,644

 

42,919

 

47,644

 

42,919

 

 

Derivatives

 

8,861

 

11,525

 

8,861

 

11,525

 

 

Tax deductible prepayments

 

6,014

 

6,169

 

6,014

 

6,169

 

 

Other

 

8,753

 

9,389

 

8,598

 

9,222

 

 

Gross deferred income tax liabilities

 

366,922

 

357,595

 

315,996

 

309,211

 

 

Deferred income taxes

$

231,952

$

225,130

$

204,616

$

201,486

 


On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act). The Tax Act makes broad and complex changes to the U.S. tax code, including a reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent.


The SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting for certain income tax effects. In accordance with SAB 118 any subsequent adjustment to these amounts would be recorded in 2018 when the analysis is complete. The analysis was completed, and no material adjustments have been recorded during 2018.


The Tax Act reduced the corporate tax rate to 21 percent, effective January 1, 2018. The one-time impacts recorded to remeasure deferred income tax balances at the 21 percent corporate federal income tax rate as of December 31, 2017, were as follows:


 

(In thousands)

 

MGE Energy

 

MGE

 

 

Net Decrease in Deferred Tax Liability

$

176,871

$

156,493

 

 

Decrease in Regulatory Asset

 

4,347

 

4,347

 

 

Increase in Regulatory Liability(b)

 

130,497

 

130,497

 

 

Decrease in Investment ATC

 

20,375

 

-

 

 

Net Deferred Income Tax Benefit Recorded(c)

 

21,651

 

21,649

 


(b)

Given that changes in income taxes are generally passed through in customer rates for the regulated utility, a regulatory liability was recorded. The amount and timing of the cash impacts will depend on the period over which certain income tax benefits are provided to customers, which will be subject to review by the PSCW. A portion of the regulatory liability will be returned to customers based on a mandated timeframe dictated by applicable tax laws.


(c)

Generated by nonregulated activities.


Beginning January 1, 2018, MGE began amortizing the regulated utility excess deferred taxes recognized using a normalization method of accounting. For the year ended December 31, 2018, MGE recognized $2.8 million of excess deferred taxes as a reduction of revenue and a corresponding increase in a regulatory liability. The amount and timing of the cash impacts will depend on the period over which certain income tax benefits are provided to customers, which will be determined by the PSCW.




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Customer rates approved for 2018 reflect an income tax rate of 35 percent. In January 2018, the PSCW issued an order directing Wisconsin investor-owned utilities to defer the over-collection of income tax expense as a result of the decrease in tax rate to 21 percent. The PSCW issued an order in May 2018 to return to customers the estimated 2018 over-collection of income tax expense. The decision includes a one-time bill credit on customer bills to reflect the estimate of the over-collection for January through June 2018, along with a monthly volumetric bill credit which began in July 2018 and continued through the remainder of 2018 for the estimated remaining annual amount. As of December 31, 2018, MGE returned $8.2 million to customers through bill credits. Any over/under recovery of the actual costs will be subject to the PSCW's review in a future rate case. As of December 31, 2018, MGE has deferred $3.1 million as a regulatory liability and recorded a corresponding reduction in operating revenues for over-collection of income tax expense (net of customer bill credits).


Our state valuation allowance reduces MGE Energy's and MGE's deferred tax assets for state carryforward losses to estimated realizable value due to the uncertainty of future income estimates in various state tax jurisdictions. For tax purposes, as of December 31, 2018, both MGE Energy and MGE had approximately $1.4 million of state tax net operating loss deductions subject to a valuation allowance that expire between 2020 and 2023 if unused.


b.

Accounting for Uncertainty in Income Taxes - MGE Energy and MGE.


The difference between the tax benefit amount taken on prior year tax returns, or expected to be taken on a current year tax return, and the tax benefit amount recognized in the financial statements is accounted for as an unrecognized tax benefit.


A tabular reconciliation of unrecognized tax benefits and is as follows:


 

(In thousands)

 

 

 

 

 

 

 

 

Unrecognized Tax Benefits:

 

2018

 

2017

 

2016

 

 

Unrecognized tax benefits, January 1,

$

1,924

$

2,487

$

2,528

 

 

Additions based on tax positions related to the current year

 

425

 

552

 

452

 

 

Additions based on tax positions related to the prior years

 

272

 

19

 

39

 

 

Reductions based on tax positions related to the prior years

 

(672)

 

(1,134)

 

(532)

 

 

Unrecognized tax benefits, December 31,

$

1,949

$

1,924

$

2,487

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

Interest on Unrecognized Tax Benefits:

 

2018

 

2017

 

2016

 

 

Accrued interest on unrecognized tax benefits, January 1,

$

165

$

388

$

311

 

 

Reduction in interest expense on uncertain tax positions

 

(136)

 

(312)

 

(27)

 

 

Interest expense on uncertain tax positions

 

162

 

89

 

104

 

 

Accrued interest on unrecognized tax benefits, December 31,

$

191

$

165

$

388

 


Unrecognized tax benefits are classified with "Other deferred liabilities" on the consolidated balance sheets. The interest component recoverable in rates is offset by a regulatory asset.


As of December 31, 2018, 2017, and 2016, unrecognized tax benefits primarily related to temporary tax differences associated with the change in income tax method of accounting for electric generation and electric and gas distribution repairs. In addition, as of December 31, 2018, unrecognized tax benefits relating to permanent differences and tax credits was $0.3 million. As of December 31, 2017 and 2016, unrecognized tax benefits relating to permanent differences and tax credits was less than $0.1 million.


The unrecognized tax benefits as of December 31, 2018, are not expected to significantly increase or decrease within the next twelve months. In addition, statutes of limitations will expire for MGE Energy and MGE tax returns. The impact of the statutes of limitations expiring is not anticipated to be material. The following table shows tax years that remain subject to examination by major jurisdiction:


 

Taxpayer

Open Years

 

 

MGE Energy and consolidated subsidiaries in federal return

2015 through 2018

 

 

MGE Energy Wisconsin combined reporting corporation return

2013 through 2018

 




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13.

Pension Plans and Other Postretirement Benefits - MGE Energy and MGE.


MGE maintains qualified and nonqualified pension plans, health care, and life insurance benefits, and defined contribution 401(k) benefit plans for its employees and retirees. MGE's costs for the 401(k) plans were $3.9 million, $3.5 million, and $3.1 million for the years ended December 31, 2018, 2017, and 2016, respectively. A measurement date of December 31 is utilized for all pension and postretirement benefit plans.

All employees hired after December 31, 2006, have been enrolled in the defined contribution pension plan, rather than the defined benefit pension plan previously in place.


a.

Benefit Obligations and Plan Assets.


 

(In thousands)

 

Pension Benefits

 

Other Postretirement

Benefits

 

 

Change in Benefit Obligations:

 

2018

 

2017

 

2018

 

2017

 

 

Net benefit obligation at beginning of year

$

391,269

$

349,556

$

82,290

$

78,842

 

 

Service cost

 

5,723

 

5,383

 

1,283

 

1,231

 

 

Interest cost

 

12,859

 

12,625

 

2,612

 

2,666

 

 

Plan participants' contributions

 

-

 

-

 

950

 

894

 

 

Actuarial (gain) loss(a)

 

(34,439)

 

37,689

 

(7,555)

 

2,749

 

 

Gross benefits paid

 

(15,124)

 

(13,984)

 

(4,623)

 

(4,262)

 

 

    Less: federal subsidy on benefits paid(b)

 

-

 

-

 

204

 

170

 

 

Benefit obligation at end of year

$

360,288

$

391,269

$

75,161

$

82,290

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Plan Assets:

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

$

361,651

$

311,933

$

48,470

$

43,177

 

 

Actual return on plan assets

 

(24,485)

 

56,987

 

(2,780)

 

7,104

 

 

Employer contributions

 

1,738

 

6,715

 

504

 

1,557

 

 

Plan participants' contributions

 

-

 

-

 

950

 

894

 

 

Gross benefits paid

 

(15,124)

 

(13,984)

 

(4,623)

 

(4,262)

 

 

Fair value of plan assets at end of year

$

323,780

$

361,651

$

42,521

$

48,470

 

 

Funded Status as of December 31

$

(36,508)

$

(29,618)

$

(32,640)

$

(33,820)

 


(a)

In 2018, higher discount rates were the main driver of the actuarial gain. However, in 2017, lower discount rates were the main driver of the actuarial loss.


(b)

In 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law authorizing Medicare to provide prescription drug benefits to retirees. For the years ended December 31, 2018 and 2017, the subsidy due to MGE was $0.2 million.


The accumulated benefit obligation for the defined benefit pension plans as of December 31, 2018 and 2017, was $335.8 million and $356.0 million, respectively.


The amounts recognized in the consolidated balance sheets to reflect the funded status of the plans as of December 31 are as follows:


 

 

 

Pension Benefits

 

Other Postretirement

Benefits

 

 

(In thousands)

 

2018

 

2017

 

2018

 

2017

 

 

Long-term asset

$

-

$

7,336

$

-

$

-

 

 

Current liability

 

(1,732)

 

(1,726)

 

-

 

-

 

 

Long-term liability

 

(34,776)

 

(35,228)

 

(32,640)

 

(33,820)

 

 

Net liability

$

(36,508)

$

(29,618)

$

(32,640)

$

(33,820)

 




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The following table shows the amounts that have not yet been recognized in our net periodic benefit cost as of December 31 and are recorded as regulatory assets in the consolidated balance sheets:

 

 

 

 

Pension Benefits

 

Other Postretirement

Benefits

 

 

(In thousands)

 

2018

 

2017

 

2018

 

2017

 

 

Net actuarial loss

$

92,978

$

81,969

$

10,569

$

12,600

 

 

Prior service benefit

 

(385)

 

(429)

 

(7,153)

 

(9,821)

 

 

Transition obligation

 

-

 

-

 

21

 

23

 

 

Total

$

92,593

$

81,540

$

3,437

$

2,802

 


The projected benefit obligation and fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets were as follows:


 

(In thousands)

 

Pension Benefits

 

 

Projected Benefit Obligation in Excess of Plan Assets

 

2018

 

2017

 

 

Projected benefit obligation, end of year

$

360,288

$

36,954

 

 

Fair value of plan assets, end of year

 

323,780

 

-

 


The accumulated benefit obligation and fair value of plan assets for pension plans with an accumulated benefit obligation in excess of plan assets were as follows:


 

(In thousands)

 

Pension Benefits

 

 

Accumulated Benefit Obligation in Excess of Plan Assets

 

2018

 

2017

 

 

Accumulated benefit obligation, end of year

$

31,200

$

32,813

 

 

Fair value of plan assets, end of year

 

-

 

-

 


b.

Net Periodic Benefit Cost.


 

(In thousands)

 

Pension Benefits

 

Other Postretirement Benefits

 

 

Components of Net Periodic Benefit Cost:

 

2018

 

2017

 

2016

 

2018

 

2017

 

2016

 

 

Service cost

$

5,723

$

5,383

$

5,365

$

1,283

$

1,231

$

1,271

 

 

Interest cost

 

12,859

 

12,625

 

12,393

 

2,612

 

2,666

 

2,681

 

 

Expected return on assets

 

(26,241)

 

(22,963)

 

(22,365)

 

(3,232)

 

(2,887)

 

(2,829)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Transition obligation

 

-

 

-

 

-

 

3

 

3

 

3

 

 

    Prior service (credit) cost

 

(44)

 

(17)

 

10

 

(2,669)

 

(2,669)

 

(2,669)

 

 

    Actuarial loss

 

5,278

 

6,352

 

5,600

 

488

 

660

 

589

 

 

Net periodic benefit cost (credit)

$

(2,425)

$

1,380

$

1,003

$

(1,515)

$

(996)

$

(954)

 


The components of net periodic benefit cost, other than the service cost component, are recorded in "Other income, net" on the consolidated statements of income. The service cost component is recorded in "Other operations and maintenance" on the consolidated statements of income. Prior to January 1, 2018, a portion of all net periodic benefit cost components were capitalized within the consolidated balance sheets. The FASB issued authoritative guidance within the codification's Compensation-Retirement Benefits topic that, beginning January 1, 2018, only allows the service cost component of net periodic benefit cost to be eligible for capitalization within the consolidated balance sheets. MGE has regulatory treatment and recognizes regulatory assets or liabilities for timing differences between when net periodic benefit costs are recovered and when costs are recognized.




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c.

Plan Assumptions.


The weighted-average assumptions used to determine the benefit obligations were as follows for the years ended December 31:


 

 

 

Pension Benefits

 

Other Postretirement Benefits

 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

Discount rate

 

4.32%

 

3.73%

 

4.24%

 

3.58%

 

 

Rate of compensation increase

 

3.20%

 

3.67%

 

N/A

 

N/A

 

 

Assumed health care cost trend rates:

 

 

 

 

 

 

 

 

 

 

    Health care cost trend rate assumed for next year

 

N/A

 

N/A

 

6.25%

 

6.00%

 

 

    Rate to which the cost trend rate is assumed to

 

 

 

 

 

 

 

 

 

 

       decline (the ultimate trend rate)

 

N/A

 

N/A

 

5.00%

 

5.00%

 

 

 Year that the rate reaches the ultimate trend rate

 

N/A

 

N/A

 

2024

 

2022

 


MGE uses individual spot rates, instead of a weighted average of the yield curve spot rates, for measuring the service cost and interest cost components of net periodic benefit cost.


The weighted-average assumptions used to determine the net periodic cost were as follows for the years ended December 31:


 

 

 

Pension Benefits

 

Other Postretirement Benefits

 

 

 

 

2018

 

2017

 

2016

 

2018

 

2017

 

2016

 

 

Discount rate

 

3.73%

 

4.30%

 

4.51%

 

3.60%

 

4.09%

 

4.32%

 

 

Expected rate of return on plan assets

 

7.40%

 

7.40%

 

7.65%

 

6.94%

 

6.80%

 

6.96%

 

 

Rate of compensation increase

 

3.72%

 

3.76%

 

3.76%

 

N/A

 

N/A

 

N/A

 


The assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The following table shows how an assumed 1% increase or 1% decrease in health care cost trends could impact postretirement benefits in 2018 dollars:


 

(In thousands)

 

1% Increase

 

1% Decrease

 

 

Effect on other postretirement benefit obligation

$

754

$

(980)

 

 

Effect on total service and interest cost components

 

21

 

(30)

 


MGE employs a building-block approach in determining the expected long-term rate of return for asset classes. Historical markets are studied and long-term historical relationships among asset classes are analyzed, consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors, such as interest rates and dividend yields, are evaluated before long-term capital market assumptions are determined.


The expected long-term nominal rate of return for plan assets is primarily a function of expected long-term real rates of return for component asset classes and the plan's target asset allocation in conjunction with an inflation assumption. Peer data and historical returns are reviewed to check for appropriateness.


d.

Investment Strategy.


MGE employs a total return investment approach whereby a mix of equities, fixed income, and real estate investments are used to maximize the expected long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan-funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity, fixed income, and real estate investments. Investment risk is measured and monitored on an ongoing basis through periodic investment portfolio reviews and liability measurements.




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The asset allocation for MGE's pension plans as of December 31, 2018 and 2017, and the target allocation for 2019, by asset category, follows:


 

 

Target Allocation

 

Percentage of Plan Assets

at Year End

 

 

 

 

2018

 

2017

 

 

Equity securities(a)

63.0 %

 

60.0 %

 

65.0 %

 

 

Fixed income securities

30.0 %

 

33.0 %

 

29.0 %

 

 

Real estate

7.0 %

 

7.0 %

 

6.0 %

 

 

Total

100.0 %

 

100.0 %

 

100.0 %

 


(a)

Target allocations for equity securities are broken out as follows:  45.5% United States equity, 17.5% non-United States equity.


The fair value of plan assets for the postretirement benefit plans is $42.5 million and $48.5 million as of December 31, 2018 and 2017, respectively. Of this amount, $37.5 million and $43.1 million as of December 31, 2018 and 2017, respectively, were held in the master pension trust and are allocable to postretirement health expenses. The target asset allocation and investment strategy for the portion of assets held in the master pension trust are the same as that explained for MGE's pension plans. The remainder of postretirement benefit assets are held either in an insurance continuance fund for the payment of retiree life benefits or health benefit trusts for payment of retiree health premiums. The asset allocation for the insurance continuance fund is determined by the life insurer. The target asset allocation for the health benefit trusts are established based on a similar investment strategy as assets held in the master pension trust, with consideration for liquidity needs in the health benefit trusts.


e.

Concentrations of Credit Risk.


MGE evaluated its pension and other postretirement benefit plans' asset portfolios for the existence of significant concentrations of credit risk as of December 31, 2018. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, and foreign country. As of December 31, 2018, there were no significant concentrations (defined as greater than 10 percent of plan assets) of risk in MGE pension and postretirement benefit plan assets.


f.

Fair Value Measurements of Plan Assets.


Pension and other postretirement benefit plan investments are recorded at fair value. See Footnote 15 for more information regarding the fair value hierarchy.


The following descriptions are the categories of underlying plan assets held within the pension and other postretirement benefit plans as of December 31, 2018:


Cash and Cash Equivalents – This category includes highly liquid investments with maturities of less than three months which are traded in active markets.


Equity Securities – These securities consist of U.S. and international stock funds. The U.S. stock funds are primarily invested in domestic equities. Securities in these funds are typically priced using the closing price from the applicable exchange, NYSE, Nasdaq, etc. The international funds are composed of international equities. Securities are priced using the closing price from the appropriate local stock exchange.


Fixed Income Securities – These securities consist of U.S. bond funds and short-term funds. U.S. bond funds are priced by a pricing agent using inputs such as benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. The short-term funds are valued initially at cost and adjusted for amortization of any discount or premium.


Real Estate – Real estate funds are funds with a direct investment in pools of real estate properties. These funds are valued by investment managers on a periodic basis using pricing models that use independent appraisals. The fair value of real estate investments is determined using net asset value.


Insurance Continuance Fund (ICF) – The ICF is a supplemental retirement plan that includes assets that have been segregated and restricted to pay retiree term life insurance premiums.




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Fixed Rate Fund – The Fixed Rate fund is supported by an underlying portfolio of fixed income securities, including public bonds, commercial mortgages, and private placement bonds. Public market data and GAAP reported market values are used when available to determine fair value.


All of the fair values of MGE's plan assets are measured using net asset value, except for cash and cash equivalents which are considered level 1 investments. The fair values of MGE's plan assets by asset category as of December 31 are as follows:


 

(In thousands)

 

2018

 

2017

 

 

Cash and Cash Equivalents

$

701

$

488

 

 

Equity Securities:

 

 

 

 

 

 

    U.S. Large Cap

 

102,984

 

124,594

 

 

    U.S. Mid Cap

 

23,683

 

29,138

 

 

    U.S. Small Cap

 

28,573

 

37,782

 

 

    International Blend

 

61,299

 

71,514

 

 

Fixed Income Securities:

 

 

 

 

 

 

    Short-Term Fund

 

4,053

 

4,641

 

 

    High Yield Bond

 

19,437

 

19,400

 

 

    Long Duration Bond

 

93,216

 

91,678

 

 

Real Estate

 

27,923

 

25,995

 

 

Insurance Continuance Fund

 

1,491

 

1,500

 

 

Fixed Rate Fund

 

2,941

 

3,391

 

 

    Total

$

366,301

$

410,121

 


g.

Expected Cash Flows.


MGE does not expect to need to make any required contributions to the qualified plans for 2019 and 2020. The contributions for years after 2020 are not yet currently estimated. MGE has adopted the asset smoothing as permitted in accordance with the Pension Protection Act of 2006, including modifications made by WRERA.


Due to uncertainties in the future economic performance of plan assets, discount rates, and other key assumptions, estimated contributions are subject to change. MGE may also elect to make additional discretionary contributions.


In 2018, MGE made $5.6 million in employer contributions to its pension and postretirement plans.


h.

Benefit Payments.


The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:


 

 

 

Pension

 

Other Postretirement Benefits

 

 

(In thousands)

 

Pension

Benefits

 

Gross Postretirement Benefits

 

Expected Medicare Part D Subsidy

 

Net Postretirement Benefits

 

 

2019

$

16,362

$

4,248

$

(228)

$

4,020

 

 

2020

 

17,087

 

4,585

 

(252)

 

4,333

 

 

2021

 

17,835

 

4,994

 

(276)

 

4,718

 

 

2022

 

18,956

 

5,325

 

(305)

 

5,020

 

 

2023

 

19,770

 

5,604

 

(334)

 

5,270

 

 

2024 - 2028

 

110,037

 

29,478

 

(2,103)

 

27,375

 




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14.

Derivative and Hedging Instruments - MGE Energy and MGE.


a.

Purpose.


As part of its regular operations, MGE enters into contracts, including options, swaps, futures, forwards, and other contractual commitments, to manage its exposure to commodity prices. To the extent that these contracts are derivatives, MGE assesses whether or not the normal purchases or normal sales exclusion applies. For contracts to which this exclusion cannot be applied, the derivatives are recognized in the consolidated balance sheets at fair value. MGE's financial commodity derivative activities are conducted in accordance with its electric and gas risk management program, which is approved by the PSCW and limits the volume MGE can hedge with specific risk management strategies. The maximum length of time over which cash flows related to energy commodities can be hedged is four years. If the derivative qualifies for regulatory deferral, the derivatives are marked to fair value and are offset with a corresponding regulatory asset or liability depending on whether the derivative is in a net loss or net gain position, respectively. The deferred gain or loss is recognized in earnings in the delivery month applicable to the instrument. Gains and losses related to hedges qualifying for regulatory treatment are recoverable in gas rates through the PGA or in electric rates as a component of the fuel rules mechanism.


b.

Notional Amounts.


The gross notional volume of open derivatives is as follows:


 

 

December 31, 2018

 

December 31, 2017

 

 

Commodity derivative contracts

386,440 MWh

 

552,310 MWh

 

 

Commodity derivative contracts

5,260,000 Dth

 

5,460,000 Dth

 

 

FTRs

2,252 MW

 

2,226 MW

 

 

PPA

2,050 MW

 

2,650 MW

 


c.

Financial Statement Presentation.


MGE purchases and sells exchange-traded and over-the-counter options, swaps, and future contracts. These arrangements are primarily entered into to help stabilize the price risk associated with gas or power purchases. These transactions are employed by both MGE's gas and electric segments. Additionally, as a result of the firm transmission agreements that MGE holds on electricity transmission paths in the MISO market, MGE holds financial transmission rights (FTRs). An FTR is a financial instrument that entitles the holder to a stream of revenues or charges based on the differences in hourly day-ahead energy prices between two points on the transmission grid. The fair values of these instruments are offset with a corresponding regulatory asset/liability depending on whether they are in a net loss/gain position. Depending on the nature of the instrument, the gain or loss associated with these transactions will be reflected as cost of gas sold, fuel for electric generation, or purchased power expense in the delivery month applicable to the instrument. As of December 31, 2018 and 2017, the fair value of exchange traded derivatives and FTRs exceeded their cost basis by $0.7 million and $0.2 million, respectively.


MGE is a party to a purchased power agreement that provides MGE with firm capacity and energy during a base term from June 1, 2012, through May 31, 2022. The agreement also allows MGE an option to extend the contract after the base term. The agreement is accounted for as a derivative contract and is recognized at its fair value on the consolidated balance sheets. However, the derivative qualifies for regulatory deferral and is recognized with a corresponding regulatory asset or liability depending on whether the fair value is in a loss or gain position. The fair value of the contract as of December 31, 2018 and 2017, reflects a loss position of $32.5 million and $42.2 million, respectively. The actual cost will be recognized in purchased power expense in the month of purchase.




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The following table summarizes the fair value of the derivative instruments on the consolidated balance sheets. All derivative instruments in this table are presented on a gross basis and are calculated prior to the netting of instruments with the same counterparty under a master netting agreement as well as the netting of collateral. For financial statement purposes, instruments are netted with the same counterparty under a master netting agreement as well as the netting of collateral.


 

(In thousands)

 

Derivative Assets

 

Derivative Liabilities

 

Balance Sheet Location

 

December 31, 2018

 

 

 

 

 

 

 

Commodity derivative contracts(a)

$

727

$

270

Other current assets

 

Commodity derivative contracts(a)

 

74

 

72

 

Other deferred charges

 

FTRs

 

241

 

-

 

Other current assets

 

PPA

 

N/A

 

8,550

 

Derivative liability (current)

 

PPA

 

N/A

 

23,980

 

Derivative liability (long-term)

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

Commodity derivative contracts(a)

$

566

$

603

 

Derivative liability (current)(b)

 

Commodity derivative contracts(a)

 

110

 

190

 

Derivative liability (long-term)

 

FTRs

 

329

 

-

 

Other current assets

 

PPA

 

N/A

 

8,180

 

Derivative liability (current)

 

PPA

 

N/A

 

33,990

 

Derivative liability (long-term)


(a)

As of December 31, 2017, collateral of $0.1 million was posted against and netted with derivative liability positions on the consolidated balance sheets. No collateral was posted against derivative positions as of December 31, 2018.


(b)

As of December 31, 2017, MGE presented $0.1 million as other current assets on the consolidated balance sheets.


The following tables show the effect of netting arrangements for recognized derivative assets and liabilities that are subject to a master netting arrangement or similar arrangement on the consolidated balance sheets.


 

Offsetting of Derivative Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Gross Amounts

 

Gross Amounts Offset in Balance Sheets

 

Collateral Posted Against Derivative Positions

 

Net Amount Presented in Balance Sheets

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

801

$

(342)

$

-

$

459

 

 

FTRs

 

241

 

-

 

-

 

241

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

676

$

(654)

$

-

$

22

 

 

FTRs

 

329

 

-

 

-

 

329

 


 

Offsetting of Derivative Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Gross Amounts

 

Gross Amounts Offset in Balance Sheets

 

Collateral Posted Against Derivative Positions

 

Net Amount Presented in Balance Sheets

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

342

$

(342)

$

-

$

-

 

 

PPA

 

32,530

 

-

 

-

 

32,530

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

793

$

(654)

$

(139)

$

-

 

 

PPA

 

42,170

 

-

 

-

 

42,170

 




90




 



The following tables summarize the unrealized and realized gains/losses related to the derivative instruments on the consolidated balance sheets as of December 31, 2018 and 2017, and the consolidated statements of income for the years ended December 31, 2018 and 2017.


 

 

2018

 

 

2017

 

 

Current and Long-Term Regulatory Asset

 

Other Current Assets

 

 

Current and Long-Term Regulatory Asset

 

Other Current Assets

(In thousands)

 

 

 

 

 

 

 

 

 

Balance as of January 1,

$

41,958

$

806

 

$

49,281

$

230

Unrealized gain

 

(11,094)

 

-

 

 

(2,743)

 

-

Realized gain (loss) reclassified to a deferred account

 

523

 

(523)

 

 

(1,260)

 

1,260

Realized loss reclassified to income statement

 

443

 

94

 

 

(3,320)

 

(684)

Balance as of December 31,

$

31,830

$

377

 

$

41,958

$

806


 

 

Realized Losses (Gains)

 

 

2018

 

 

2017

(In thousands)

 

Fuel for Electric Generation/ Purchased Power

 

Cost of Gas Sold

 

 

Fuel for Electric Generation/ Purchased Power

 

Cost of Gas Sold

Year Ended December 31:

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

(716)

$

(199)

 

$

786

$

634

FTRs

 

(702)

 

-

 

 

(1,464)

 

-

PPA

 

1,080

 

-

 

 

4,048

 

-


MGE's commodity derivative contracts, FTRs, and PPA are subject to regulatory deferral. These derivatives are marked to fair value and are offset with a corresponding regulatory asset or liability. Realized gains and losses are deferred on the consolidated balance sheets and are recognized in earnings in the delivery month applicable to the instrument. As a result of the above described treatment, there are no unrealized gains or losses that flow through earnings.


The PPA has a provision that may require MGE to post collateral if MGE's debt rating falls below investment grade (i.e., below BBB-). The amount of collateral that it may be required to post varies from $20.0 million to $40.0 million, depending on MGE's nominated capacity amount. As of December 31, 2018, no collateral is required to be, or has been, posted. Certain counterparties extend MGE a credit limit. If MGE exceeds these limits, the counterparties may require collateral to be posted. As of December 31, 2017, certain counterparties were in a net liability of $0.1 million. As of December 31, 2018, no counterparties were in a net liability position.


Nonperformance of counterparties to the non-exchange traded derivatives could expose MGE to credit loss. However, MGE enters into transactions only with companies that meet or exceed strict credit guidelines, and it monitors these counterparties on an ongoing basis to mitigate nonperformance risk in its portfolio. As of December 31, 2018, no counterparties have defaulted.


15.

Fair Value of Financial Instruments - MGE Energy and MGE.


Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The accounting standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability including assumptions about risk. The standard also establishes a three level fair value hierarchy based upon the observability of the assumptions used and requires the use of observable market data when available. The levels are:


Level 1 - Pricing inputs are quoted prices within active markets for identical assets or liabilities.


Level 2 - Pricing inputs are quoted prices within active markets for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations that are correlated with or otherwise verifiable by observable market data.


Level 3 - Pricing inputs are unobservable and reflect management's best estimate of what market participants would use in pricing the asset or liability.




91




 



a.

Fair Value of Financial Assets and Liabilities Recorded at the Carrying Amount.


The carrying amount of cash, cash equivalents, and outstanding commercial paper approximates fair market value due to the short maturity of those investments and obligations. The estimated fair market value of long-term debt is based on quoted market prices for similar financial instruments as of December 31. Since long-term debt is not traded in an active market, it is classified as Level 2. The estimated fair market value of financial instruments are as follows:


 

 

 

December 31, 2018

 

 

December 31, 2017

 

 

(In thousands)

 

Carrying Amount

 

Fair

Value

 

 

Carrying Amount

 

Fair

Value

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

$

83,102

$

83,102

 

$

107,952

$

107,952

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Short-term debt - commercial paper

 

13,000

 

13,000

 

 

4,000

 

4,000

 

 

    Long-term debt(a)

 

502,431

 

518,811

 

 

426,883

 

475,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

$

4,843

$

4,843

 

$

5,951

$

5,951

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Short-term debt - commercial paper

 

13,000

 

13,000

 

 

4,000

 

4,000

 

 

    Long-term debt(a)

 

502,431

 

518,811

 

 

426,883

 

475,282

 


(a)

Includes long-term debt due within one year. Excludes debt issuance costs and unamortized discount of $4.5 million and $4.3 million as of December 31, 2018 and 2017, respectively.


b.

Recurring Fair Value Measurements.


The following table presents the balances of assets and liabilities measured at fair value on a recurring basis.


 

 

Fair Value as of December 31, 2018

 

 

(In thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net

$

1,042

$

296

$

-

$

746

 

 

    Exchange-traded investments

 

848

 

848

 

-

 

-

 

 

    Total Assets

$

1,890

$

1,144

$

-

$

746

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net

$

32,872

$

124

$

-

$

32,748

 

 

    Deferred compensation

 

3,078

 

-

 

3,078

 

-

 

 

    Total Liabilities

$

35,950

$

124

$

3,078

$

32,748

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net

$

1,042

$

296

$

-

$

746

 

 

    Exchange-traded investments

 

43

 

43

 

-

 

-

 

 

    Total Assets

$

1,085

$

339

$

-

$

746

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net

$

32,872

$

124

$

-

$

32,748

 

 

    Deferred compensation

 

3,078

 

-

 

3,078

 

-

 

 

    Total Liabilities

$

35,950

$

124

$

3,078

$

32,748

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



92




 




 

 

Fair Value as of December 31, 2017

 

 

(In thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net

$

1,005

$

278

$

-

$

727

 

 

    Exchange-traded investments

 

792

 

792

 

-

 

-

 

 

    Total Assets

$

1,797

$

1,070

$

-

$

727

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net(b)

$

42,963

$

210

$

-

$

42,753

 

 

    Deferred compensation

 

3,065

 

-

 

3,065

 

-

 

 

    Total Liabilities

$

46,028

$

210

$

3,065

$

42,753

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net

$

1,005

$

278

$

-

$

727

 

 

    Exchange-traded investments

 

64

 

64

 

-

 

-

 

 

    Total Assets

$

1,069

$

342

$

-

$

727

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net(b)

$

42,963

$

210

$

-

$

42,753

 

 

    Deferred compensation

 

3,065

 

-

 

3,065

 

-

 

 

    Total Liabilities

$

46,028

$

210

$

3,065

$

42,753

 


(b)

These amounts are shown gross and exclude $0.1 million of collateral that was posted against derivative positions with counterparties as of December 31, 2017.


No transfers were made in or out of Level 1 or Level 2 for the year ended December 31, 2018.


Investments include exchange-traded investment securities valued using quoted prices on active exchanges and are therefore classified as Level 1.


Derivatives include exchange-traded derivative contracts, over-the-counter transactions, a purchased power agreement, and FTRs. Most exchange-traded derivative contracts are valued based on unadjusted quoted prices in active markets and are therefore classified as Level 1. A small number of exchange-traded derivative contracts are valued using quoted market pricing in markets with insufficient volumes and are therefore considered unobservable and classified as Level 3. Transactions done with an over-the-counter party are on inactive markets and are therefore classified as Level 3. These transactions are valued based on quoted prices from markets with similar exchange-traded transactions. FTRs are priced based upon monthly auction results for identical or similar instruments in a closed market with limited data available and are therefore classified as Level 3.


The purchased power agreement (see Footnote 14) was valued using an internally-developed pricing model and therefore is classified as Level 3. The model projects future market energy prices and compares those prices to the projected power costs to be incurred under the contract. Inputs to the model require significant management judgment and estimation. Future energy prices are based on a forward power pricing curve using exchange-traded contracts in the electric futures market. A basis adjustment is applied to the market energy price to reflect the price differential between the market price delivery point and the counterparty delivery point. The historical relationship between the delivery points is reviewed and a discount (below 100%) or premium (above 100%) is derived. This comparison is done for both peak times when demand is high and off peak times when demand is low. If the basis adjustment is lowered, the fair value measurement will decrease, and if the basis adjustment is increased, the fair value measurement will increase.


The projected power costs anticipated to be incurred under the purchased power agreement are determined using many factors, including historical generating costs, future prices, and expected fuel mix of the counterparty. An increase in the projected fuel costs would result in a decrease in the fair value measurement of the purchased power agreement. A significant input that MGE estimates is the counterparty's fuel mix in determining the projected power cost. MGE also considers the assumptions that market participants would use in valuing the asset or liability. This consideration includes assumptions about market risk such as liquidity, volatility, and contract duration. The fair value model uses a discount rate that incorporates discounting, credit, and model risks.




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The following table presents the significant unobservable inputs used in the pricing model as of December 31:


 

 

 

Model Input

 

Significant Unobservable Inputs

 

2018

 

2017

 

Basis adjustment:

 

 

 

 

 

    On peak

 

92.1%

 

92.3%

 

    Off peak

 

92.8%

 

94.1%

 

Counterparty fuel mix:

 

 

 

 

 

    Internal generation

 

50%-75%

 

55%-75%

 

    Purchased power

 

50%-25%

 

45%-25%


The deferred compensation plan allows participants to defer certain cash compensation into a notional investment account. These amounts are included within other deferred liabilities in the consolidated balance sheets of MGE Energy and MGE. The notional investments earn interest based upon the semiannual rate of U.S. Treasury Bills having a 26-week maturity increased by 1% compounded monthly with a minimum annual rate of 7%, compounded monthly. The notional investments are based upon observable market data, however, since the deferred compensation obligations themselves are not exchanged in an active market, they are classified as Level 2.


The following table summarizes the changes in Level 3 commodity derivative assets and liabilities measured at fair value on a recurring basis.


 

(In thousands)

 

2018

 

2017

 

2016

 

 

Balance as of January 1,

$

(42,026)

$

(50,306)

$

(53,501)

 

 

Realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

    Included in regulatory liabilities

 

10,024

 

8,281

 

3,195

 

 

    Included in other comprehensive income

 

-

 

-

 

-

 

 

    Included in earnings

 

132

 

(3,718)

 

(5,347)

 

 

    Included in current assets

 

(47)

 

(9)

 

(142)

 

 

Purchases

 

23,643

 

24,181

 

23,346

 

 

Sales

 

-

 

-

 

-

 

 

Issuances

 

-

 

-

 

-

 

 

Settlements

 

(23,728)

 

(20,455)

 

(17,857)

 

 

Transfers in and/or out of Level 3

 

-

 

-

 

-

 

 

Balance as of December 31,

$

(32,002)

$

(42,026)

$

(50,306)

 

 

Total gains (losses) included in earnings attributed to the

 

 

 

 

 

 

 

 

change in unrealized gains (losses) related to assets and

 

 

 

 

 

 

 

 

liabilities held as of December 31,(c)

$

-

$

-

$

-

 


The following table presents total realized and unrealized gains (losses) included in income for Level 3 assets and liabilities measured at fair value on a recurring basis (c).


 

(In thousands)

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2018

 

2017

 

2016

 

 

Purchased power expense

$

355

$

(3,314)

$

(5,262)

 

 

Cost of gas sold expense

 

(223)

 

(404)

 

(85)

 

 

Total

$

132

$

(3,718)

$

(5,347)

 


(c)

MGE's exchange-traded derivative contracts, over-the-counter party transactions, purchased power agreement, and FTRs are subject to regulatory deferral. These derivatives are therefore marked to fair value and are offset in the financial statements with a corresponding regulatory asset or liability.


16.

Share-Based Compensation - MGE Energy and MGE.


Under MGE Energy's Director Incentive Plan and its Performance Unit Plan, non-employee directors and eligible employees, respectively, may receive performance units that entitle the holder to receive a cash payment equal to the value of a designated number of shares of MGE Energy's common stock, plus dividend equivalent payments thereon, at the end of the set performance period set in the award. In accordance with the plans' provisions, these awards are subject to prescribed vesting schedules and must be settled in cash. Accordingly, no shares of common stock will be issued in connection with the plans.




94




 



On the grant date, the cost of the director or employee services received in exchange for a performance unit award is measured based on the current market value of MGE Energy common stock. The fair value of the awards is remeasured quarterly, including as of December 31, 2018, as required by applicable accounting standards. Changes in fair value as well as the original grant are recognized as compensation cost. Since this amount is remeasured throughout the vesting period, the compensation cost is subject to variability.


Units granted under the Director Incentive Plan are subject to a three-year vesting schedule. The most recent three years of units granted under this plan are as follows:


 

Grant Date

 

MGE Energy

Units Granted

 

 

January 18, 2019

 

5,175

 

 

March 1, 2018

 

1,106

 

 

January 19, 2018

 

4,704

 

 

January 20, 2017

 

4,608

 


Units granted under the Performance Unit Plan are subject to a five-year vesting schedule. The most recent units granted under this plan are as follows:


 

Grant Date

 

MGE Energy

Units Granted

 

 

February 15, 2019

 

17,022

 

 

February 16, 2018

 

17,830

 

 

March 1, 2017

 

14,704

 

 

February 19, 2016

 

19,055

 

 

February 20, 2015

 

18,948

 


For nonretirement eligible employees under the Performance Unit Plan, stock-based compensation costs are accrued and recognized using the graded vesting method. Compensation cost for retirement eligible employees or employees that will become retirement eligible during the vesting schedule are recognized on an abridged horizon as retirement eligibility accelerates vesting.


During the years ended December 31, 2018, 2017 and 2016, MGE recorded $1.1 million, $1.0 million, and $3.1 million, respectively, in compensation expense as a result of awards under the plans. In January 2018, cash payments of $1.6 million were distributed relating to awards that were granted under the plans. No forfeitures of units occurred during the years ended December 31, 2018, 2017, and 2016. As of December 31, 2018, $5.2 million of outstanding awards are vested. Of this amount, no cash settlements have occurred as cash payments are only made at the end of the period covered by the awards.


17.

Commitments and Contingencies.


a.

Purchase Contracts - MGE Energy and MGE.


MGE Energy and MGE have entered into various commodity supply, transportation, and storage contracts to meet their obligations to deliver electricity and natural gas to customers. Management expects to recover these costs in future customer rates. As of December 31, 2018, the future minimum commitments related to these purchase contracts were as follows:


 

(In thousands)

 

2019

 

2020

 

2021

 

2022

 

2023

 

Thereafter

 

 

Coal(a)

$

25,167

$

8,213

$

828

$

-

$

-

$

-

 

 

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Transportation and storage(b)

 

21,051

 

20,853

 

20,853

 

20,853

 

20,853

 

53,361

 

 

    Supply(c)

 

15,423

 

-

 

-

 

-

 

-

 

-

 

 

Purchase power(d)

 

27,577

 

28,082

 

28,675

 

15,533

 

5,641

 

21,751

 

 

Other

 

6,261

 

3,007

 

2,980

 

2,894

 

2,825

 

7

 

 

 

$

95,479

$

60,155

$

53,336

$

39,280

$

29,319

$

75,119

 


(a)

Total coal commitments for the Columbia and Elm Road Units, including transportation. Fuel procurement for MGE's jointly owned Columbia and Elm Road Units is handled by WPL and WEPCO, respectively, who are the operators of those facilities.


(b)

MGE's natural gas transportation and storage contracts require fixed monthly payments for firm supply pipeline transportation and storage capacity. The pricing components of the fixed monthly payments for the transportation and storage contracts are established by FERC but may be subject to change.




95




 



(c)

These commitments include market-based pricing.


(d)

MGE has several purchase power agreements to help meet future electric supply requirements.


b.

Leases - MGE Energy and MGE.


MGE has noncancelable operating leases, primarily for combustion turbines, railcars, and computer equipment. The operating leases generally do not contain renewal options, with the exception of certain railcar operating leases. These leases have a renewal option of one year or less. MGE is required to pay all executory costs, such as maintenance and insurance, for its leases.


Future minimum rental payments as of December 31, 2018, under agreements classified as operating leases with noncancelable terms in excess of one year are as follows:


 

(In thousands)

 

2019

 

2020

 

2021

 

2022

 

2023

 

Thereafter

 

 

Minimum lease payments

$

1,646

$

1,371

$

1,095

$

989

$

975

$

22,707

 


Rental expense under operating leases totaled $1.6 million, $1.7 million, and $2.0 million for 2018, 2017, and 2016, respectively.


c.

Environmental - MGE Energy and MGE.


Water Quality


Water quality regulations promulgated by the EPA and WDNR in accordance with the Federal Water Pollution Control Act, or more commonly known as the Clean Water Act (CWA), impose restrictions on discharges of various pollutants into surface waters. The CWA also regulates surface water quality issues that affect aquatic life, such as water temperatures, intake structures, and wetlands filling. The CWA also includes discharge standards, which require the use of effluent-treatment processes equivalent to categorical "best practicable" or "best available" technologies. The CWA regulates discharges from "point sources," such as power plants, through establishing discharge limits in water discharge permits. MGE's power plants operate under Wisconsin Pollution Discharge Elimination System (WPDES) permits issued by the WDNR to ensure compliance with these discharge limits. Permits are subject to periodic renewal.


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

In November 2015, the EPA published its final rule setting Effluent Limitations Guidelines (ELG) for the steam electric power generating industry. The ELG rule establishes federal limits on the amount of metals and other pollutants that can be discharged in wastewater from new and existing steam electric generation plants. The rule will be applied to Wisconsin-based power plants as they renew their WPDES permits, no later than 2023. The operators of the Columbia and Elm Road Units have indicated that equipment upgrades may be necessary to comply with the new discharge standards. Management believes that any compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects.


EPA Cooling Water Intake Rules (Section 316(b))

Section 316(b) of the Clean Water Act requires that the cooling water intake structures at electric power plants meet best available technology standards so that mortality from entrainment (drawing aquatic life into a plant's cooling system) and impingement (trapping aquatic life on screens) are reduced. 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.


The WCCF, Blount, and Columbia plants are considered existing plants under this rule. The WCCF facility already employs a system that meets the Section 316(b) rule. The Blount plant's WPDES permit assumes that Blount meets best technology available (BTA) for the duration of the permit, which expires in 2023. However, MGE needs to perform an entrainment study by the end of 2021 to determine future BTA, which will be included with the next permit renewal. Section 316(b) applies to river intakes at the Columbia plant. The operator of the Columbia plant is in the process of a WPDES permit renewal. The draft permit directs the Columbia operator to conduct similar studies on their intake structures. The study requirements will not be known until the permit is final. Future BTA requirements at Blount and Columbia will be based on the results of these required intake studies and will be specified in the next permits issued in 2023 or later. MGE expects that the Section 316(b) rule will not have a material effect on its existing plants.




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Energy Efficiency and Renewables


The Wisconsin Energy Efficiency and Renewables Act requires that 10% of the state's electricity be generated from renewable sources. MGE is in compliance with the requirement. The costs to comply with the Act and its accompanying regulations are being recovered in rates.


Air Quality


Federal and state air quality regulations impose restrictions on various emissions, including emissions of particulate matter (PM), sulfur dioxide (SO2), nitrogen oxides (NOx), and other pollutants, and require permits for operation of emission sources. These permits have been obtained by MGE and must be renewed periodically. Current EPA initiatives under the Clean Air Act, including the Cross-State Air Pollution Rule (CSAPR), and National Ambient Air Quality Standards (NAAQS), and the Affordable Clean Energy (ACE) rule have the potential to result in additional operating and capital expenditure costs for MGE.


EPA's Greenhouse Gas (GHG) Reduction Guidelines under the Clean Air Act 111(d) Rule

The EPA's Clean Power Plan (CPP) rule became effective in December 2015, setting guidelines for states to use in developing plans to control GHG emissions from existing fossil fuel-fired EGUs and systems. When fully implemented in 2030, the CPP was projected to reduce GHG emissions from this sector by 32% below 2005 levels. States were given up to three years to submit a plan or be subject to a federal plan to meet the reduction goals, and states were expected to meet interim goals starting in 2022 and the final goals in 2030. Implementation of the rule was expected to have a direct impact on coal and natural gas fired generating units, including possible changes in dispatch and additional operating costs. In February 2016, the U.S. Supreme Court stayed implementation of the CPP which remains in effect. In October 2017, the EPA proposed to rescind the CPP.


In August 2018, the EPA proposed the ACE rule which would replace the CPP, if successfully implemented. The ACE proposal directs states to submit plans to the EPA for approval that implement standards of performance (called Best System of Emissions Reductions, or BSER) for individual EGUs over 25 MW. ACE defines BSER as on-site, heat-rate efficiency improvements, whereas the CPP defines BSERs using carbon dioxide emission performance rates. Simple cycle units such as smaller combustion units, and combined cycle units such as the WCCF are exempt from the proposed rule. Under the ACE proposal, if a state fails to prepare a plan, or its plan is not approved by the EPA, a federal implementation plan will be issued for that state. The proposed ACE as it is currently written has the potential to impact Blount, Columbia, and the Elm Road Units.


Given the pending legal proceedings, and the proposed ACE rule, the nature and timing of any final requirements is subject to uncertainty. MGE is unable to determine with any certainty the impact of the CPP and proposed ACE rule on our operations. If an ACE rule is implemented substantially in the form of the CPP rule, it is expected to have a material impact on MGE. MGE will continue to monitor developments with the proposed ACE rule, the CPP rule, and related litigation.


National Ambient Air Quality Standards (NAAQS) and Related Rules

The EPA's NAAQS regulations have been developed to set ambient levels of six pollutants to protect sensitive human populations (primary NAAQS) and the environment (secondary NAAQS) from the negative effects of exposure to these pollutants at higher levels. The Clean Air Act requires that the EPA periodically review, and adjust as necessary, the NAAQS for these six air pollutants. The EPA's NAAQS review can result in a lowering of the allowed ambient levels of a pollutant, a change in how the pollutant is monitored, and/or a change in which sources of that pollutant are regulated. States implement any necessary monitoring and measurement changes and recommend areas for attainment (meets the ambient requirements) or nonattainment (does not meet these standards). The EPA makes the final attainment and nonattainment determinations. States must come up with a state implementation plan (SIP) to get nonattainment areas into attainment and maintain air quality in attainment areas. A company with facilities located in a nonattainment area will be most affected. Their facilities may be subject to additional data submissions and measurement during permitting renewals, their facilities may need to meet new emission limitations set by the SIP (which could result in significant capital expenditures), and the company may have additional expenses and/or difficulties expanding existing facilities or building new facilities. The process from determining acceptable primary and/or secondary NAAQS to executing SIPs can take years. Since the NAAQS regulations have the potential to affect both existing and new facilities in areas, MGE continuously monitors changes to these rules to evaluate whether changes could impact its operations. In addition, the EPA has adopted interstate



97




 



transport rules, such as the CSAPR, to address contributions to NAAQS nonattainment from upwind sources in neighboring states. In the following paragraphs we discuss specific NAAQS and transport rule developments that may affect MGE.


Ozone NAAQS

In May 2018, the EPA issued a final rule which designated the northeast portion of Milwaukee County as being in nonattainment with Ozone NAAQS. The Elm Road Units are located in Milwaukee County, outside the designated nonattainment area. In August 2018, several environmental groups, the City of Chicago, and the State of Illinois filed federal lawsuits challenging several of the EPA's attainment designation decisions, including the partial Milwaukee County designation as being too narrow and not sufficiently protective. MGE is monitoring the outcome of this lawsuit and how it may affect the Elm Road Units in Milwaukee County. If the entire county where to be considered in nonattainment as a result of this lawsuit, the State of Wisconsin would need to develop an implementation plan that addressed emissions that contribute to Ozone (NOx and Volatile Organic Compound emissions) for the County, which could affect operations and emissions control obligations of the Elm Road units. MGE is monitoring the outcome of this lawsuit and how it may affect the Elm Road Units in Milwaukee County. At this time MGE expects that the 2015 Ozone NAAQS will not have a material effect on its existing plants based on final designations.


EPA's Cross-State Air Pollution Rule: Proposed Ozone Season Update based on 2008 Ozone NAAQS

The EPA's CSAPR is an interstate air pollution transport rule designed to reduce ozone and fine particulate (PM2.5) air levels in areas that the EPA has determined are being significantly impacted by pollution from neighboring and upwind states. This is accomplished in the CSAPR through a reduction in SO2 and NOx from qualifying fossil-fuel fired power plants in upwind or "contributing" states. NOx and SO2 contribute to fine particulate pollution and NOx contributes to ozone formation in downwind areas. Reductions are achieved through a cap and trade system. Individual plants can meet their caps through modifications and/or buying allowances on the market.


In October 2016, the EPA finalized rulemaking for an update to CSAPR that incorporated 2008 Ozone NAAQS standards into the rule (the original CSAPR is based on 1997 Ozone NAAQS standards) and began further reducing summertime ozone season NOx allowances in 2017. The update affects 22 states, including Wisconsin, by further limiting statewide NOx allowances in each of those states. The rule also includes revisions to CSAPR that are designed to address issues remaining from the D.C. Circuit remand of CSAPR, including Wisconsin's inclusion in the NOx ozone season portion of the rule. The State of Wisconsin filed a legal challenge to the CSAPR update rule asserting, among other things, that the rule over-controls NOx emissions in Wisconsin.


MGE has met our CSAPR obligations in 2018 and 2017 through a combination of reduced emissions through pollution control (e.g. SCR installation at Columbia), as well as owned, received, and purchased allowances. There remains uncertainty around CSAPR due to legal challenges, however, MGE expects that we will meet ongoing CSAPR obligations for the foreseeable future. MGE will continue to monitor developments and litigations to this rule.


Clean Air Visibility Rule (CAVR)

Columbia is subject to the best available retrofit technology (BART) regulations, a subsection of the EPA's 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. At this time, however, the BART regulatory obligations, compliance strategies, and costs remain uncertain in Wisconsin due to the continued legal challenges surrounding CSAPR and CAVR. MGE will continue to monitor developments to this rule.


Solid Waste


EPA's Coal Combustion Residuals Rule

The EPA's Coal Combustion Residuals Rule (CCR), which regulates coal ash from burning coal for purpose of generating electricity as a solid waste, and defines what ash use activities would be considered generally exempt beneficial reuse of coal ash. The CCR rule also regulates existing, modified, and new landfills, ash ponds, and other surface impoundments used for coal combustion residuals by regulating their design, location, monitoring, and operation.




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Review of the Elm Road Units has indicated that the costs to comply with this rule are not expected to be significant. Columbia's operator has completed a review of their system and has determined that an onsite ash pond will need to be closed and replaced with a dry ash handling system. The dry ash handling system installation is planned for 2020-2021.


In July 2018, the EPA published a final rule that included amendments to the CCR (which include the allowance of alternative performance standards for landfills and surface impoundments, revised risk-based groundwater protection standards, and an extension of the deadline by which certain facilities must cease the placement of waste in CCR units). In August 2018, the Court of Appeals for the D.C. Circuit vacated parts of the CCR for not being sufficiently protective of the environment. It is unclear how the EPA will respond to that decision. MGE will continue to monitor potential rule modifications to assess potential impacts on our operations.


In 2015, MGE recorded an asset retirement obligation for its share of the legal liability associated with the effect of the CCR. Actual costs of compliance may be different than the amount recorded due to potential changes in compliance strategies that will be used, as well as other potential cost estimate changes.


Columbia


Based upon current available information, compliance with various environmental requirements and initiatives is expected to result in significant additional operating and capital expenditures at Columbia as noted below.


Columbia Clean Air Act Litigation

Columbia is a coal-fired generating station operated by WPL in which WPL, WPSC, and MGE have ownership interests. In December 2009, the EPA sent a Notice of Violation (NOV) to the co-owners, including MGE. The NOV alleged that WPL, which is the plant operator, and the Columbia co-owners failed to comply with appropriate pre-construction review and permitting requirements and, as a result, violated the Prevention of Significant Deterioration program requirements, Title V Operating Permit requirements of the CAA, and the Wisconsin SIP. In June 2013, the court approved and entered a consent decree entered by the EPA, Sierra Club, and the co-owners of Columbia. One of the requirements of the consent decree requires installation of an SCR system at Columbia Unit 2 by December 31, 2018. Installation of the SCR was approved by the PSCW, which was placed in service in 2018.


d.

Legal Matters - MGE Energy and MGE.


MGE is involved in various legal matters that are being defended and handled in the normal course of business. MGE maintains accruals for such costs that are probable of being incurred and subject to reasonable estimation. The accrued amount for these matters is not material to the financial statements. MGE does not expect the resolution of these matters to have a material adverse effect on its consolidated results of operations, financial condition, or cash flows.


e.

Other Commitments.


MGE Energy holds investments in nonpublic venture funds. From time to time, these entities require additional capital infusions from their investors. MGE Energy has committed to contribute $11.4 million in capital for such infusions. The timing of these infusions is dependent on the needs of the investee and is therefore uncertain at this time.


In addition, MGE Energy has a three year agreement with a venture debt fund expiring in December 2019. MGE Energy has committed to invest up to a total of $1.5 million into this fund. As of December 31, 2018, MGE Energy has $0.6 million remaining in commitments. The timing of infusions is dependent on the needs of the fund and is therefore uncertain at this time.


MGE has several other commitments related to various projects. Payments for these commitments are expected to be as follows:


 

(In thousands)

 

2019

 

2020

 

2021

 

2022

 

2023

 

Thereafter

 

 

Other commitments

$

333

$

333

$

333

$

333

$

333

$

3,665

 




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18.

Asset Retirement Obligations - MGE Energy and MGE.


MGE recorded an obligation for the fair value of its legal liability for asset retirement obligations (AROs) associated with removal of the West Campus Cogeneration Facility and the Elm Road Units, electric substations, combustion turbine generating units, wind generating facilities, and photovoltaic generating facilities, all of which are located on property not owned by MGE Energy and MGE and would need to be removed upon the ultimate end of the associated leases. The significant conditional AROs identified by MGE included the costs of abandoning in place gas services and mains, the abatement and disposal of equipment and buildings contaminated with asbestos and PCBs, and the proper disposal and removal of tanks, batteries, and underground cable. Changes in management's assumptions regarding settlement dates, settlement methods, or assigned probabilities could have a material effect on the liabilities and the associated regulatory asset recorded as of December 31, 2018.


MGE also may have AROs relating to the removal of various assets, such as certain electric and gas distribution facilities. These facilities are generally located on property owned by third parties, on which MGE is permitted to operate by lease, permit, easement, license, or service agreement. The asset retirement obligations associated with these facilities cannot be reasonably determined due to the indeterminate life of the related agreements.


The following table summarizes the change in AROs. Amounts include conditional AROs.


 

(In thousands)

 

2018

 

2017

 

 

Balance as of January 1,

$

26,738

$

26,886

 

 

Liabilities incurred(a)

 

1,943

 

145

 

 

Accretion expense

 

1,415

 

1,359

 

 

Liabilities settled(b)

 

(175)

 

(1,789)

 

 

Revisions in estimated cash flows

 

59

 

137

 

 

Balance as of December 31,

$

29,980

$

26,738

 


(a)

In 2018, MGE recorded an obligation of $1.6 million for the fair value of its legal liability for AROs associated with Forward Wind. See Footnote 5 for additional information on the purchase of Forward Wind.


(b)

In 2017, MGE removed asbestos at Blount for $1.6 million.


19.

Revenue - MGE Energy and MGE.


Revenues disaggregated by revenue source were as follows:


 

(In thousands)

 

Year Ended December 31,

 

 

Electric revenues

 

2018

 

2017

 

2016

 

 

Residential

$

138,566

$

136,168

$

136,792

 

 

Commercial(a)

 

204,683

 

216,461

 

213,101

 

 

Industrial

 

13,878

 

16,176

 

17,589

 

 

Other-retail/municipal

 

34,023

 

38,010

 

35,559

 

 

    Total retail

 

391,150

 

406,815

 

403,041

 

 

Sales to the market

 

7,438

 

4,067

 

6,135

 

 

Other revenues

 

1,870

 

2,323

 

1,483

 

 

Adjustments to revenues

 

424

 

721

 

(1,653)

 

 

    Total electric revenues

 

400,882

 

413,926

 

409,006

 

 

 

 

 

 

 

 

 

 

 

Gas revenues

 

 

 

 

 

 

 

 

Residential

 

94,017

 

88,695

 

81,014

 

 

Commercial/Industrial(a)

 

59,060

 

55,151

 

48,497

 

 

    Total retail

 

153,077

 

143,846

 

129,511

 

 

Gas transportation

 

4,283

 

4,561

 

4,635

 

 

Other revenues

 

407

 

418

 

397

 

 

    Total gas revenues

 

157,767

 

148,825

 

134,543

 

 

 

 

 

 

 

 

 

 

 

Nonregulated energy revenues

 

1,119

 

348

 

1,196

 

 

Total Operating Revenue(a)

$

559,768

$

563,099

$

544,745

 


(a)

In 2017 and 2016, MGE had less than $0.1 million of revenues related to CNG vehicle fuel servicing. No revenue was recognized for fuel servicing by MGE Energy in 2017 and 2016.




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Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of MGE Energy's and MGE's contracts have a single performance obligation.


Retail Revenue (Residential, Commercial, Industrial, and Other Retail/Municipal)

Retail revenue of electric and gas utility service represent MGE's core business activities. Tariffs are approved by the PSCW through a rate order and provide MGE's customers with the standard terms and conditions, including pricing terms. The performance obligation to deliver electricity or gas is satisfied over time as the customer simultaneously receives and consumes the commodities provided by MGE. MGE recognizes revenues as the commodity is delivered to customers. Meters are read on a systematic basis throughout the month based on established meter-reading schedules and the customer is subsequently billed for their services. At the end of the month, MGE accrues an estimate for the unbilled amount of commodities delivered to customers. The unbilled revenue estimate is based on daily system demand volumes, weather factors, estimated line losses, estimated customer usage by class, and applicable customer rates.


Utility Cost Recovery Mechanisms

MGE's tariff rates include a provision for fuel cost recovery. The PSCW allows Wisconsin utilities to defer electric fuel-related costs, less excess revenues, that fall outside a symmetrical cost tolerance band. Any over/under recovery of the actual costs in a given year is determined in the following year and is then reflected in future billings to electric retail customers. Over-collection of fuel-related costs that are outside the approved range will be recognized as a reduction of revenue. Prior to adoption of the new revenue recognition guidance, effective January 1, 2018, over-collected fuel-related costs were reflected in "Purchased power" expense. Under-collection of these costs will continue to be recognized in "Purchased power" expense in the consolidated statements of income. The cumulative effects of these deferred amounts will be recorded in "Regulatory assets" or "Regulatory liabilities" on the consolidated balance sheets until they are reflected in future billings to customers. See Footnote 8.b. for further information.


MGE received a PSCW order in January 2018 to defer the over-collection of income tax expense collected in customer rates as a result of the Tax Cuts and Jobs Act (the Tax Act) reduction in the income tax rate to 21 percent. See Footnote 12 for further information.


MGE has other cost recovery mechanisms. For example, any over-collection of the difference between actual costs incurred and the amount of costs collected from customers is recorded as a reduction of revenue in the period incurred.


Sales to the Market

Sales to the market include energy charges, capacity or demand charges, and ancillary charges represented by wholesale sales of electricity made to third parties who are not ultimate users of the electricity. Most of these sales are spot market transactions on the markets operated by MISO. Each transaction is considered a performance obligation and revenue is recognized in the period in which energy charges, capacity or demand charges, and ancillary services are sold into MISO. MGE reports, on a net basis, transactions on the MISO markets in which it buys and sells power within the same hour to meet electric energy delivery requirements.


Transportation of Gas

MGE has contracts under which MGE provides gas transportation services to customers who have elected to purchase gas from a third party and have the gas delivered via pipelines within MGE's service territory. Revenue is recognized as service is rendered or gas is delivered to customers. Tariffs are approved by the PSCW through a rate order and provide gas transportation customers with the standard terms and conditions, including pricing terms.


20.

Noncontrolling Interest - MGE.


The noncontrolling interest on MGE's consolidated balance sheets as of December 31 was as follows:


 

(In thousands)

 

2018

 

2017

 

 

MGE Power Elm Road(a)

$

97,519

$

97,635

 

 

MGE Power West Campus(a)

 

43,935

 

43,267

 

 

Total Noncontrolling Interest

$

141,454

$

140,902

 




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The net income attributable to noncontrolling interest, net of tax, for the years ended December 31, 2018, 2017, and 2016 was as follows:


 

(In thousands)

 

2018

 

2017

 

2016

 

 

MGE Power Elm Road(a)

$

15,384

$

29,274

$

14,748

 

 

MGE Power West Campus(a)

 

7,168

 

13,963

 

7,200

 

 

MGE Transco(b)

 

-

 

-

 

1,410

 

 

Net Income Attributable to Noncontrolling Interest, Net of Tax

$

22,552

$

43,237

$

23,358

 


(a)

MGE Power Elm Road and MGE Power West Campus are not subsidiaries of MGE; however, they have been consolidated in the consolidated financial statements of MGE (see Footnote 3). MGE Power Elm Road and MGE Power West Campus are 100% owned by MGE Power, and MGE Power is 100% owned by MGE Energy. MGE Energy's proportionate share of the equity and net income (through its wholly owned subsidiary MGE Power) of MGE Power Elm Road and MGE Power West Campus is classified within the MGE consolidated financial statements as noncontrolling interest. In 2017, there was a $14.8 million and $6.8 million one-time tax impact as a result of the Tax Act for MGE Power Elm Road and MGE Power West Campus, respectively. The Tax Act reduced the federal tax rate from 35% to 21%. See Footnote 12 for further information.


(b)

As of December 31, 2018, MGE Energy is the owner of MGE Transco. In July 2016, MGE's ownership interest in MGE Transco declined below a majority as a result of continued funding of ATC capital contributions by MGE Energy. As a result of the change in majority ownership in MGE Transco, MGE deconsolidated MGE Energy's proportionate share of the equity in MGE Transco. The change in consolidation was applied prospectively by reducing its investment and noncontrolling interest on MGE's consolidated financial statements. The change had no effect on MGE Energy's consolidated financial statements; however, MGE Energy's proportionate share of the equity and net income of MGE Transco classified as noncontrolling interest was deconsolidated from MGE's financial statements. No gain or loss was recognized in July 2016 due to MGE ceasing to have a controlling financial interest.


21.

Segment Information - MGE Energy and MGE.


The electric utility business purchases, generates and distributes electricity, and contracts for transmission service. The gas utility business purchases and distributes natural gas and contracts for the transportation of natural gas. Both the electric and gas segments operate through MGE Energy's principal subsidiary, MGE.


The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power, MGE Power Elm Road, and MGE Power West Campus. These subsidiaries own and lease electric generating capacity to assist MGE. MGE Power Elm Road has an ownership interest in two coal-fired generating units in Oak Creek, Wisconsin, which are leased to MGE, and MGE Power West Campus owns a controlling interest in the electric generation plant of a natural gas-fired cogeneration facility on the UW campus. MGE Power West Campus's portion is also leased to MGE.


The transmission investment segment invests in ATC, a company that provides electric transmission services primarily in Wisconsin, and ATC Holdco, a company formed to pursue electric transmission development and investments outside of Wisconsin. These investments are held in MGE Transco and MGEE Transco, respectively. See Footnote 6 for further discussion.


The "All Others" segment includes: corporate, CWDC, MAGAEL, MGE State Energy Services, MGE Services, NGV Fueling Services (dissolved in 2018), and North Mendota. These entities' operations consist of investing in companies and property which relate to the regulated operations, financing the regulated operations, or owning and operating natural gas compression equipment.


General corporate expenses include the cost of executive management, corporate accounting and finance, information technology, risk management, human resources and legal functions, and employee benefits that are allocated to electric and gas segments based on formulas prescribed by the PSCW. Identifiable assets are those used in MGE's operations in each segment.


Sales between our electric and gas segments are based on PSCW approved tariffed rates. Additionally, intersegment operations related to the leasing arrangement between our electric segment and MGE Power Elm Road/MGE Power West Campus are based on terms previously approved by the PSCW. Consistent with internal reporting, management has presented the direct financing capital leases between MGE and MGE Power Elm Road/MGE Power West Campus based on actual lease payments included in rates. Lease payments made by MGE to MGE Power Elm Road and MGE Power West Campus are shown as operating expenses. The lease payments received by MGE Power Elm Road and MGE Power West Campus from MGE are shown as lease income in interdepartmental revenues. The depreciation expense associated with the Elm Road Units and WCCF is reflected in the nonregulated energy segment.




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The following table shows segment information for MGE Energy's and MGE's operations:


(In thousands)

MGE Energy

 

Electric

 

Gas

 

Non-Regulated Energy

 

Transmission Investment

 

All Others

 

Consolidation/ Elimination Entries

 

Consolidated Total

Year Ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

400,882

$

157,767

$

1,119

$

-

$

-

$

-

$

559,768

Interdepartmental revenues

 

(289)

 

16,076

 

39,526

 

-

 

-

 

(55,313)

 

-

Total operating revenues

 

400,593

 

173,843

 

40,645

 

-

 

-

 

(55,313)

 

559,768

Depreciation and amortization

 

(38,925)

 

(10,060)

 

(7,427)

 

-

 

-

 

-

 

(56,412)

Other operating expenses

 

(297,374)

 

(145,883)

 

(144)

 

(16)

 

(1,045)

 

55,313

 

(389,149)

Operating income (loss)

 

64,294

 

17,900

 

33,074

 

(16)

 

(1,045)

 

-

 

114,207

Other income (deductions), net

 

7,294

 

3,132

 

-

 

8,602

 

(1,973)

 

-

 

17,055

Interest (expense) income, net

 

(12,198)

 

(3,692)

 

(5,307)

 

-

 

1,588

 

-

 

(19,609)

Income (loss) before taxes

 

59,390

 

17,340

 

27,767

 

8,586

 

(1,430)

 

-

 

111,653

Income tax (provision) benefit

 

(13,453)

 

(4,474)

 

(7,534)

 

(2,345)

 

372

 

-

 

(27,434)

Net income (loss)

$

45,937

$

12,866

$

20,233

$

6,241

$

(1,058)

$

-

$

84,219

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

413,926

$

148,825

$

348

$

-

$

-

$

-

$

563,099

Interdepartmental revenues

 

(510)

 

14,974

 

44,468

 

-

 

-

 

(58,932)

 

-

Total operating revenues

 

413,416

 

163,799

 

44,816

 

-

 

-

 

(58,932)

 

563,099

Depreciation and amortization

 

(36,660)

 

(9,000)

 

(7,417)

 

-

 

-

 

-

 

(53,077)

Other operating expenses(a)

 

(308,100)

 

(135,029)

 

(190)

 

(9)

 

(1,001)

 

58,932

 

(385,397)

Operating income (loss)

 

68,656

 

19,770

 

37,209

 

(9)

 

(1,001)

 

-

 

124,625

Other income (deductions), net(a)

 

4,539

 

1,912

 

-

 

9,844

 

(1,896)

 

-

 

14,399

Interest (expense) income, net

 

(11,257)

 

(3,234)

 

(5,533)

 

-

 

700

 

-

 

(19,324)

Income (loss) before taxes

 

61,938

 

18,448

 

31,676

 

9,835

 

(2,197)

 

-

 

119,700

Income tax (provision) benefit(b)

 

(20,547)

 

(7,303)

 

8,860

 

(3,954)

 

850

 

-

 

(22,094)

Net income (loss)

$

41,391

$

11,145

$

40,536

$

5,881

$

(1,347)

$

-

$

97,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

409,006

$

134,543

$

1,196

$

-

$

-

$

-

$

544,745

Interdepartmental revenues

 

1,912

 

21,378

 

43,930

 

-

 

-

 

(67,220)

 

-

Total operating revenues

 

410,918

 

155,921

 

45,126

 

-

 

-

 

(67,220)

 

544,745

Depreciation and amortization

 

(29,122)

 

(8,128)

 

(7,372)

 

-

 

(24)

 

-

 

(44,646)

Other operating expenses(a)

 

(313,649)

 

(128,721)

 

(155)

 

(17)

 

(895)

 

67,220

 

(376,217)

Operating income (loss)

 

68,147

 

19,072

 

37,599

 

(17)

 

(919)

 

-

 

123,882

Other income, net(a)

 

3,668

 

1,668

 

-

 

8,429

 

292

 

-

 

14,057

Interest (expense) income, net

 

(11,147)

 

(3,223)

 

(5,768)

 

-

 

272

 

-

 

(19,866)

Income (loss) before taxes

 

60,668

 

17,517

 

31,831

 

8,412

 

(355)

 

-

 

118,073

Income tax (provision) benefit

 

(20,115)

 

(6,894)

 

(12,775)

 

(2,836)

 

107

 

-

 

(42,513)

Net income (loss)

$

40,553

$

10,623

$

19,056

$

5,576

$

(248)

$

-

$

75,560


(a)

Reflects retrospective application of new accounting pronouncement related to pension and other postretirement benefits. See Footnote 2 for further information.


(b)

In December 2017, there was a $21.7 million one-time tax impact as a result of the Tax Act. See Footnote 12 for further information.



103




 




(In thousands)

MGE

 

Electric

 

Gas

 

Nonregulated Energy

 

Transmission Investment(d)

 

Consolidation/ Elimination Entries

 

Consolidated Total

Year Ended December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

400,882

$

157,767

$

1,119

$

-

$

-

$

559,768

Interdepartmental revenues

 

(289)

 

16,076

 

39,526

 

-

 

(55,313)

 

-

Total operating revenues

 

400,593

 

173,843

 

40,645

 

-

 

(55,313)

 

559,768

Depreciation and amortization

 

(38,925)

 

(10,060)

 

(7,427)

 

-

 

-

 

(56,412)

Other operating (expenses) income(c)

 

(310,626)

 

(150,195)

 

(7,678)

 

-

 

55,313

 

(413,186)

Operating income(c)

 

51,042

 

13,588

 

25,540

 

-

 

-

 

90,170

Other income, net(c)

 

7,093

 

2,970

 

-

 

-

 

-

 

10,063

Interest expense, net

 

(12,198)

 

(3,692)

 

(5,307)

 

-

 

-

 

(21,197)

Net income

 

45,937

 

12,866

 

20,233

 

-

 

-

 

79,036

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 noncontrolling interest, net of tax

 

-

 

-

 

-

 

-

 

(22,552)

 

(22,552)

Net income attributable to MGE

$

45,937

$

12,866

$

20,233

$

-

$

(22,552)

$

56,484

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

413,929

$

148,834

$

348

$

-

$

-

$

563,111

Interdepartmental revenues

 

(513)

 

14,965

 

44,468

 

-

 

(58,920)

 

-

Total operating revenues

 

413,416

 

163,799

 

44,816

 

-

 

(58,920)

 

563,111

Depreciation and amortization

 

(36,660)

 

(9,000)

 

(7,417)

 

-

 

-

 

(53,077)

Other operating (expenses) income(a)(b)(c)

 

(328,093)

 

(142,175)

 

8,670

 

-

 

58,920

 

(402,678)

Operating income(c)

 

48,663

 

12,624

 

46,069

 

-

 

-

 

107,356

Other income, net(a)(c)

 

3,985

 

1,755

 

-

 

-

 

-

 

5,740

Interest expense, net

 

(11,257)

 

(3,234)

 

(5,533)

 

-

 

-

 

(20,024)

Net income

 

41,391

 

11,145

 

40,536

 

-

 

-

 

93,072

Less: net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest, net of tax

 

-

 

-

 

-

 

-

 

(43,237)

 

(43,237)

Net income attributable to MGE

$

41,391

$

11,145

$

40,536

$

-

$

(43,237)

$

49,835

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

409,030

$

134,572

$

1,196

$

-

$

-

$

544,798

Interdepartmental revenues

 

1,888

 

21,349

 

43,930

 

-

 

(67,167)

 

-

Total operating revenues

 

410,918

 

155,921

 

45,126

 

-

 

(67,167)

 

544,798

Depreciation and amortization

 

(29,122)

 

(8,128)

 

(7,372)

 

-

 

-

 

(44,622)

Other operating expenses(a)(c)

 

(333,632)

 

(135,578)

 

(12,930)

 

-

 

67,167

 

(414,973)

Operating income (loss)(c)

 

48,164

 

12,215

 

24,824

 

-

 

-

 

85,203

Other income (deductions), net(a)(c)

 

3,536

 

1,631

 

-

 

4,360

 

-

 

9,527

Interest expense, net

 

(11,147)

 

(3,223)

 

(5,768)

 

-

 

-

 

(20,138)

Net income

 

40,553

 

10,623

 

19,056

 

4,360

 

-

 

74,592

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest, net of tax

 

-

 

-

 

-

 

-

 

(23,358)

 

(23,358)

Net income attributable to MGE

$

40,553

$

10,623

$

19,056

$

4,360

$

(23,358)

$

51,234


(a)

Reflects retrospective application of new accounting pronouncement related to pension and other postretirement benefits. See Footnote 2 for further information.


(b)

In December 2017, there was a $21.7 million one-time tax impact as a result of the Tax Act. See Footnote 12 for further information.


(c)

Amounts are shown net of the related tax expense, consistent with the presentation on the MGE Consolidated Statements of Income.


(d)

As of July 31, 2016, MGE no longer consolidates MGE Energy's proportionate share of equity earnings in MGE Transco. See Footnote 6 for further information.




104




 



The following table shows segment information for MGE Energy's and MGE's assets and capital expenditures:


 

 

Utility

 

 

Consolidated

(In thousands)

MGE Energy

 

Electric

 

Gas

 

 

Nonregulated Energy

 

Transmission Investment(e)

 

All Others

 

Consolidation/ Elimination Entries

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

$

1,193,083

$

377,005

 

$

265,301

$

66,366

$

465,661

$

(378,798)

$

1,988,618

December 31, 2017

 

1,058,988

 

354,875

 

 

270,384

 

61,783

 

485,548

 

(376,396)

 

1,855,182

December 31, 2016

 

1,038,308

 

329,538

 

 

271,277

 

74,535

 

465,202

 

(377,800)

 

1,801,060

Capital Expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended Dec. 31, 2018

$

176,399

$

30,497

 

$

5,301

$

-

$

-

$

-

$

212,197

Year ended Dec. 31, 2017

 

77,353

 

26,847

 

 

3,931

 

-

 

-

 

-

 

108,131

Year ended Dec. 31, 2016

 

50,699

 

29,136

 

 

3,824

 

-

 

-

 

-

 

83,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

Utility

 

 

Consolidated

 

(In thousands)

MGE

 

Electric

 

Gas

 

 

Nonregulated Energy

 

Consolidation/ Elimination Entries

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

$

1,193,083

$

377,005

 

$

265,251

$

(448)

$

1,834,891

 

December 31, 2017

 

1,058,988

 

354,875

 

 

270,334

 

(156)

 

1,684,041

 

December 31, 2016

 

1,038,308

 

329,538

 

 

271,227

 

(221)

 

1,638,852

 

Capital Expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

Year ended Dec. 31, 2018

$

176,399

$

30,497

 

$

5,301

$

-

$

212,197

 

Year ended Dec. 31, 2017

 

77,353

 

26,847

 

 

3,931

 

-

 

108,131

 

Year ended Dec. 31, 2016

 

50,699

 

29,136

 

 

3,824

 

-

 

83,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(e)

In December 2017, there was a $20.4 million one-time tax impact as a result of the Tax Act. See Footnote 12 for further information.




105




 



22.

Quarterly Summary of Operations - MGE Energy (unaudited).


 

(In thousands, except per share amounts)

 

Quarters Ended

 

 

2018

 

March 31

 

June 30

 

September 30

 

December 31

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

Electric revenues

$

94,867

$

99,282

$

119,388

$

88,464

 

 

Gas revenues

 

62,765

 

24,980

 

18,407

 

51,615

 

 

Total Operating Revenues

 

157,632

 

124,262

 

137,795

 

140,079

 

 

Operating expenses

 

131,444

 

100,031

 

97,997

 

116,089

 

 

Operating income

 

26,188

 

24,231

 

39,798

 

23,990

 

 

Interest and other income, net

 

180

 

(52)

 

(695)

 

(1,987)

 

 

Income tax provision

 

(6,367)

 

(5,828)

 

(9,597)

 

(5,642)

 

 

Earnings on common stock

$

20,001

$

18,351

$

29,506

$

16,361

 

 

Earnings per common share

$

0.58

$

0.53

$

0.85

$

0.47

 

 

Dividends per share

$

0.323

$

0.323

$

0.338

$

0.338

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

Electric revenues

$

98,397

$

102,382

$

120,761

$

92,734

 

 

Gas revenues

 

58,426

 

24,081

 

18,778

 

47,540

 

 

Total Operating Revenues

 

156,823

 

126,463

 

139,539

 

140,274

 

 

Operating expenses(a)

 

124,987

 

100,868

 

97,542

 

115,077

 

 

Operating income

 

31,836

 

25,595

 

41,997

 

25,197

 

 

Interest and other income, net(a)

 

(1,369)

 

(1,316)

 

216

 

(2,456)

 

 

Income tax provision(b)

 

(11,167)

 

(8,736)

 

(15,584)

 

13,393

 

 

Earnings on common stock

$

19,300

$

15,543

$

26,629

$

36,134

 

 

Earnings per common share

$

0.56

$

0.45

$

0.77

$

1.04

 

 

Dividends per share

$

0.308

$

0.308

$

0.323

$

0.323

 


(a)

Reflects retrospective application of new accounting pronouncement related to pension and other postretirement benefits. See Footnote 2 for more information.


(b)

In December 2017, there was a $21.7 million one-time tax impact as a result of the Tax Act. See Footnote 12 for further information.


Notes:


The quarterly results of operations within a year may not be comparable because of seasonal and other factors.


The sum of earnings per share of common stock for any four quarters may vary slightly from the earnings per share of common stock for the equivalent twelve-month period due to rounding.


MGE Energy's operations are based primarily on its utility subsidiary MGE.




106




 



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


MGE Energy and MGE


None.


Item 9A. Controls and Procedures.


MGE Energy and MGE


Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures


During the fourth quarter of 2018, each registrant's management, including the principal executive officer and principal financial officer, evaluated its disclosure controls and procedures related to the recording, processing, summarization, and reporting of information in its periodic reports that it files with the SEC. These disclosure controls and procedures have been designed to ensure that material information relating to that registrant, including its subsidiaries, is accumulated and made known to that registrant's management, including its principal executive officer and its principal financial officer, by other employees of that registrant and its subsidiaries as appropriate to allow timely decisions regarding required disclosure, and that this information is recorded, processed, summarized, evaluated, and reported, as applicable, within the time periods specified in the SEC's rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision making can be faulty and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Also, the registrants do not control or manage certain of their unconsolidated entities, and thus, their access and ability to apply their procedures to those entities is more limited than is the case for their consolidated subsidiaries.


As of December 31, 2018, the principal executive officer and principal financial officer of each registrant concluded that such registrant's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective to accomplish their objectives. Each registrant intends to strive continually to improve its disclosure controls and procedures to enhance the quality of its financial reporting.


During the quarter ended December 31, 2018, there were no changes in MGE Energy or MGE's internal controls over financial reporting that materially affected, or are reasonably likely to affect materially, MGE Energy or MGE's internal control over financial reporting.


MGE Energy and MGE


Management of MGE Energy and MGE are required to assess and report on the effectiveness of its internal control over financial reporting as of December 31, 2018. As a result of that assessment, management determined that there were no material weaknesses as of December 31, 2018 and, therefore, concluded that MGE Energy and MGE's internal control over financial reporting was effective. Management's Report on Internal Control Over Financial Reporting is included in Item 8. Financial Statements and Supplementary Data.


Item 9B. Other Information.


MGE Energy


None.



107




 




PART III.


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


MGE Energy


The information required by Item 10 relating to directors and nominees for election as directors at MGE Energy's annual meeting of shareholders is incorporated herein by reference to the information under the heading "ELECTION OF DIRECTORS" in MGE Energy's definitive proxy statement (2019 Proxy Statement) to be filed with the SEC before April 30, 2019. Information relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the information under the heading "BENEFICIAL OWNERSHIP - Section 16(a) Beneficial Ownership Reporting Compliance" in the 2019 Proxy Statement.


The information required by Item 10 relating to executive officers is set forth above in Item 1. Business - Executive Officers of the Registrants.


Code of Ethics


MGE Energy has adopted a Code of Ethics applicable to its directors and all of its employees, including its chief executive officer, chief financial officer, and principal accounting officer. The Code of Ethics is available on MGE Energy's website at www.mgeenergy.com.


Item 11. Executive Compensation.


See Item 12.


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


MGE Energy


The required information is included in the 2019 Proxy Statement, which will be filed with the SEC before April 30, 2019, for Item 11 under the section "EXECUTIVE COMPENSATION," not including "Compensation Committee Report," and "Cumulative Five-Year Total Return Comparison Graph," and for Item 12 under the section "BENEFICIAL OWNERSHIP," which is incorporated herein by reference.


MGE Energy does not have or maintain any compensation plans pursuant to which equity is issued.


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


MGE Energy


The information required by Item 13 is incorporated by reference herein from the "BOARD OF DIRECTORS INFORMATION" section in the 2019 Proxy Statement, which will be filed with the SEC before April 30, 2019.



108




 




Item 14. Principal Accounting Fees and Services.


MGE Energy


The information required by Item 14 is incorporated herein by reference to the information under the heading "RATIFICATION OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM" in the 2019 Proxy Statement, which will be filed with the SEC before April 30, 2019.


MGE


Independent Registered Public Accounting Firm Fees Disclosure


 

 

 

2018

 

2017

 

 

Audit fees(a)

$

871,231

$

829,746

 

 

Audit-related fees(b)

 

371,838

 

75,000

 

 

Tax fees(c)

 

62,654

 

47,065

 

 

All other fees(d)

 

332,538

 

304,028

 


(a)

Professional services rendered for the audits of the financial statements, review of the interim financial statements, opinion on the effectiveness of our internal control over financial reporting for MGE Energy, and services that generally only the independent auditor can reasonably provide, such as comfort letters, statutory audits, consents, and assistance with and review of documents filed with the SEC.


(b)

Audit-Related Fees for 2018 include professional services rendered in connection with the Enterprise Forward project implementation review that included review of security and internal controls and utility commission-mandated obligations. Enterprise Forward is a strategic project aimed at transforming MGE into a digital integrated utility and includes replacement of enterprise resource planning platform and customer information system applications. Audit-Related Fees for 2017 include professional services rendered in connection with utility commission-mandated obligations.


(c)

Tax Fees for 2018 include Tax Reform services, review of federal and state income tax returns, and tax planning. Tax Fees for 2017 include review of federal and state income tax returns and tax planning.


(d)

Other fees for 2018 and 2017 include Enterprise Forward strategic advisory services.


MGE is a wholly owned subsidiary of MGE Energy and does not have a separate audit committee. Instead, that function is fulfilled for MGE by the MGE Energy Audit Committee. The Audit Committee approves each engagement of the independent registered public accounting firm to render any audit or nonaudit services before the firm is engaged to render those services. The Chair of the Audit Committee or other designated Audit Committee member may represent the entire Audit Committee for purposes of this approval. Any services approved by the Chair or other designated Audit Committee members are reported to the full Audit Committee at the next scheduled Audit Committee meeting. No de minimis exceptions to this approval process are allowed under the Audit Committee Charter; and thus, none of the services described in the preceding table were approved pursuant to Rule 2-01(c)(7)(i)(C) of Regulation S-X.




109




 




PART IV.


Item 15. Exhibits and Financial Statement Schedules.


(a)

1. Financial Statements.

 

 

MGE Energy

 

Consolidated Statements of Income for the years ended December 31, 2018, 2017, and 2016

54

Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017, and 2016

54


Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016

55

Consolidated Balance Sheets as of December 31, 2018 and 2017

56

Consolidated Statements of Common Equity as of December 31, 2018, 2017, and 2016

57

Notes to Consolidated Financial Statements

62

 

 

MGE

 

Consolidated Statements of Income for the years ended December 31, 2018, 2017, and 2016

58

Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017, and 2016

58

Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017, and 2016

59

Consolidated Balance Sheets as of December 31, 2018 and 2017

60

Consolidated Statements of Common Equity as of December 31, 2018, 2017, and 2016

61

Notes to Consolidated Financial Statements

62


2.

Financial Statement Schedule.


Schedule I – Condensed Parent Company Financial Statements.

Schedule II – Valuation and Qualifying Accounts for MGE Energy, Inc. and Madison Gas and Electric Company.


All other schedules have been omitted because they are not applicable or not required, or because the required information is shown in the consolidated financial statements or notes thereto.


3.

All Exhibits Including Those Incorporated by Reference.


Exhibits. Several of the following exhibits are incorporated herein by reference under Rule 12b-32 of the Securities Exchange Act of 1934, as amended. Several other instruments, which would otherwise be required to be listed below, have not been so listed because those instruments do not authorize securities in an amount that exceeds 10% of the total assets of the applicable registrant and its subsidiaries on a consolidated basis. The relevant registrant agrees to furnish a copy of any instrument that was so omitted on that basis to the Commission upon request.


 

 

Incorporated by Reference

Ex. No.

Exhibit Description

Form

File No.

Exhibit

Date Filed

3.1

Amended and Restated Articles of Incorporation of MGE Energy, Inc.

S-3 Registration Statement

333-197423

4.1

7/15/2014

3.2**

Amended and Restated Bylaws of MGE Energy, Inc.

 

 

 

 

 

 

 

 

 

 

3.3

Restated Articles of Incorporation of Madison Gas and Electric Company as in effect at October 25, 2012.

8-K

0-1125

3.1

10/25/2012

 

 

 

 

 

 

3.4

Amended Bylaws of Madison Gas and Electric Company as in effect at October 25, 2012

10-K

0-1125

3.3

3/26/2003

 

 

 

 

 

 

4.1

Indenture of Mortgage and Deed of Trust between Madison Gas and Electric Company and U.S. Bank, N.A. (successor to First Wisconsin Trust Company), as Trustee,

Registration Statement

2-6059

7-D

1/1/1946

 

 

 

 

 

 

4.2

Supplemental Indenture dated as of February 1, 1993 to aforementioned Indenture of Mortgage and Deed of Trust.

10-K

0-1125

4F

12/31/1992

 

 

 

 

 

 

4.3

Indenture between Madison Gas and Electric Company and The Bank of New York Mellon Trust Company, N.A. (as successor to Bank One, N.A.), as Trustee

10-K

0-1125

4B

3/29/2000

 

 

 

 

 

 

10.1

Amended and Restated Credit Agreement dated as of February 7, 2019, among MGE Energy, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.

8-K

0-49965

10.1

2/13/2019

 

 

 

 

 

 

10.2

Amended and Restated Credit Agreement dated as of February 7, 2019, among Madison Gas and Electric Company, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.

8-K

0-1125

10.2

2/13/2019

 

 

 

 

 

 

10.3

Amended and Restated Credit Agreement dated as of February 7, 2019, among Madison Gas and Electric Company, the Lenders party thereto and U.S. Bank National Association, as Administrative Agent.

8-K

0-1125

10.3

2/13/2019



110





 

 

Incorporated by Reference

Ex. No.

Exhibit Description

Form

File No.

Exhibit

Date Filed

 

 

 

 

 

 

10.4

Joint Power Supply Agreement with Wisconsin Power and Light Company and Wisconsin Public Service Corporation.

Registration Statement

2-27308

4.09

2/2/1967

 

 

 

 

 

 

10.5

Joint Power Supply Agreement (Exclusive of Exhibits) with Wisconsin Power and Light Company and Wisconsin Public Service Corporation.

Registration Statement

2-48781

5.04A

7/26/1973

 

 

 

 

 

 

10.6**

Second Amended and Restated Agreement for Construction and Operation of Columbia Generating Plant.

 

 

 

 

 

 

 

 

 

 

10.7

West Campus Cogeneration Facility Joint Ownership Agreement, dated as of October 13, 2003, among MGE Power West Campus, LLC, The Board of Regents of the University of Wisconsin System, and the State of Wisconsin, as Joint Owners.

10-Q

0-1125

10.19

11/8/2005

 

 

 

 

 

 

10.8

West Campus Cogeneration Facility Operation and Maintenance Agreement, dated as of October 13, 2003, among Madison Gas and Electric Company, as Operator, and the Board of Regents of the University of Wisconsin System, as Joint Owner.

10-Q

0-1125

10.20

11/8/2005

 

 

 

 

 

 

10.9

West Campus Cogeneration Facility Lease Agreement, dated as of March 18, 2004, among MGE Power West Campus, LLC, as Lessor, and Madison Gas and Electric Company, as Lessee.

10-Q

0-1125

10.21

11/8/2005

 

 

 

 

 

 

10.10

West Campus Cogeneration Facility Ground Lease, dated as of July 15, 2002, among MGE Power LLC, as Lessee, and the Board of Regents of the University of Wisconsin System, as Lessor.

10-Q

0-1125

10.22

11/8/2005

 

 

 

 

 

 

10.11

West Campus Cogeneration Facility Amendment of Ground Lease, dated as of March 18, 2004, among MGE Power West Campus, LLC, as Lessee, and the Board of Regents of the University of Wisconsin System, as Lessor.

10-Q

0-1125

10.23

11/8/2005

 

 

 

 

 

 

10.12

West Campus Cogeneration Facility MGE Ground Sublease, dated as of March 18, 2004, among MGE Power West Campus, LLC, as Lessee, and Madison Gas and Electric Company, as Lessor.

10-Q

0-1125

10.24

11/8/2005

 

 

 

 

 

 

10.13

Elm Road Generating Station Common Facilities Operating and Maintenance Agreement, dated as of December 17, 2004, among Madison Gas and Electric Company, Wisconsin Electric Power Company, and Wisconsin Public Power Inc., as Lessee/Owner Parties, and Wisconsin Electric Power Company, as Operating Agent.

10-Q

0-1125

10.7

11/8/2005

 

 

 

 

 

 

10.14

Elm Road Generating Station New Common Facilities Ownership Agreement, dated as of December 17, 2004, among MGE Power Elm Road, LLC, Elm Road Generating Station Supercritical, LLC, and Wisconsin Public Power Inc., as Joint Owners.

10-Q

0-1125

10.8

11/8/2005

 

 

 

 

 

 

10.15

Elm Road Generating Station I Ownership Agreement, dated as of December 17, 2004, among MGE Power Elm Road, LLC, Elm Road Generating Station Supercritical, LLC, and Wisconsin Public Power Inc., as Joint Owners, Elm Road Services, LLC, as Project Manager, and W.E. Power LLC.

10-Q

0-1125

10.9

11/8/2005

 

 

 

 

 

 

10.16

Elm Road Generating Station I Facility Lease Agreement, dated as of November 4, 2005, among MGE Power Elm Road, LLC, as Lessor, and Madison Gas and Electric Company, as Lessee.

10-Q

0-1125

10.10

11/8/2005

 

 

 

 

 

 

10.17

Elm Road Generating Station I Operating and Maintenance Agreement, dated as of December 17, 2004, among Madison Gas and Electric Company, Wisconsin Electric Power Company, and Wisconsin Public Power Inc., as Lessee/ Owners, and Wisconsin Electric Power Company, as Operating Agent.

10-Q

0-1125

10.11

11/8/2005

 

 

 

 

 

 

10.18

Elm Road Generating Station I Easement and Indemnification Agreement, dated as of December 17, 2004, among MGE Power Elm Road, LLC and Wisconsin Public Power Inc., as Grantees, and Wisconsin Electric Power Company, as Grantor.

10-Q

0-1125

10.12

11/8/2005

 

 

 

 

 

 

10.19

Assignment and Assumption Agreement, dated as of November 4, 2005 between MGE Power Elm Road, LLC and Madison Gas and Electric Company relating to Elm Road Generating Station I Easement and Indemnification Agreement, dated as of December 17, 2004, among MGE Power Elm Road, LLC and Wisconsin Public Power Inc., as Grantees, and Wisconsin Electric Power Company, as Grantor.

10-K

0-1125

10.16

3/8/2006

 

 

 

 

 

 

10.20

Elm Road Generating Station II Ownership Agreement, dated as of December 17, 2004, among MGE Power Elm Road, LLC, Elm Road Generating Station Supercritical, LLC, and Wisconsin Public Power Inc., as Joint Owners, Elm Road Services, LLC, as Project Manager, and W.E. Power LLC.

10-Q

0-1125

10.13

11/8/2005

 

 

 

 

 

 

10.21

Elm Road Generating Station II Facility Lease Agreement, dated as of November 4, 2005, among MGE Power Elm Road, LLC, as Lessor, and Madison Gas and Electric Company, as Lessee.

10-Q

0-1125

10.14

11/8/2005

 

 

 

 

 

 

10.22

Elm Road Generating Station II Operating and Maintenance Agreement, dated as of December 17, 2004, among Madison Gas and Electric Company, Wisconsin Electric Power Company, and Wisconsin Public Power Inc., as Lessee/ Owners, and Wisconsin Electric Power Company, as Operating Agent.

10-Q

0-1125

10.15

11/8/2005

 

 

 

 

 

 

10.23

Elm Road Generating Station II Easement and Indemnification Agreement, dated as of December 17, 2004, among MGE Power Elm Road, LLC and Wisconsin Public Power Inc., as Grantees, and Wisconsin Electric Power Company, as Grantor.

10-Q

0-1125

10.16

11/8/2005

 

 

 

 

 

 

10.24

Substation and Transformer Shared Use Agreement and Easement Agreement, dated as of September 29, 2006, among Madison Gas and Electric Company and Northern Iowa Windpower II LLC as Joint Owners.

10-Q

0-1125

10.6

11/7/2006

 

 

 

 

 

 

10.25

Management and Administration Agreement, dated as of October 13, 2006, among Madison Gas and Electric Company as Owner and Midwest Renewable Energy Resources, LLC as Manager.

10-Q

0-1125

10.7

11/7/2006

 

 

 

 

 

 

10.26*

Form of Severance Agreement.

10-K

0-49965

10.37

2/26/2009



111





 

 

Incorporated by Reference

Ex. No.

Exhibit Description

Form

File No.

Exhibit

Date Filed

 

 

 

 

 

 

10.27*

Form of Amendment to Severance Agreement.

10-Q

0-49965

10.1

5/5/2016

 

 

 

 

 

 

10.28*

Form of Severance Agreement for Officers hired on or after January 1, 2012.

10-Q

0-49965

10.2

5/5/2016

 

 

 

 

 

 

10.29*

Form of Deferred Compensation Agreement.

10-K

0-49965

10.38

2/26/2009

 

 

 

 

 

 

10.30*

Form of Amended and Restated Deferred Compensation Agreement.

10-K

0-49965

10.39

2/26/2009

 

 

 

 

 

 

10.31*

Form of Income Continuation Agreement as revised January 1, 2016.

10-Q

0-49965

10.3

5/5/2016

 

 

 

 

 

 

10.32*

Income Continuation Agreement

-

-

-

-

 

 

 

 

 

 

10.33*

Defined Contribution Supplemental Executive Retirement Plan

10-K

0-49965

10.32

2/24/2017

 

 

 

 

 

 

10.34*

Form of Participation Agreement for the Defined Contribution Supplemental Executive Retirement Plan

10-K

0-49965

10.33

2/24/2017

 

 

 

 

 

 

10.35*

MGE Energy, Inc., 2006 Performance Unit Plan, as amended.

10-Q

0-49965

10.1

5/5/2017

 

 

 

 

 

 

10.36*

Form of Performance Unit Award Agreement.

10-K

0-49965

10.42

2/26/2009

 

 

 

 

 

 

10.37*

Form of Amendment to Performance Unit Award Agreement.

8-K

0-49965

10.1

4/21/2011

 

 

 

 

 

 

10.38*

MGE Energy, Inc., 2013 Director Incentive Plan, as amended.

10-Q

0-49965

10.2

5/5/2017

 

 

 

 

 

 

10.39*

Form of 2013 Director Incentive Plan Award Agreement.

10-K

0-49965

10.38

2/27/2014

 

 

 

 

 

 

21**

Subsidiaries of MGE Energy, Inc.

-

-

-

-

 

 

 

 

 

 

23.1**

Consent of Independent Registered Public Accounting Firm - MGE Energy, Inc.

-

-

-

-

 

 

 

 

 

 

23.2**

Consent of Independent Registered Public Accounting Firm - Madison Gas and Electric Company

-

-

-

-

 

 

 

 

 

 

31.1**

Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 filed by Jeffrey M. Keebler for MGE Energy, Inc.

-

-

-

-

 

 

 

 

 

 

31.2**

Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 filed by Jeffrey C. Newman for MGE Energy, Inc.

-

-

-

-

 

 

 

 

 

 

31.3**

Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 filed by Jeffrey M. Keebler for Madison Gas and Electric Company

-

-

-

-

 

 

 

 

 

 

31.4**

Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 filed by Jeffrey C. Newman for Madison Gas and Electric Company

-

-

-

-

 

 

 

 

 

 

32.1***

Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002) filed by Jeffrey M. Keebler for MGE Energy, Inc.

-

-

-

-

 

 

 

 

 

 

32.2***

Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002) filed by Jeffrey C. Newman for MGE Energy, Inc.

-

-

-

-

 

 

 

 

 

 

32.3***

Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002) filed by Jeffrey M. Keebler for Madison Gas and Electric Company

-

-

-

-

 

 

 

 

 

 

32.4***

Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002) filed by Jeffrey C. Newman for Madison Gas and Electric Company

-

-

-

-

 

 

 

 

 

 

101.INS**

XBRL Instance

-

-

-

-

101.SCH**

XBRL Taxonomy Extension Schema

-

-

-

-

101.CAL**

XBRL Taxonomy Extension Calculation

-

-

-

-

101.DEF**

XBRL Taxonomy Extension Definition

-

-

-

-

101.LAB**

XBRL Taxonomy Extension Labels

-

-

-

-

101.PRE**

XBRL Taxonomy Extension Presentation

-

-

-

-

 

 

 

 

 

 

*

Indicates a management contract or compensatory plan or arrangement.

 

 

 

 

**

Filed herewith.

 

 

 

 

***

Furnished herewith.

 

 

 

 


Item 16. Form 10-K Summary.


MGE Energy and MGE


None.

 



112




 




Schedule I

Condensed Parent Company Financial Statements

 

 

 

 

 

 

 

 

MGE Energy, Inc.

Statements of Comprehensive Income

(Parent Company Only)

(In thousands)

 

 

 

 

 

 

 

 

 

 

For the Years Ended December 31,

 

 

 

2018

 

2017

 

2016

 

Operating Expenses:

 

 

 

 

 

 

 

    Other operations and maintenance

$

913

$

880

$

720

 

        Total Operating Expenses

 

913

 

880

 

720

 

Operating Loss

 

(913)

 

(880)

 

(720)

 

Equity in earnings of investments

 

85,220

 

99,246

 

75,581

 

Other (loss) income, net

 

(1,966)

 

(2,165)

 

435

 

Interest income, net

 

1,489

 

605

 

176

 

    Income before income taxes

 

83,830

 

96,806

 

75,472

 

Income tax provision

 

389

 

800

 

88

 

Net Income

 

84,219

 

97,606

 

75,560

 

Other Comprehensive Income, Net of Tax:

 

 

 

 

 

 

 

    Unrealized gain (loss) on available-for-sale securities, net of

 

 

 

 

 

 

 

    tax ($-, $(117), and $104)

 

-

 

175

 

(155)

 

Comprehensive Income

$

84,219

$

97,781

$

75,405

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.


 

 

 

 

 

 

 

 

MGE Energy, Inc.

Statements of Cash Flows

(Parent Company Only)

(In thousands)

 

 

 

 

 

 

 

 

 

 

For the Years Ended December 31,

 

 

 

2018

 

2017

 

2016

 

Net Cash Flows Provided by Operating Activities

$

27,211

$

70,268

$

74,994

 

Investing Activities:

 

 

 

 

 

 

 

     Contributions to affiliates

 

(3,200)

 

(6,522)

 

(2,789)

 

     Contributions to other investments

 

(2,626)

 

(4,534)

 

(360)

 

     Other

 

873

 

843

 

385

 

        Cash Used for Investing Activities

 

(4,953)

 

(10,213)

 

(2,764)

 

Financing Activities:

 

 

 

 

 

 

 

    Cash dividends paid on common stock

 

(45,762)

 

(43,682)

 

(41,775)

 

    Other

 

-

 

(58)

 

(11)

 

        Cash Used for Financing Activities

 

(45,762)

 

(43,740)

 

(41,786)

 

    Change in cash, cash equivalents, and restricted cash

 

(23,504)

 

16,315

 

30,444

 

    Cash, cash equivalents, and restricted cash at beginning of period

 

98,540

 

82,225

 

51,781

 

    Cash, cash equivalents, and restricted cash at end of period

$

75,036

$

98,540

$

82,225

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.



113




 




Schedule I

Condensed Parent Company Financial Statements (continued)

 

 

 

 

 

MGE Energy, Inc.

Balance Sheets

(Parent Company Only)

(In thousands)

 

 

 

 

 

 

 

As of December 31,

ASSETS

 

2018

 

2017

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

75,036

$

98,540

    Other current assets

 

3,646

 

1,601

        Total Current Assets

 

78,682

 

100,141

Other deferred assets and other

 

110

 

171

Investments:

 

 

 

 

    Investments in affiliates

 

763,625

 

702,134

    Other investments

 

7,672

 

5,640

        Total Investments

 

771,297

 

707,774

        Total Assets

$

850,089

$

808,086

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

Current Liabilities:

 

 

 

 

    Accounts payable to affiliates

$

617

$

665

    Other current liabilities

 

2,500

 

2,047

        Total Current Liabilities

 

3,117

 

2,712

Other Credits:

 

 

 

 

    Deferred income taxes

 

27,151

 

23,480

    Accounts payable to affiliates

 

3,177

 

3,707

       Total Other Credits

 

30,328

 

27,187

Shareholders' Equity:

 

 

 

 

    Common shareholders' equity

 

350,936

 

350,936

    Retained earnings

 

465,708

 

426,874

    Accumulated other comprehensive income, net of tax

 

-

 

377

        Total Shareholders' Equity

 

816,644

 

778,187

Commitments and contingencies (see Footnote 3)

 

 

 

 

        Total Liabilities and Shareholders' Equity

$

850,089

$

808,086

 

 

 

 

 

The accompanying notes are an integral part of the above consolidated financial statements.




114




 



Schedule I

Condensed Parent Company Financial Statements (continued)

Notes to Condensed Financial Statements

(Parent Company Only)


1.

Basis of Presentation.


MGE Energy is a holding company and conducts substantially all of its business operations through its subsidiaries. For Parent Company only presentation, investment in subsidiaries are accounted for using the equity method. These condensed Parent Company financial statements and related notes have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X. These statements should be read in conjunction with the financial statements and the notes in Item 8. Financial Statements and Supplementary Data of the Annual Report on Form 10-K for the year ended December 31, 2018.


2.

Credit Agreements.


As of December 31, 2018, MGE Energy had access to an unsecured, committed credit facility with aggregate bank commitments of $50.0 million. As of December 31, 2018, no borrowings were outstanding under this facility.


See Footnote 11 of the Notes to Consolidated Financial Statements in this Report for further information regarding MGE Energy's credit agreements.


3.

Commitments and Contingencies.


See Footnote 17 of the Notes to Consolidated Financial Statements in this Report for commitments and contingencies.


4.

Dividends from Affiliates.


 

 

 

Dividends from Affiliates

 

 

(In thousands)

 

2018

 

2017

 

2016

 

 

MGE(a)

$

-

$

45,000

$

50,000

 

 

MGE Power Elm Road

 

15,500

 

12,000

 

13,500

 

 

MGE Power West Campus

 

6,500

 

6,000

 

9,500

 

 

MGE Transco

 

4,625

 

4,669

 

1,107

 

 

MGEE Transco

 

60

 

112

 

-

 

 

NGV Fueling Services

 

50

 

-

 

-

 

 

Total

$

26,735

$

67,781

$

74,107

 


(a)

Excludes $15.8 million dividend in kind to MGE Energy from MGE in 2016.


Dividend Restrictions

Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a lesser degree, MGE's first mortgage bonds. The PSCW order restricts any dividends, above the PSCW authorized amount of $70.8 million, that MGE may pay MGE Energy if its common equity ratio, calculated in the manner used in the rate proceeding, is less than 55%. MGE's thirteen month rolling average common equity ratio as of December 31, 2018, is 56.3% as determined under the calculation used in the rate proceeding. MGE was not restricted from paying cash dividends in 2018. Cash dividends of $45.0 million were paid by MGE to MGE Energy in 2017. MGE paid no dividends to MGE Energy during 2018. The rate proceeding calculation includes as indebtedness imputed amounts for MGE's outstanding purchase power capacity payments and other PSCW adjustments but does not include the indebtedness associated with MGE Power Elm Road or MGE Power West Campus, which are consolidated into MGE's financial statements but are not direct obligations of MGE.


MGE has covenanted with the holders of its first mortgage bonds not to declare or pay any dividend or make any other distribution on or purchase any shares of its common stock unless, after giving effect thereto, the aggregate amount of all such dividends and distributions and all amounts applied to such purchases, after December 31, 1945, shall not exceed the earned surplus (retained earnings) accumulated subsequent to December 31, 1945. As of December 31, 2018, approximately $400.0 million was available for the payment of dividends under this covenant.


See Footnotes 10 and 11 of the Notes to Consolidated Financial Statements in this Report for long-term debt and lines of credit dividend restrictions.



115




 




Schedule II

MGE Energy, Inc. and Madison Gas and Electric Company

Valuation and Qualifying Accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

 

 

 

 

Balance at Beginning of Period

 

Charged to Costs and Expenses

Charged to

Other Accounts

 

Net Accounts Written Off(a)

 

Balance at End of Period

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2016:

 

 

 

 

 

 

 

 

 

Accumulated provision for uncollectibles

$

3,694,080

 

1,195,500

19,500

 

(1,465,784)

$

3,443,296

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2017:

 

 

 

 

 

 

 

 

 

Accumulated provision for uncollectibles

$

3,443,296

 

1,015,970

20,400

 

(1,304,721)

$

3,174,945

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2018:

 

 

 

 

 

 

 

 

 

Accumulated provision for uncollectibles

$

3,174,945

 

1,065,970

320,400

 

(1,407,653)

$

3,153,662


(a)

Net of recovery of amounts previously written off.


116




 



Signatures - MGE Energy, Inc.



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.


 

MGE Energy, Inc.

(Registrant)

 

 

Date: February 22, 2019

/s/ Jeffrey M. Keebler

 

Chairman, President, and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 22, 2019.


/s/ Jeffrey M. Keebler

Jeffrey M. Keebler

Chairman, President, and Chief Executive Officer and Director

(Principal Executive Officer)

 

 

/s/ Jeffrey C. Newman

Jeffrey C. Newman

Executive Vice President, Chief Financial Officer, Secretary, and Treasurer

(Principal Financial Officer and Principal Accounting Officer)




/s/ Marcia M. Anderson

Marcia M. Anderson, Director



/s/ James G. Berbee

James G. Berbee, Director



/s/ Mark D. Bugher

Mark D. Bugher, Director



/s/ Londa J. Dewey

Londa J. Dewey, Director



/s/ F. Curtis Hastings

F. Curtis Hastings, Director



/s/ Regina M. Millner

Regina M. Millner, Director



/s/ James L. Possin

James L. Possin, Director



/s/ Thomas R. Stolper

Thomas R. Stolper, Director



/s/ Gary J. Wolter

Gary J. Wolter, Director

 


117




 



Signatures - Madison Gas and Electric Company



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.


 

Madison Gas and Electric Company

(Registrant)

 

 

Date: February 22, 2019

/s/ Jeffrey M. Keebler

 

Chairman, President, and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 22, 2019.


/s/ Jeffrey M. Keebler

Jeffrey M. Keebler

Chairman, President, and Chief Executive Officer and Director

(Principal Executive Officer)

 

 

/s/ Jeffrey C. Newman

Jeffrey C. Newman

Executive Vice President, Chief Financial Officer, Secretary, and Treasurer

(Principal Financial Officer and Principal Accounting Officer)

 

 

/s/ Marcia M. Anderson

Marcia M. Anderson, Director



/s/ James G. Berbee

James G. Berbee, Director



/s/ Mark D. Bugher

Mark D. Bugher, Director



/s/ Londa J. Dewey

Londa J. Dewey, Director



/s/ F. Curtis Hastings

F. Curtis Hastings, Director



/s/ Regina M. Millner

Regina M. Millner, Director



/s/ James L. Possin

James L. Possin, Director



/s/ Thomas R. Stolper

Thomas R. Stolper, Director



/s/ Gary J. Wolter

Gary J. Wolter, Director




118