2014 ANNUAL REPORT
embracing our
obligation to serve
today and tomorrow
MGE Energy
2014 annual report
MGE Energy, Inc.
MGE Energy is an investor-owned public utility holding
company headquartered in the state capital of Madison, Wis.
MGE Energy is the parent company of Madison Gas and
Electric Co. The utility provides natural gas and electric
service in south-central and western Wisconsin. Assets
total approximately $1.7 billion. In 2014, revenue was
approximately $620 million. See the Corporate Profile on
the inside back cover.
embracing our
obligation to serve
today and tomorrow
Table of Contents
1. 2014 Highlights
2. Letter to Our Shareholders
6. Reliability Leader
8. Technology Advancements
10. Proven Engagement
12. Our Obligation to Serve
14. Corporate Leadership
16. Shareholder Information
Financials: Form 10-K
About the cover
Our obligation to serve begins with dependable energy
service delivered 24/7 throughout the year. But as a local
company, we do far more. We are involved with our
customers through programs, services and outreach.
By understanding customer needs, we can best serve this
community we call home.
MGE Energy (MGEE)
Year at a Glance
(Thousands, except per share amounts and shares outstanding)
2014
2013
Increase/(Decrease) % Change
Total Market Value (Dec. 31)
$ 1,581,224
$ 1,334,039
$ 247,185
Market Price Per Share (Dec. 31)
Book Value Per Share
$
$
45.61
19.02
$
$
38.48
17.81
$
$
7.13
1.21
Average Shares Outstanding
34,668,370
34,668,370
Shares Outstanding at Year-End
34,668,370
34,668,370
-
-
Operating Revenues
Net Income
Basic and Diluted Earnings Per Share
Dividends Declared Per Share
$
$
$
$
619,852
80,319
2.32
1.11
$
$
$
$
590,887
$ 28,965
74,905
2.16
1.07
$
$
$
5,414
0.16
0.04
Dividend Payout Ratio
47.8%
49.5%
(1.7 ) %
Total Assets
$ 1,697,666
$ 1,579,060
$ 118,606
Total Retail Electric Sales (kWh)
3,297,742
3,314,468
Total Gas Deliveries (therms)
295,478
274,996
(16,726 )
20,482
For detailed financial information, see the 2014 MGE Energy Form 10-K.
18.5
18.5
6.8
0.0
0.0
4.9
7.2
7.4
3.7
-3.4
7.5
-0.5
7.4
Cumulative Total Return Comparison
(assumes $1,000 investment on 12/31/09 with dividends reinvested)
Earnings Per Share
(2010 – 2014)
MGEE $2,261
$1.66
$1.76
$1.86
$2.16
$2.32
$2,250
$1,000
Investment
$600
2009
2010
2011
2012
2013
2014
MGE Energy
17.72%
Russell 2000
15.55%
EEI Investor-Owned Electrics
13.82%
2010
2011
2012
2013
2014
1
Letter to our shareholders
We embrace our obligation to equitably serve customers with reliable energy while
producing long-term value for shareholders.
Our utility Madison Gas and Electric (MGE) is more than
pipes and wires. As a community energy company, we are
committed to our customers and the long-term vitality of
the communities we serve. We strive to excel today as we
prepare for the challenges of an evolving energy future.
Outstanding financial performance
In 2014, MGE Energy shareholders received an exceptional
total return of 22%, resulting from strong market gains and
consistent dividend growth. Taking a longer-range view, our
five-year annualized total return approached 18%. A $1,000
investment at the end of 2009 increased to $2,261 by the
close of 2014, with dividends reinvested.
Stock price appreciation is one part of our total return.
Our stock price closed 2014 at $45.61, up from a closing of
$38.48 at the end of 2013. Over
the last 10 years, our stock price
has outperformed the major
national indices of the Dow
Jones Industrial Average and the S&P 500. Our stock price
has nearly doubled over the last decade.
Steady dividend growth also contributed to the total return.
The Board of Directors increased the dividend by 4% in
2014. The dividends paid per share reached $1.11 in 2014.
MGE Energy has increased the dividend for 39 consecutive
years. The last three dividend increases approved by the
board have been the largest percentage dividend increases
over the past two decades.
We reported earnings of $2.32 per share in 2014, compared
to $2.16 per share in 2013. Earnings benefitted primarily by
savings from MGE’s ongoing effort to manage operating and
maintenance costs, lower benefit costs and colder winter
temperatures. Gas retail sales volume increased during the
year 4.8% in part due to colder weather in the first quarter of
2014 compared to the same period in 2013.
As a community energy
company, we are deeply
committed to our obligation
to serve all customers.
Gary J. Wolter,
MGE Energy Chairman,
President and Chief Executive Officer
2
Industry leader
• Our regulated utility MGE has maintained its high credit
ratings. For 2014, Standard & Poor’s and Moody’s gave
MGE the highest credit rating in the nation for investor-
owned, combination utilities.
• MGE Energy’s financial performance ranks ninth among
the 71 largest U.S.-based power and gas companies,
according to the journal Public Utilities Fortnightly. This
MGEE Five-Year Total Return
(assumes $1,000 investment on 12/31/09
is MGE Energy’s seventh consecutive year on the journal’s
with dividends reinvested)
list of the 40 best energy companies. The study evaluates
dividend yield, return on assets and other metrics.
$2,261
• Value Line, Inc., gave us top ratings for both financial
$914
strength and investment safety. MGE Energy is one of four
investor-owned utilities to receive the highest investment
safety ranking among 19 utilities in the central U.S. region.
$347
• MGE Energy once again was named one of the nation’s
top three sustainable utilities in the small cap category
$1,000
by Target Rock Advisors, LLC, a financial research
firm focusing on sustainability practices in the
utility industry. Target Rock based its rankings on
environmental stewardship, economic performance
2011
and societal contribution.
2012
2010
2013
2009
2014
Initial Investment
Dividend Appreciation
Stock Price Appreciation
Dividends Per Share
(rounded)
$0.36
$1.11
MGE Top Credit Quality
S&P
Corporate Credit: AA-
Outlook: Stable
Moody’s
Secured: Aa2
Unsecured: A1
Outlook: Stable
1975
2014
MGEE Five-Year Total Return
(assumes $1,000 investment on 12/31/09
with dividends reinvested)
$2,261
$914
$347
$1,000
$1,000
2009
2010
2011
2012
2013
2014
12/31/2009
12/31/2014
Initial
Investment
Dividend
Appreciation
Stock Price
Appreciation
MGEE Five-Year Total Return
(assumes $1,000 investment on 12/31/09
with dividends reinvested)
$2,261
$914
$347
Stock Price
Appreciation
Dividend
Appreciation
$1,000
Initial
Investment
100.0
2005 - 2014 Stock Price Performance
%
Change
0.0
-40.0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
MGEE
S&P 500
DJIA
MGE Energy compared to the S&P 500 and the Dow Jones Industrial Average.
MGEE
90%
70%
65%
3
Letter to our shareholders
Strong energy grid
The world of energy is changing. As the ways to produce and
use energy are evolving, so too are customer needs.
Customers rely on electricity more and more as we all
increasingly manage our personal and work lives digitally.
MGE is working hard to take advantage of new technology
while maintaining the dependable delivery of energy,
environmental responsibility and affordability.
Our electric distribution grid is the system of wires,
substations and equipment used to deliver energy to homes
and businesses. Utility distribution systems were initially
built to carry electricity from large central power plants to
individual customers. Increasingly, with distributed
technology like solar, power flows two ways.
In 1999, we began installing at business sites about
50 grid-connected backup generators. Then, electricity
produced from biogas at a local landfill came onto our grid.
And, we began working with customers to connect solar
power to our distribution system. We connected all of these
local energy sources to our “community energy grid.” Our
community grid efficiently and reliably delivers energy from
centralized power plants along with energy produced locally
for the benefit of all customers. Today, more than 350 local
energy sources are connected to our community grid ranging
from small rooftop solar to large biogas units to wind
turbines. We manage the energy flow on the grid to ensure
reliability and seamless service.
We are investing in the future with a state-of-the-art
distribution management system to help us operate,
maintain and optimize the function of the electric grid.
Our community grid is a powerful network that connects us
to each other, reliably delivers the energy we need and
moves us into the future.
No. 1 in electric reliability
MGE once again has been recognized as the most reliable
electric utility in the United States based on the results of a
national industry survey. In 2014, MGE was ranked No. 1 in
reliability with the fewest and shortest power interruptions
based on average customer outages in 2013. In the last seven
years, MGE consistently placed in the top three utilities
nationwide for both the fewest and shortest outages.
Environmental responsibility
In 2014, one of the largest environmental projects ever
constructed at a Wisconsin power plant was completed.
The new emission controls at the Columbia Energy Center
are projected to reduce sulfur dioxide and mercury
MGE was ranked as the most reliable
electric utility in the nation. We make
it a priority to monitor and maintain
our system.
We work with customers who install
solar units. More than 350 customer-
sited generation sources are connected
to our grid.
Anthony Conard is one of our line
technicians who brings dedication and
skill to the job to keep our grid strong.
4
emissions by approximately 90%. MGE Energy owns 22%
of this plant and invested approximately $130 million in this
$600 million project. We also are investing $29 million in
additional improvements at Columbia with turbine and other
upgrades. This work, which will improve plant efficiency,
should be completed in 2017.
Communitywide conversations
More than 10 years ago, we held our first Community Energy
Conversations. We met with customers across our service
area to learn about their vision for our energy future. These
conversations helped form our long-range energy plan called
Energy 2015.
Now, we are beginning another round of Community Energy
Conversations. These conversations once again will help
build the foundation for our long-range energy plans.
Listening and learning are part of our obligation to our
customers as a community energy company. For today
and tomorrow, collaboration helps us meet the needs of all
our customers by balancing reliability, affordability, the
benefit of new technology and environmental stewardship.
Thank you for your confidence in MGE Energy.
Gary J. Wolter
Chairman, President and Chief Executive Officer
Chairman, President and Chief Executive Officer
MGE projects an approximate 20% reduction in total carbon
dioxide emissions from 2005 through 2015. Contributing to
this reduction are improvements to generation efficiencies
and increased wind power.
Our environmental responsibility extends throughout all
of our operations. Recently, we received the Green Master
designation from the Wisconsin Sustainable Business
Council’s Green Masters Program. This statewide program
evaluates participating companies on their sustainable
actions in nine areas ranging from governance to
transportation to workforce. The top 20% of the companies
achieve the highest-ranking Green Master distinction. MGE
is one of 33 companies and the only utility in Wisconsin to be
named a Green Master.
MGE is also the only utility in Wisconsin to be awarded the
highest participation level in Green Tier, the Wisconsin
Department of Natural Resources’ environmental
leadership program.
Our obligation to serve begins
with our employees
We work around the clock to safely provide energy to
our community. Our employees are experienced, skilled
and prepared. They know firsthand how important it is
for homes and businesses to have reliable energy. They
are quick to respond when a storm knocks out power.
They are helpful when customers call with energy
questions. They are thorough as they plan our future
energy needs. Our employees take seriously our
obligation to serve.
Todd Baier works in MGE’s Gas Operations, and
Sandra Alamilla is in our Customer Center.
5
Reliability leader
We remain committed to our exceptional record of safe, reliable
electric and gas service as we move forward in a changing world.
embracing our
obligation to serve
today and tomorrow
M GE excels at reliability because the vitality of our
community depends on a constant supply of
electricity and natural gas. We serve a diverse
employees in the field and work long days. Our first priority
is getting our customers back into service safely and quickly.
Prepared for the future
Our commitment to reliable energy not only serves our
community well today, it means we have the people,
processes and equipment for dependable service as the
world of technology evolves. To maintain our electric
reliability, we installed a new state-of-the-art distribution
management system that provides real-time data about how
our electric grid is performing. This system ties into a new
outage management system that also helps us maintain our
high reliability.
Natural gas service
Natural gas reliability is a priority. We served natural gas
customers in Madison without interruption when the polar
vortex gripped our area during the winter of 2013-14. The
record cold weather put our system, equipment and supplies
to the test. Eight of MGE’s 10 highest gas usage days on
record occurred in January 2014. But we successfully met
the challenge.
MGE has just completed a six-year natural gas project to
further strengthen our gas system in our growing downtown.
This project connected two high-capacity systems that carry
gas from separate suppliers—giving MGE more options to
ensure a steady supply.
metro area including businesses and homes, government and
a world-class university, all of which require around-the-
clock reliability. Today, we all manage larger aspects of our
personal and work lives with digital technology. Reliability
has never been more important.
That is why our obligation to customers starts with
dependable energy.
For electric reliability, MGE is ranked No. 1 in the United
States, according to a nationwide survey of investor-owned
utilities. MGE customers experienced the fewest minutes
without power—only 28 minutes on average per year
compared to a nationwide average of more than four hours.
The annual survey results, published in 2014, were based on
average customer outages in 2013. In the last seven years,
MGE consistently placed in the top three utilities for both
the fewest and shortest outages.
To maintain this high reliability, MGE has an ongoing
improvement process. Our engineering and field operations
employees analyze outages and root causes. They identify
and implement continuous improvement actions.
When a major storm hits, we use our storm restoration
process and mobilize our entire workforce. We put extra
staff in our customer call center, deploy additional
6
Below left: MGE is one of the most reliable utilities in the nation
delivering dependable energy around the clock.
Below right: Bioscience and high-tech companies play a key role in
our local economy and employ nearly 60,000 residents.
Dependable 24/7 electric service
is essential to high-tech businesses
Energy-intensive data centers locate in our service area because
of our high reliability. For example, the OneNeck IT Solutions
data center offers best-in-class technology to customers
worldwide. MGE works with OneNeck to provide redundant
power sources and backup electric generation. In turn, OneNeck
can provide the constant service their customers expect.
“OneNeck is located in the Madison area because energy
reliability and affordability are incredibly important to us.
MGE is a strong business partner,” said Brian Osterhaus,
OneNeck district sales manager.
Below: MGE Line Technician Apprentice Max Allbee works on
our electric system. MGE developed its own four-year apprentice
program so crews are trained locally—giving them more in-depth
knowledge about our system.
MGE’s Senior Account Manager Bob Maney (left) works closely
with the OneNeck IT Solutions data center team. OneNeck District
Sales Manager Brian Osterhaus (center) and Facilities Manager
Eric Patterson (right) know that Bob is just a phone call away.
7
Technology advancements
We maintain leading-edge technology to serve
our forward-looking customers.
embracing our
obligation to serve
today and tomorrow
E volving energy technologies provide significant
opportunities for MGE and its customers. The
proliferation of distributed energy sources, such as
development of microgrids, which are smaller versions of
electric distribution systems. Because of our experience with
a range of technologies, we are better positioned to test the
next generation of new technology such as distributed
energy storage systems and microgrids.
We will keep moving forward in understanding and
harnessing new technology that can benefit our customers
and community.
Electric vehicles
MGE has an extensive network of public charging stations
for EVs including one of the first fast charging stations in the
Midwest. Many of our customers are early adopters of new
technology such as EVs. We put the technology in place to
serve this market.
To continue our research into how electric vehicle charging
affects the electric grid, MGE is launching a new pilot
program for EV owners. In exchange for a service fee, MGE
will install and own 240-volt EV charging equipment at their
homes. The systems will be tied to cloud-based software—
allowing MGE to learn more about charging habits, energy
use and controlling energy demand. This type of pilot
program helps us develop a smarter grid that can better
integrate evolving technology such as electric vehicle
charging and distributed renewable generation.
solar, allows us to grow MGE’s community energy grid with
cleaner sources of power. Electric vehicles (EV) provide
opportunities to serve customers with new services and
options. MGE’s research into new technologies helps
prepare our company and customers for the future.
Technology Demonstration program
MGE’s long-established Technology Demonstration program
provides insight into how new technologies can meet our
community’s energy needs. Since 2000, we have installed
more than 30 technology demonstration projects. We learn
from these projects and, in turn, share that knowledge with
our customers.
For example, our various solar photovoltaic units have
shown which installation angles and solar technologies work
best in our climate. MGE has installed 25 solar projects at
schools, community centers and other public spaces. Our
geothermal heat pump installation at a local community
center helps us learn about efficiency and payback. We
installed one of the first micro-combined heat and power
(micro-CHP) units in Wisconsin. This natural gas-fired unit
produces heat and electricity for a building at a local zoo.
We test the technologies’ performance as we evaluate their
potential role in meeting our energy future. Our experience
with the micro-CHP unit will be valuable with the
8
Below left: An engine turns methane gas into electricity at a
local landfill. This site produces enough electricity for about
4,600 homes.
Below right: MGE has installed 25 solar photovoltaic installations
throughout the community.
We’re providing the answers about
electric vehicle and CNG options
Fuel options for vehicles continue to advance with the
developing markets for electric vehicles and compressed
natural gas (CNG) vehicles. We help answer customer
questions so they can make educated decisions when
considering a purchase of an electric or CNG vehicle. Our
marketing employees have developed customer information
including websites, printed materials and presentations.
We recently produced a series of “Straight Talk About CNG”
videos for customers and offered workshops and resources
for local businesses that are interested in offering workplace
electric vehicle charging for their employees.
Below: MGE’s direct current (DC) quick charger is located at a
public gas station right off the Interstate. The unit can charge a
vehicle battery to 80% capacity in 30 minutes or less.
MGE’s New Market Manager Debbie Branson and Market
Development Manager Laura Williams provide the information
that customers want when purchasing an EV or CNG vehicle.
9
Proven engagement
As a local community energy company, we listen to all customers
as we work toward a clean and dependable energy future.
embracing our
obligation to serve
today and tomorrow
W e are part of the fabric of Madison. We
work together with customers to further
opportunities for deepening and expanding our
service to them. We reach out through partnerships and
through our own programs.
Our efforts with businesses continue with a range of services
such as on-site energy evaluations and various programs.
Our Shared Savings program helps businesses make energy
efficiency improvements. MGE provides the up-front
financing, and the business repays the loan partly or entirely
with energy savings.
Listening, learning
Our ongoing engagement with customers puts us in the
position to educate and work with our customers today.
Just as importantly, it allows us to listen to our customers
and learn about their needs and values.
About 10 years ago, we held a series of Community Energy
Conversations. We met with customers across our service
area to learn about their vision for our energy future. From
this engagement came our Power Tomorrow workshops that
helped customers learn firsthand about saving energy and
reducing carbon emissions. These conversations also
informed our long-range energy plan called Energy 2015.
Under this innovative plan, MGE discontinued coal use at its
Madison Blount power plant and increased its wind capacity
by more than 12 times.
In 2015, we are holding our second round of Community
Energy Conversations. This effort includes opportunities to
share information and to hear from all of our customers,
community and business leaders, community organizations
and others. These conversations will help inform plans for
our collective energy future.
MGE works hand in hand with EnAct, a local group that
helps our customers save energy and live more sustainably.
EnAct creates teams of friends, neighbors or coworkers who
collaboratively track their energy efficiency steps, water
reduction and other sustainable actions. Throughout our
decade-long relationship, MGE has served on EnAct’s board
and provided funding and conservation information.
A newer program is the New Green Challenge/El Desafio de
Vivir Verde, which brings energy efficiency and sustainability
into the homes of African-American and Latino customers.
The six-month challenge encourages saving energy, reducing
waste and conserving water. The families who take the
challenge then share their accomplishments through
Facebook and at a communitywide Earth Day event.
Working with businesses
Our support of the Mpower Business ChaMpion program
created a network of sustainable local businesses.
Businesses learned about energy efficiency through an
intensive yearlong program. Monthly meetings helped the
businesses learn from each other. MGE not only provided
grants for the program, we worked one-on-one with
businesses to become more energy efficient.
10
Below left: MGE’s Customer Service Representative Kim Moore
discusses the company’s payment plan options with a customer.
Below right: MGE Gas Operations employees consult as they
prepare to install services at a home under construction.
Working together, our customers
learn about savings and sustainability
Saving energy is important to our customers. They want to
use resources wisely, save money and help the environment.
Those goals motivated our customer Araceli Gonzalez to
take steps at home. She and her husband Froylan turned
down the thermostat, replaced leaky windows and
unplugged appliances when not in use.
MGE’s Residential Services Manager Mario Garcia Sierra
worked with Araceli through our program the New Green
Challenge. At workshops, customers discuss sustainable
practices, share ideas and work together. Araceli said:
“I want a better environment for our future.”
Below: MGE’s Residential Services Manager Charles Warner
discusses energy savings with customers Gary and Nancy
Walden at a local home improvement show.
MGE’s Residential Services Manager Mario Garcia Sierra works
with customers who want to save energy such as Araceli Gonzalez.
11
Our obligation to serve
Continue to responsibly meet the needs of all our customers
as customer needs and new technologies evolve.
embracing our
obligation to serve
today and tomorrow
O ne of our primary obligations is to reliably provide
energy to all customers whenever and however
they want it. When they flip a switch, we need to
serve them. Dependence on electricity is growing in our
increasingly digital world. This means MGE’s obligation to
serve is more important than ever.
electric system. The software provides real-time data that
will help us improve our response to outages. Advanced
control and communication technologies will enhance
reliability. System improvements, such as voltage upgrades,
help serve areas where electric demand is growing.
Integrated community grid of the future
Our future includes a fully integrated community grid with
two-way flow of power and information. Through this
integrated grid, we will harness the benefit of new
technology on behalf of all customers. We will grow our use
of local, renewable energy while maintaining reliable service.
We will integrate all the resources that serve our community
safely and efficiently. We will use new technology to bring
value to customers with enhanced services.
Most importantly, we will continue to provide the universal
access for all customers that has been the bedrock of our
company’s promise and service to this community. Our
obligation is to serve all customers—today and tomorrow—
and we embrace it fully.
In a world of evolving technology, the ways we use and
produce power are changing. For more than 100 years,
power has flowed one way on the electric grid—from
centralized power plants to individual customers. Now, the
modern electric grid is becoming more decentralized. This
creates greater complexity and challenges that require more
sophistication and new investments to ensure that customer
needs continue to be met.
Building the community grid
Increasingly, MGE is working with customers to connect
local energy resources to the grid. These resources range
from small solar units to large biogas operations. Our
community grid already delivers power from more than
350 distributed renewable resources.
Preparing with new infrastructure
It is our responsibility to ensure that all of the resources
work together efficiently, safely and reliably. We make
improvements to ensure a strong grid. MGE’s new
distribution management system helps us monitor the
12
Below left: This rooftop solar installation on an apartment
building is one of 350 renewable energy resources connected to
our electric grid.
Below right: MGE’s grid is the dependable highway that
delivers electricity from central power plants and distributed
renewable resources.
We’re providing programs and services
with top-notch electric reliability
MGE offers customers services and options along with its
24/7 reliable energy. The Madison Concourse Hotel and
Governor’s Club is completing a multimillion dollar
renovation that includes many energy efficiency
improvements. This premier downtown hotel also
participates in our Green Power Tomorrow program—
supporting clean, renewable energy.
“We’re grateful to MGE for its outstanding reliability but
also for MGE’s other programs that allow the Concourse to
be a good environmental steward,” said Tim Brechlin, the
Concourse marketing manager.
Below: Under Madison’s downtown district is an electric
network system that is more reliable by design. The system has
redundant energy feeds to help ensure dependable energy.
MGE’s Network Inspector Justin Gruenenfelder helps maintain
the downtown system that serves the Concourse Hotel, where
Tim Brechlin works as its marketing manager.
13
Corporate leadership
Directors of MGE Energy and MGE
Mark D. Bugher
Retired Director of University
Research Park, University of
Wisconsin-Madison
Londa J. Dewey
President of QTI Management
Services, Inc., a human resources
and staffing company
F. Curtis Hastings
Retired Chairman of J. H. Findorff
& Son, Inc., commercial and
industrial general contractors
Age 66
Age 54
Age 69
MGEE Director since 2010
MGEE Director since 2008
MGEE Director since 1999
Regina M. Millner
Retired President of
RMM Enterprises Inc.
Attorney, analyst and broker
Age 70
John R. Nevin
Grainger Professor and Executive
Director of Grainger Center for
Supply Chain Management at the
School of Business, UW-Madison
James L. Possin
Certified Public Accountant and
tax consultant with James L. Possin
CPA, LLC. Former partner at
Grant Thornton LLP
MGEE Director since 1996
Age 71
Age 63
MGEE Director since 1998
MGEE Director since 2009
Thomas R. Stolper
Executive Vice President and a
Director of ProActive Solutions
USA LLC, a cleaning and sanitizing
products manufacturer
Gary J. Wolter
Chairman, President and
Chief Executive Officer of
MGE Energy, Inc., and
Madison Gas and Electric Co.
Age 66
Age 60
MGEE Director since 2008
MGEE Director since 2000
14
Note: Ages as of Dec. 31, 2014.
For detailed information on board members, see the MGE Energy Proxy Statement.
Officers of MGE Energy and MGE
Gary J. Wolter*
Chairman, President and
Chief Executive Officer
Age 60
Years of Service, 30
Jeffrey C. Newman*
Vice President,
Chief Financial Officer,
Secretary and Treasurer
Age 52
Years of Service, 30
Lynn K. Hobbie
Senior Vice President
Age 56
Years of Service, 29
Kristine A. Euclide
Vice President and
General Counsel
Age 62
Years of Service, 13
Craig A. Fenrick
Vice President –
Energy Delivery
Age 55
Years of Service, 32
Peter J. Waldron
Vice President and
Chief Information Officer
Age 57
Years of Service, 34
Gregory A. Bollom
Assistant Vice President –
Energy Planning
Age 54
Years of Service, 32
Jeffrey M. Keebler
Assistant Vice President –
Energy Supply and
Customer Service
Age 43
Years of Service, 19
John M. Yogerst
Assistant Vice President –
Gas Operations
Age 57
Years of Service, 34
* Officers of MGE Energy and MGE. All others are MGE officers.
Note: Ages and years of service as of Dec. 31, 2014.
15
Shareholder information
2015 Annual Shareholder Meeting
Tuesday, May 19, 2015
Marriott Madison West
1313 John Q. Hammons Drive
Greenway Center
Middleton, Wis.
Stock Listing
• MGE Energy common stock trades on
The Nasdaq Stock Market®
• Stock symbol: MGEE
• Listed in newspaper stock tables as MGE
Shareholder Services
We welcome inquiries from shareholders.
Please notify us promptly if:
• A stock certificate is lost or stolen.
• A dividend check or statement is not received within 10 days
of the scheduled payment date.
• Your name or address changes.
Direct Stock Purchase and Dividend Reinvestment Plan
MGE Energy’s Direct Stock Purchase and Dividend Reinvestment
Plan allows investors to:
• Buy common stock directly through the company.
• Reinvest dividends.
• Deposit certificates for safekeeping.
Materials Available
More financial information is available upon request or on our
website including the Direct Stock Purchase and Dividend
Reinvestment Plan.
National Association of Investors Corp.
MGE Energy is a corporate sponsor of the NAIC, which
is a nonprofit, volunteer-based group providing investment
information, education and support to help create successful
lifetime investors. Web address: betterinvesting.org
2015 Expected Record and Dividend Payment Dates
MGEE Common Stock
Record Dates
March 1
June 1
Sept. 1
Dec. 1
Payment Dates
March 15
June 15
Sept. 15
Dec. 15
16
investor@mgeenergy.com
Contact MGE Energy Shareholder Services
Email:
Web Address: mgeenergy.com
(608) 252-4744
Madison Area:
Continental U.S.: 1-800-356-6423
Business Hours:
8:00 a.m. to 4:30 p.m. (Central Time)
Monday through Friday
MGE Energy Shareholder Services
PO Box 1231, Madison WI 53701-1231
133 S. Blair St., Madison WI 53788-0001
Mailing Address:
Location:
Online Account Access
Registered shareholders can access their account information
online. Visit MGE Energy’s website to log on through the secure
My Shareholder Account link.
Contact Shareholder Services for a security code to help you set
up private access to your account.
Go to the home page at mgeenergy.com and click the
My Shareholder Account link.
Eliminate Duplicate Proxy Mailings
If you receive more than one proxy mailing from MGE Energy, you
can reduce the mailbox clutter.
• Registered shareholders: call or email MGE Energy
• Brokerage shareholders: contact your broker
Sign Up For Electronic Delivery
You may choose to receive email alerts when annual meeting
invitations, proxy materials, the annual report and newsletters
are available on our website. Registered shareholders can sign up
by visiting mgeenergy.com/paperless. If your MGEE shares are
held in a brokerage account, contact your broker.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
MGE Energy Shareholder
Services (left to right)
Ken Frassetto, Kari Foster,
Jerilyn Geishirt and
Joan Stuessy.
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, 2014
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
Name of Registrant, State of Incorporation, Address
of Principal Executive Offices, and Telephone No.
IRS Employer
Identification No.
MGE Energy, Inc.
(a Wisconsin Corporation)
133 South Blair Street
Madison, Wisconsin 53788
(608) 252-7000
mgeenergy.com
Madison Gas and Electric Company
(a Wisconsin Corporation)
133 South Blair Street
Madison, Wisconsin 53788
(608) 252-7000
mge.com
39-2040501
39-0444025
Commission
File No.
000-49965
000-1125
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
MGE Energy, Inc. ... Common Stock, $1 Par Value Per Share
Title of Class
Name of Each Exchange on which
Registered
The Nasdaq Stock Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Madison Gas and Electric Company ...................
Title of Class
Common Stock, $1 Par Value Per Share
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
MGE Energy, Inc. ..................................... Yes [X] No [ ]
Madison Gas and Electric Company ......... Yes [X] No [ ]
Indicate by checkmark if the registrant is 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]
1
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 and posted on their corporate Web sites, if
any, 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 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. [X]
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting
company" in Rule 12b-2 of the Exchange Act:
MGE Energy, Inc. .....................................
Madison Gas and Electric Company .........
X
X
Large Accelerated Filer Accelerated Filer Non-accelerated Filer
Smaller Reporting
Company
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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, 2014, was as follows:
MGE Energy, Inc. ....................................... $1,365,673,259
Madison Gas and Electric Company .......... $0
The number of shares outstanding of each registrant's common stock as of February 1, 2015, 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 on or before March 27, 2015, 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).
2
Table of Contents
Filing Format .......................................................................................................................................................................................... 4(cid:3)
Forward-Looking Statements .................................................................................................................................................................. 4(cid:3)
Where to Find More Information ............................................................................................................................................................ 4(cid:3)
Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report .......................................................................... 5(cid:3)
PART I. ................................................................................................................................................................................................... 7(cid:3)
Item 1. Business. ................................................................................................................................................................................. 7(cid:3)
Item 1A. Risk Factors. ...................................................................................................................................................................... 14(cid:3)
Item 1B. Unresolved Staff Comments. ............................................................................................................................................. 18(cid:3)
Item 2. Properties. ............................................................................................................................................................................. 19(cid:3)
Item 3. Legal Proceedings. ................................................................................................................................................................ 21(cid:3)
Item 4. Mine Safety Disclosures. ...................................................................................................................................................... 21(cid:3)
PART II. ............................................................................................................................................................................................... 22(cid:3)
Item 5. Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities. ........... 22(cid:3)
Item 6. Selected Financial Data. ....................................................................................................................................................... 25(cid:3)
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. ................................................ 26(cid:3)
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. .......................................................................................... 46(cid:3)
Item 8. Financial Statements and Supplementary Data. .................................................................................................................... 49(cid:3)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. ............................................. 102(cid:3)
Item 9A. Controls and Procedures. ................................................................................................................................................. 102(cid:3)
Item 9B. Other Information. ........................................................................................................................................................... 102(cid:3)
PART III. ............................................................................................................................................................................................ 103(cid:3)
Item 10. Directors, Executive Officers, and Corporate Governance. .............................................................................................. 103(cid:3)
Item 11. Executive Compensation. ................................................................................................................................................. 103(cid:3)
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. ......................... 103(cid:3)
Item 13. Certain Relationships and Related Transactions, and Director Independence. ................................................................. 103(cid:3)
Item 14. Principal Accounting Fees and Services. .......................................................................................................................... 104(cid:3)
PART IV. ............................................................................................................................................................................................ 105(cid:3)
Item 15. Exhibits and Financial Statement Schedules. .................................................................................................................... 105(cid:3)
Signatures - MGE Energy, Inc. ....................................................................................................................................................... 114(cid:3)
Signatures - Madison Gas and Electric Company ........................................................................................................................... 115(cid:3)
3
Filing Format
This combined Form 10-K is being filed separately by MGE Energy, Inc. (MGE Energy) and Madison Gas and Electric
Company (MGE). MGE is a wholly owned subsidiary of MGE Energy and represents a majority of its assets, liabilities,
revenues, expenses, and operations. Thus, all information contained in this report relates to, and is filed by,
MGE Energy. Information that is specifically identified in this report as relating solely to MGE Energy, such as its
financial statements and information relating to its nonregulated business, does not relate to, and is not filed by, MGE.
MGE makes no representation as to that information. The terms "we" and "our," as used in this report, refer to
MGE Energy and its consolidated subsidiaries, unless otherwise indicated.
Forward-Looking Statements
This report, and other documents filed by MGE Energy and MGE with the Securities and Exchange Commission (SEC)
from time to time, contain forward-looking statements that reflect management's current assumptions and estimates
regarding future performance and economic conditions—especially as they relate to economic conditions, future load
growth, revenues, expenses, capital expenditures, 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 18.
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.
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.
4
Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report
Abbreviations, acronyms, and definitions used in the text and notes of this report are defined below.
MGE Energy and Subsidiaries:
CWDC
MAGAEL
MGE
MGE Energy
MGE Power
MGE Power Elm Road
MGE Power West Campus
MGE State Energy Services
MGE Transco
NGV Fueling Services
North Mendota
Other Defined Terms:
AFUDC
Alliant
ANR
ARO
ATC
BART
Bechtel
Blount
CAA
CAIR
CAVR
CO2
Codification
Columbia
Cooling degree days
COSO
CSAPR
CWA
Dth
EEI
EGUs
Elm Road Units
EPA
FASB
FERC
FTR
GAAP
GHG
HAPs
Heating degree days (HDD)
ICF
IRS
kVA
kWh
LIBOR
Central Wisconsin Development Corporation
MAGAEL, LLC
Madison Gas and Electric Company
MGE Energy, Inc.
MGE Power, LLC
MGE Power Elm Road, LLC
MGE Power West Campus, LLC
MGE State Energy Services, LLC
MGE Transco Investment, LLC
NGV Fueling Services, LLC
North Mendota Energy & Technology Park, LLC
Allowance for Funds Used During Construction
Alliant Energy Corporation
ANR Pipeline Company
Asset Retirement Obligation
American Transmission Company LLC
Best Available Retrofit Technology
Bechtel Power Corporation
Blount Station
Clean Air Act
Clean Air Interstate Rule
Clean Air Visibility Rule
Carbon Dioxide
Financial Accounting Standards Board Accounting Standards Codification
Columbia Energy Center
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
Committee of Sponsoring Organizations
Cross-State Air Pollution Rule
Clean Water Act
Dekatherms
Edison Electric Institute
Electric Generating Units
Elm Road Generating Station
United States Environmental Protection Agency
Financial Accounting Standards Board
Federal Energy Regulatory Commission
Financial Transmission Rights
Generally Accepted Accounting Principles
Greenhouse Gas
Hazardous Air Pollutants
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
Insurance Continuance Fund
Internal Revenue Service
Kilovolt Ampere
Kilowatt-hour
London Inter Bank Offer Rate
5
MACT
MATS
MISO
MW
MWh
NAAQS
Nasdaq
NERC
NNG
NOV
NOx
NSPS
NYSE
OPRB
PCBs
PGA
PJM
PM
PPA
PPACA
PSCW
PSD
REC
RICE
RTO
SCR
SEC
SIP
SO2
the State
Stock Plan
UW
VIE
WCCF
WDNR
WEPCO
Working capital
WPDES
WPL
WPSC
WRERA
XBRL
Maximum Achievable Control Technology
Mercury and Air Toxins Standards
Midcontinent Independent System Operator Inc. (a regional transmission
organization)
Megawatt
Megawatt-hour
National Ambient Air Quality Standards
The Nasdaq Stock Market
North American Electric Reliability Corporation
Northern Natural Gas Company
Notice of Violation
Nitrogen Oxides
New Source Performance Standards
New York Stock Exchange
Other Postretirement Benefits
Polychlorinated Biphenyls
Purchased Gas Adjustment clause
PJM Interconnection, LLC (a regional transmission organization)
Particulate Matter
Purchased power agreement
Patient Protection and Affordable Care Act
Public Service Commission of Wisconsin
Prevention of Significant Deterioration
Renewable Energy Credit
Reciprocating Internal Combustion Engine
Regional Transmission Organization
Selective Catalytic Reduction
Securities and Exchange Commission
State Implementation Plan
Sulfur Dioxide
State of Wisconsin
Direct Stock Purchase and Dividend Reinvestment Plan of MGE Energy
University of Wisconsin at Madison
Variable Interest Entity
West Campus Cogeneration Facility
Wisconsin Department of Natural Resources
Wisconsin Electric Power Company
Current assets less current liabilities
Wisconsin Pollutant Discharge Elimination System
Wisconsin Power and Light Company
Wisconsin Public Service Corporation
Worker, Retiree and Employer Recovery Act of 2008
eXtensible Business Reporting Language
6
PART I.
Item 1. Business.
MGE Energy operates in the following business segments:
(cid:120)
(cid:120)
Regulated electric utility operations – generating, purchasing, and distributing electricity through MGE.
Regulated gas utility operations – purchasing and distributing natural gas through MGE.
(cid:120) 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.
(cid:120)
Transmission investments – representing our investment in American Transmission Company LLC, a company
engaged in the business of providing electric transmission services primarily in Wisconsin.
(cid:120) 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, NGV Fueling
Services, 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 316 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.
At December 31, 2014, MGE supplied electric service to approximately 143,000 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 86% were residential and 14% were commercial or industrial. Electric retail revenues for
2014, 2013, and 2012 were comprised of the following:
Year Ended December 31,
2013
2012
2014
Residential ............................................................
Commercial ...........................................................
Industrial ...............................................................
Public authorities (including the UW) ......................
Total .....................................................................
33.3%
52.8%
4.8%
9.1%
100.0%
33.2%
52.4%
4.8%
9.6%
100.0%
32.9%
52.4%
4.9%
9.8%
100.0%
Electric operations accounted for approximately 64.0%, 69.0%, and 73.7% of MGE's total 2014, 2013, and 2012
regulated revenues, respectively.
See Item 2. Properties for a description of MGE's electric utility plant.
7
MGE is registered with a regional entity, The Midwest Reliability Organization. The essential purposes of this entity 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) is owned by the utilities that contributed facilities or capital to it in
accordance with Wisconsin law. 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 and is a transmission-owning member of the MISO.
Regional Transmission Organizations
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. During the years ended
December 31, 2014, 2013, and 2012, MGE's electric energy delivery requirements were satisfied by the following
sources:
Year Ended December 31,
2013
2012
2014
Coal .......................................
Natural gas .............................
Fuel oil ...................................
Renewable sources ..................
Purchased power
Renewable ..........................
Other ..................................
Total ......................................
47.8%
3.2%
0.1%
3.1%
8.7%
37.1%
100.0%
54.1%
5.8%
0.1%
2.9%
7.6%
29.5%
100.0%
50.1%
8.7%
0.1%
2.7%
8.4%
30.0%
100.0%
Sources used depend on market prices, generating unit availability, weather, and customer demand.
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 Operations below for more information regarding
generating capacity leased to MGE by nonregulated subsidiaries.
8
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 at December 31, 2014, with
unaffiliated parties for the next five years.
(Megawatts)
Purchase Power Commitments ..........
2015
162.4
2016
162.4
2017
152.5
2018
152.5
2019
98.5
Gas Utility Operations
MGE transports and distributes natural gas in a service area covering 1,678 square miles in seven south-central
Wisconsin counties. The service area includes the city of Madison, Wisconsin and surrounding areas.
At December 31, 2014, MGE supplied natural gas service to approximately 149,000 customers in the cities of Elroy,
Fitchburg, Lodi, Madison, Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 24 villages; and all or parts of
47 townships. Of the total number of customers, approximately 89% were residential and 11% were commercial or
industrial. Gas revenues for 2014, 2013, and 2012 were comprised of the following:
Year Ended December 31,
2013
2012
2014
Residential ............................................................
Commercial ...........................................................
Industrial ...............................................................
Transportation service and other ..............................
Total .....................................................................
53.0%
34.3%
11.0%
1.7%
100.0%
54.3%
33.4%
10.3%
2.0%
100.0%
56.1%
32.9%
8.9%
2.1%
100.0%
Gas operations accounted for approximately 36.0%, 31.0%, and 26.3% of MGE's total 2014, 2013, and 2012 regulated
revenues, respectively.
MGE can curtail gas deliveries to its interruptible customers. Approximately 17% of retail gas deliveries in 2014 and
20% in 2013 were to interruptible customers.
Gas supply
MGE has physical interconnections with ANR and NNG. MGE's primary service territory, which includes Madison and
the surrounding area, receives deliveries at one NNG and four ANR gate stations. MGE also receives deliveries at NNG
gate stations located in Elroy, Prairie du Chien, Viroqua, and Crawford County. Interconnections with two major
pipelines provide competition in interstate pipeline service and a more reliable and economical gas supply mix, which
includes gas from Canada and 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 5,940,536 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:
•
•
162,150 Dth (including 106,078 Dth of storage withdrawals) on ANR.
65,108 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.
9
Transmission Investments
American Transmission Company 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 jointly owned by
MGE Energy and MGE. At December 31, 2014, MGE Transco held a 3.6% ownership interest in ATC.
In 2011, ATC and Duke Energy announced the creation of a joint venture, Duke-American Transmission Company, that
seeks to build, own, and operate new electric transmission infrastructure in North America to address increasing
demand for affordable, reliable transmission capacity.
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 regulations governing coal-combustion byproducts, and potential
climate change legislation.
Energy Efficiency and Renewables
The Wisconsin Energy Efficiency and Renewables Act requires that, by 2015, 10% of the state's electricity be generated
from renewable resources. As of December 31, 2014, MGE is in compliance with the 2015 requirement. The costs to
comply with the Act and its accompanying regulations are being recovered in rates.
Water Quality
EPA Cooling Water Intake Rules (Section 316(b))
Section 316(b) of the CWA 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 316(b) rule for existing facilities in
2014; however, the rule is the subject of a pending legal challenge. Section 316(b) requirements are implemented in
Wisconsin through modifications to plants' WPDES permits, which govern plant water discharges. WDNR is
developing rules to implement the EPA 316(b) rule.
Existing facilities under the 316(b) rule (for MGE that includes our Blount, WCCF, and Columbia plants) will need to
meet impingement and entrainment reduction standards or take one of seven actions to meet the reduction requirements.
Compliance with 316(b) requirements will coincide with permit renewals.
MGE has studied its options and expects that it will meet requirements at its affected facilities with minimal cost. Our
WCCF facility already employs a "closed cycle" cooling (CCC) system as defined under the rule. The Columbia plant
may need to address multiple intake structures. Our Blount plant has conducted studies regarding options for
compliance with the rule. The exact requirements, however, will not be known until those facilities' WPDES permits are
modified to account for this rule. Nonetheless, MGE expects that the 316(b) rule will not have material effects on its
existing plants.
Air Quality
Air quality regulations promulgated by the U.S. Environmental Protection Agency (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 are expected to result in additional operating and
capital expenditure costs for fossil-fueled electric generating units.
10
EPA's Cross-State Air Pollution Rule
The EPA's Cross-State Air Pollution Rule (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 affected by pollution from
neighboring and upwind states. The EPA has identified 27 eastern states that are contributing to pollution in other states.
CSAPR aims to achieve ozone and PM2.5 reductions by reducing NOx and/or SO2 air emissions, which contribute to
ozone and PM2.5, from qualifying electric power plants in the 27 "contributing" states. The rule has been designed so
that qualifying power plants will be allocated NOx and SO2 allowances in two phases, with the second phase including
further emissions reductions. These plants will need to reduce their emissions and/or purchase allocations from the
marketplace to meet their obligations.
CSAPR, as well as its precursor rules, the Clean Air Interstate Rule (CAIR) and the NOx SIP Call, have been subject to
litigation. EPA rule adjustments and several court rulings, including recent court and EPA actions, continue to impart a
level of uncertainty heading into 2015. See below for additional information on recent developments and uncertainties
associated with this rule.
In July 2011, the EPA finalized CSAPR as a court-ordered replacement rule for its CAIR that had been remanded in
2008. The D.C. Circuit Court of Appeals stayed CSAPR in December 2011, then vacated CSAPR and conditionally
reinstated CAIR in August 2012. The U.S. Supreme Court issued a decision in April 2014, reversing the D.C. Circuit
Court's vacature of CSAPR and remanded the matter back to the D.C. Circuit for further proceedings. In October 2014,
the D.C. Circuit lifted its stay of CSAPR and set a briefing schedule for remaining litigation issues that were not
resolved by the Supreme Court's decision. The briefing schedule with oral arguments is planned for 2015. Additionally,
the State of Wisconsin has filed pleadings with the D.C. Circuit Court reiterating its contention that Wisconsin be
removed from CSAPR.
The EPA has interpreted the October 2014 lifting of the stay by the D.C. Circuit as granting the EPA the ability to reset
deadlines that have since passed (CSAPR was originally designed to begin in 2012). The EPA instituted an interim final
rule effective January 1, 2015, that tolls the CSAPR's deadlines by three years. The tolling of three years under the
interim final rule introduces Phase I of CSAPR in 2015, and Phase II of CSAPR in 2017. The EPA is accepting
comments on other aspects of the rule through February 2015.
The ongoing litigation in the D.C. Circuit, including the EPA's interpretation of tolling rule deadlines and the State of
Wisconsin's arguments to be removed from the rule, leaves unresolved issues that may affect whether, when, and how
MGE's facilities will need to comply with this rule. We have worked to achieve compliance with Phase I requirements,
should those requirements be confirmed as being effective as of January 1, 2015, while monitoring the court
proceedings, which will extend into 2015, as well as any additional actions taken by the EPA in response to its request
for comments on the reinstated rule. Further, MGE expects to be able to meet CSAPR requirements by applying
reductions achieved from recent pollution control installations at Columbia and early reduction efforts at Blount. We
will continue to monitor and evaluate the D.C. Circuit Court remand proceedings and the implementation of the interim
rule by the EPA.
Clean Air Visibility Rule (CAVR)
Air modeling indicates that SO2 and NOx emissions from Columbia may impair visibility at certain Class I Scenic
Areas. Columbia may, therefore, be subject to the best available retrofit technology (BART) regulations, a subsection of
the EPA's Clean Air Visibility Rule (CAVR), which may require pollution control retrofits. The EPA has issued rules
directing that compliance with emissions limitations in the CSAPR could also serve as compliance with the BART for
SO2 and NOx emissions at electric plants such as Columbia. However, these rules are subject to a legal challenge
pending before the D.C. Circuit. In addition, an environmental group had sought, then dismissed without prejudice to
refile, a federal appellate court review of Wisconsin's implementation plan for the BART portion of CAVR. These
BART rules remain uncertain while subject to the pending legal challenges and while regulatory uncertainty surrounds
the CSAPR. Thus, at this time, the BART regulatory obligations, compliance strategies, and costs remain uncertain.
Global climate change
MGE is a producer of 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 coal 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.
11
MGE has taken steps to address GHG emissions through voluntary actions. In 2005, MGE announced its Energy 2015
Plan, which commits to ensuring a balanced, economic energy supply with reduced environmental emissions. The Plan
emphasizes increased renewable energy, energy efficiency, and new cleaner generation – three strategies that reduce
GHG emissions. Under MGE's Energy 2015 Plan and other actions, our CO2 emissions are currently projected to
decline from 2005 to 2015 even though total system energy is estimated to increase.
Climate Change Legislation
Federal Legislative Actions on Climate Change
Several bills and/or actions related to GHG regulation, including those to limit, prevent or delay the EPA's regulation of
GHGs under the current Clean Air Act, have been proposed in both the House and the Senate. It is not anticipated that
Congress will enact broad GHG reduction legislation in 2015.
State and Regional Legislative Actions on Climate Change
It is not expected that the Wisconsin Legislature will enact broad GHG regulation in 2015. MGE continues to monitor
legislative developments.
Greenhouse Gas Regulation
President Obama's Executive Order Regarding Climate Change and his Directive to the EPA Regarding Power Sector
Pollution Standards
In June 2013, President Obama introduced his "National Climate Action Plan." The plan consists of planned federal
actions and directives to several federal agencies, including the EPA, on a range of activities and policies designed to
reduce greenhouse gas emissions in the United States.
EPA's Greenhouse Gas Reduction Guidelines under the Clean Air Act 111d Rule
In June 2014, the EPA developed a proposed rule called the Clean Power Plan that set guidelines for states to use in
developing plans to control GHG emissions from existing fossil fuel fired electric generating units (EGUs). The EPA's
proposal seeks to reduce GHG emissions from EGUs by a national average of 30% by 2030 as measured from a 2012
baseline. Each state is given its own emission reduction targets to meet this goal. These targets are expressed as a "rate-
based" emission average to be achieved by the combined fleet of EGUs within the state. States would be expected to
make "meaningful progress" towards these reductions by 2020 and to meet their respective targets by 2030.
The EPA's proposal establishes guidelines for states and encourages the use of four "building blocks" for achieving
these reductions. These "building blocks" are: (1) increasing the efficiency of EGUs; (2) re-dispatching of gas-fired
generation in lieu of coal; (3) expanding the use of low and no carbon power sources, such as wind, nuclear and solar;
and (4) improving demand side energy efficiency to reduce electric use.
MGE has been studying the EPA's proposed rule to determine what compliance in Wisconsin would look like. MGE has
also participated in discussions on the proposed rule with the WDNR, PSCW, Wisconsin utilities, and industry experts.
The rule is expected to be finalized mid-summer 2015. States will then have up to two years to prepare compliance
plans. While there is currently no certainty regarding the terms of the final rule, it is reasonable to assume that this rule
will have a material impact on MGE. The parameters of the final rule, however, will determine the extent to which this
rule will affect MGE.
Solid Waste
EPA's Coal Combustion Residuals Rule
In December 2014, the EPA finalized its Disposal of Coal Combustion Residuals from Electric Utilities rule. The rule
will go into effect six months after it is published in the Federal Register. The rule provides that coal ash will be
regulated as a special waste rather than a hazardous waste and more strictly defines what ash use activities would be
exempt from solid waste disposal and considered beneficial use of coal ash. The rule also regulates landfills, ash ponds,
and other surface impoundments for coal combustion residuals (CCRS or coal ash) by regulating their design, location,
monitoring, and operation.
The final rule is intended to reduce the risk of structural failure of impoundments (ash ponds) and protect groundwater
from both impoundment and landfill operations by setting new standards. The rule requires closure of active coal ash
ponds and landfills that do not upgrade to meet these standards. Facilities with landfills and/or surface impoundments
will be subject to various timeframes for meeting new regulatory requirements depending on the type of landfill or
surface impoundment onsite, whether the site has failed any required integrity testing, and whether the facility intends to
12
upgrade to meet regulatory requirements or begin closure proceedings. Timeframes to meet various compliance
parameters can vary from 18 months to over 5 years.
The Columbia and Elm Road Units co-owners and plant operators are evaluating the final rule to determine what
changes may be necessary at those facilities and the associated timeframes. We anticipate that some design and
operational changes may need to be made at these facilities; however, evaluation of this rule is not completed so we are
unable to estimate with any certainty the costs to MGE operations at this time. Management believes any compliance
costs will be recovered in future rates.
Columbia
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 MGE as one of the co-owners of Columbia.
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 April 2013, the EPA filed a lawsuit
against the co-owners of Columbia asserting similar allegations. In September 2010 and April 2013, the Sierra Club
filed civil lawsuits against WPL alleging violations of the CAA at Columbia and other Wisconsin facilities operated by
WPL. In June 2013, the court approved and entered a consent decree entered by the EPA, Sierra Club, and the co-
owners of Columbia to resolve these claims, while admitting no liability. One of the requirements of the consent decree
requires installation of a SCR system at Columbia Unit 2 by December 31, 2018. Installation of the SCR has been
approved by the PSCW. MGE's share of the projected cost for the SCR system is approximately $30-$40 million. See
Footnote 18.d. of the Notes to Consolidated Financial Statements for additional information regarding this matter.
Employees
As of December 31, 2014, MGE had 699 employees. MGE employs 218 employees who are covered by a collective
bargaining agreement with Local Union 2304 of the International Brotherhood of Electrical Workers and 92 employees
who are covered by a collective bargaining agreement with Local Union No. 39 of the Office and Professional
Employees International Union. Both of these collective bargaining agreements expire on April 30, 2015. 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, 2015.
Financial Information About Segments
See Footnote 22 of the Notes to the Consolidated Financial Statements for financial information relating to
MGE Energy's and MGE's business segments.
Executive Officers of the Registrants
Executive
Gary J. Wolter(a)
Age: 60
Lynn K. Hobbie(b)
Age: 56
Scott A. Neitzel(b, c)
Age: 54
Kristine A. Euclide(b)
Age: 62
Craig A. Fenrick(b)
Age: 55
Jeffrey C. Newman(a)
Age: 52
Peter J. Waldron(b)
Age: 57
Title
Effective
Date
Service
Years as
an Officer
Chairman of the Board, President and Chief Executive Officer
02/01/2002
Senior Vice President
Senior Vice President
Vice President – Energy Supply
Vice President and General Counsel
Vice President – Electric Transmission and Distribution
Assistant VP – Electric Transmission and Distribution
02/01/2000
01/01/2012
09/01/2006
11/15/2001
01/01/2012
09/01/2006
Vice President, Chief Financial Officer, Secretary and Treasurer
Vice President and Chief Information Officer
Vice President and Operations Officer
01/01/2009
01/01/2012
09/01/2006
25
20
17
13
8
17
18
Note: Ages, years of service, and positions as of December 31, 2014.
(a) Executive officer of MGE Energy and MGE.
(b) Executive officer of MGE.
(c) Resigned as of February 13, 2015.
13
Item 1A. Risk Factors.
MGE Energy and its subsidiaries, including MGE, operate in a market environment that involves significant risks, many
of which are beyond their control. The following risk factors may adversely affect their results of operations, cash flows
and market price for their publicly traded securities. While MGE Energy and MGE believe they have identified and
discussed below the key risk factors affecting their business, there may be additional risks and uncertainties that are not
presently known or that are not currently believed to be significant that may adversely affect their 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. MGE is regulated by the PSCW as to its 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 the manner in which we do business, our ability to undertake specified actions since pre-
approval or authorization may be required, the costs of operations, and the level of rates charged to recover such costs.
Our ability to attract capital is also dependent, in part, upon our ability to obtain a fair return from the PSCW.
We could be subject to higher costs and potential penalties resulting from mandatory reliability standards.
MGE must adhere to mandatory reliability standards for its electric distribution system 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. MGE could be subject to higher operating
costs in order to maintain compliance with the mandatory reliability standards, and any noncompliance could result in
sanctions including monetary penalties.
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, and in many cases, the cost of purchased power is
tied to the cost of natural gas. Under the electric fuel rules, MGE would 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 is determined on an annual basis and will be adjusted in future
billings to its 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 would defer costs, less any excess revenues, if its
actual fuel costs exceeded 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.
We are subject to changing environmental laws and regulations that may affect our costs and business plans.
Our 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 regulations may alter or limit our business plans, make them more costly, or expose us to liabilities for past or
current operations.
Numerous environmental laws and regulations govern many aspects of our present and future operations, including air
emissions, water quality, wastewater discharges, solid waste, threatened and endangered species, and hazardous waste.
These evolving regulations can introduce uncertainty with respect to capital expenditures and operational planning, and
can introduce costly delays if previous decisions need to be revisited as a result of judicial mandate or regulatory
change. These regulations generally require us to obtain and comply with a wide variety of environmental permits and
approvals, and can result in increased capital, operating, and other costs and operating restrictions, particularly with
regard to enforcement efforts focused on obligations under existing regulations with respect to power plant emissions
and compliance costs associated with regulatory requirements. These effects can be seen not only with respect to new
construction but could also require the installation of additional control equipment or other compliance measures such
as altered operating conditions at existing facilities.
14
In addition, we may be a responsible party for environmental clean-up at current or future sites identified as containing
hazardous materials or to which waste was sent that is subsequently determined to be hazardous. It is difficult to predict
the costs potentially associated with a site clean-up due to the potential joint and several liability for all potentially
responsible parties, the nature of the clean-up required, and the availability of recovery from other potentially
responsible parties.
Additionally, depending on their form and phase-in provisions, GHG emission restrictions could have the potential for a
significant financial impact on MGE, including the cost to purchase allowances or do fuel switching.
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 transmission and distribution 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
and storage technology.
Developments in power generation and storage could affect our revenues and the timing of the recovery of our costs.
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. 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. In
addition, since a portion of our costs are recovered through charges based upon the volume of power delivered,
reductions in electricity deliveries will affect the timing of our recovery of those costs and may require changes to our
rate structures.
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, periods of recessionary economic conditions generally adversely affect 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:
(cid:120) Affect our operating costs due to increased costs associated with lower levels of generation or the need for alternate
supply or alternate transportation,
(cid:120)
(cid:120)
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. Increased oil exploration and production
in the United States has increased the amount of oil being transported by railroad, which has affected the availability
and scheduling of trains to transport coal. Demand for coal has also 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 these
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 replace the underlying commitment at higher
15
prices, or we may be forced to reduce generation at our coal units and replace this lost 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:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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 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, including terrorism and acts of sabotage or war, 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 prolonged periods or may be
unsuccessful, or we may be unable to make the necessary improvements to our operational system, causing 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.
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, 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.
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, 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.
16
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.
Failure to attract and retain an appropriately qualified workforce could affect our operations.
Events such as an aging workforce and 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
length of time period associated with skill development. 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.
Financial Risk
We are exposed to commodity price risk relating to our purchases of natural gas, electricity, coal and oil.
We face commodity price risk exposure with respect to our purchases of natural gas, electricity, coal and oil, SO2
allowances and risk through our use of derivatives, such as futures, forwards and swaps, to manage that 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.
We are exposed to interest rate risk.
We are exposed to interest rate risk on our variable rate financing. MGE Energy and MGE had $7.0 million of variable-
rate debt outstanding at December 31, 2014. 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.
Interest rate movements and market performance affects our employee benefit plan costs.
Prevailing interest rates affect our assessment and determination of discount rates that are a key assumption in the
determination of the costs and funding of our defined benefit pension plans and 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 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. Prior to funding us, our subsidiaries have financial obligations that must be satisfied, including
among others, debt service and obligations to trade creditors, and are subject to contractual and regulatory restrictions
on the payment of dividends.
17
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 recent 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.
Item 1B. Unresolved Staff Comments.
MGE Energy and MGE
None.
18
Item 2. Properties.
Electric Generation
Net summer rated capacity in service at December 31, 2014, was as follows:
Plants
Steam plants:
Columbia
Blount
WCCF
Elm Road Units
Combustion turbines
Portable generators
Wind turbines
Total
Location
Commercial
Operation Date
Fuel
Net Summer
Rated Capacity
(MW)(1)
No. of
Units
Portage, WI
Madison, WI
Madison, WI
Oak Creek, WI
Madison, WI
Marinette, WI
Madison, WI
Townships of Lincoln
and Red River, WI
Township of
Brookfield, IA
1975 & 1978
1957 & 1961
2005
2010 & 2011
1964-2000
Low-sulfur coal
Gas
Gas/oil
Coal
Gas/oil
1998-2001
Diesel
1999
Wind
2008
Wind
239(2,3)
102(7)
126(4)
106(2,5)
156(6)
50(7)
1(7,8)
3(7,9)
783
2
2
2
2
6
54
17
18
(1) 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.
(2) Baseload generation.
(3) MGE's share. See "Columbia" below.
(4) 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.
(5) MGE's share. See "Elm Road" below.
(6) Three facilities are owned by MGE and three facilities are leased.
(7) These facilities are owned by MGE.
(8) Nameplate capacity rating is 11 MW.
(9) Nameplate capacity rating is 30 MW.
Columbia
MGE and two other utilities jointly own Columbia, a coal-fired generating facility consisting of two 512 MW units,
which accounts for 31% of MGE's net summer rated capacity. Power from this facility is shared in proportion to each
owner's ownership interest. MGE has a 22% ownership interest in Columbia. The other owners are WPL (a subsidiary
of Alliant), which operates Columbia, and WPSC. The Columbia units burn low-sulfur coal obtained from the Powder
River Basin coal fields located in Wyoming. The coal inventory supply for the Columbia units increased from
approximately 28 days on December 31, 2013, to approximately 48 days on December 31, 2014.
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 account 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
19
northern West Virginia and southwestern Pennsylvania, and Powder River Basin coal from Wyoming. MGE's share of
the coal inventory supply for the Elm Road Units increased from approximately 40 days on December 31, 2013, to
approximately 53 days on December 31, 2014.
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.
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 cost of this project 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
At December 31, 2014, MGE owned 885 miles of overhead electric distribution line and 1,187 miles of underground
electric distribution cable, all of which are located in Wisconsin. These electric distribution facilities are connected by
approximately 54 substations, installed with a capacity of 1,274,300 kVA. MGE's gas facilities include 2,603 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, 2014, there were $1.2 million of first mortgage bonds outstanding. See Footnote 9 of the Notes to
Consolidated Financial Statements 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 $68.0 million of senior secured notes issued by MGE Power Elm Road. See Footnote 9 of
the Notes to Consolidated Financial Statements 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 $48.2 million of senior secured notes issued by MGE Power West Campus. See Footnote 9 of
the Notes to Consolidated Financial Statements for additional information regarding these senior notes.
20
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 18.d. of the Notes to Consolidated Financial Statements for
a description of several environmental proceedings involving MGE. See Footnote 18.e. of the Notes to Consolidated
Financial Statements for a description of other legal matters.
Item 4. Mine Safety Disclosures.
MGE Energy and MGE
Not applicable.
21
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 February 1, 2015, there were
approximately 37,637 shareholders of record. The following table shows high and low sale prices for the common stock
on Nasdaq for each quarter over the past two years.
Common stock price range
2014
High
48.00
40.85
39.68
40.71
$
$
$
$
Low
37.25
37.25
36.30
35.66
$
$
$
$
2013
High
38.94
40.46
38.63
37.25
$
$
$
$
Low
34.98
33.39
34.75
33.93
$
$
$
$
Fourth quarter
Third quarter
Second quarter
First quarter
MGE
As of February 1, 2015, 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.
Dividends
MGE Energy
The following table sets forth MGE Energy's quarterly cash dividends per share declared during 2014 and 2013:
(Per share)
Fourth quarter
Third quarter
Second quarter
First quarter
2014
2013
0.283 $
0.283 $
0.272 $
0.272 $
0.272
0.272
0.263
0.263
$
$
$
$
MGE
The following table sets forth MGE's quarterly cash dividends declared during 2014 and 2013:
(In thousands)
Fourth quarter
Third quarter
Second quarter
First quarter
2014
- $
9,750 $
9,750 $
7,000 $
2013
25,000
-
-
-
$
$
$
$
See discussion below as well as "Liquidity and Capital Resources - Financing Activities" under Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations, for a description of restrictions applicable to
dividend payments by MGE.
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 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 at December 31, 2014, is 56.9%, as determined under the calculation used in the
rate proceeding. MGE paid cash dividends of $26.5 million to MGE Energy in 2014. The rate proceeding calculation
22
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,
2014, approximately $334.8 million was available for the payment of dividends under this covenant.
Stock Split
On December 20, 2013, MGE Energy's Board of Directors declared a three-for-two stock split of MGE Energy's
outstanding shares of common stock, effective in the form of a stock dividend. Shareholders of record at the close of
business on January 24, 2014, received one additional share of MGE Energy common stock for every two shares of
common stock owned on that date. The additional shares were distributed on February 7, 2014. Shareholders received
cash in lieu of any fractional shares of common stock they otherwise would have received in connection with the
dividend. All share and per share data provided in this report give effect to this stock split.
Issuer Purchases of Equity Securities
MGE Energy
Total Number
of Shares
Purchased
42,174
27,975
75,703
145,852
Average Price
Paid per Share
39.59
44.56
45.34
43.53
$
$
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs*
-
-
-
-
Maximum number (or
Approximate Dollar
Value) of Shares That
May Yet Be Purchased
Under the Plans or
Programs*
-
-
-
-
Period
October 1-31, 2014
November 1-30, 2014
December 1-31, 2014
Total
*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 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 a 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 by MGE Energy 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 2010 through 2014. The EEI Index reflects the consolidated performance of Edison Electric Institute investor-
owned electric utilities.
Value of Investment at December 31,
MGEE
Russell 2000
EEI Index
2011
2009
2010
2014
$ 1,000 $ 1,246 $ 1,413 $ 1,590 $ 1,855 $ 2,261
2,059
1,910
1,000
1,000
1,269
1,070
1,216
1,284
1,414
1,311
1,963
1,482
2012
2013
24
Item 6. Selected Financial Data.
MGE Energy
(In thousands, except per share amounts)
Summary of Operations
Operating revenues:
Regulated electric ......................................... $
Regulated gas ..............................................
Nonregulated ...............................................
Total operating revenues............................
Operating expenses ..........................................
Other general taxes ..........................................
Operating income ............................................
Other income, net ............................................
Interest expense, net .........................................
Income before taxes ......................................
Income tax provision ........................................
Net income .................................................. $
Average shares outstanding ...............................
Basic and diluted earnings per share ............... $
Dividends declared per share ......................... $
Assets
Electric ........................................................... $
Gas .................................................................
Assets not allocated ..........................................
Nonregulated energy operations ........................
Transmission investments .................................
All others ........................................................
Eliminations ....................................................
Total assets .................................................. $
Capitalization including Short-Term Debt
Common shareholders' equity ........................... $
Long-term debt* ...............................................
Short-term debt ................................................
Total capitalization and short-term debt .......... $
*Includes current maturities
2014
394,849 $
221,720
3,283
619,852
462,102
19,652
138,098
10,079
(19,673)
128,504
(48,185)
80,319 $
34,668
2.32 $
1.11 $
For the years ended December 31,
2012
2011
2013
403,957 $
181,462
5,468
590,887
444,293
18,607
127,987
10,701
(18,924)
119,764
(44,859)
74,905 $
34,668
2.16 $
1.07 $
392,365 $
139,727
9,231
541,323
410,200
18,360
112,763
10,069
(19,467)
103,365
(38,919)
64,446 $
34,668
1.86 $
1.04 $
375,858 $
165,271
5,253
546,382
421,170
17,344
107,868
9,214
(20,162)
96,920
(35,992)
60,928 $
34,668
1.76 $
1.01 $
2010
360,729
165,915
5,947
532,591
418,931
17,058
96,602
11,093
(16,157)
91,538
(33,820)
57,718
34,668
1.66
0.99
948,241 $
308,499
41,346
281,410
67,697
441,109
(390,636)
1,697,666 $
899,257 $
265,694
19,853
288,116
64,504
431,436
(389,800)
1,579,060 $
721,721
794,738 $
888,444 $
257,505
285,702
285,468
22,079
32,882
18,559
300,862
299,421
323,216
54,241
57,006
61,064
376,219
401,862
413,291
(403,118)
(414,734)
(412,729)
1,586,924 $ 1,458,882 $ 1,317,893
659,401 $
399,438
7,000
1,065,839 $
617,510 $
403,516
-
1,021,026 $
579,429 $
361,504
-
940,933 $
550,952 $
363,570
-
914,522 $
525,080
336,018
22,500
883,598
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,
(cid:120)
(cid:120)
(cid:120) Nonregulated energy operations, conducted through MGE Power and its subsidiaries,
(cid:120)
(cid:120) All other, which includes corporate operations and services.
Transmission investments, representing our equity investment in ATC, and
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 143,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and
distributes natural gas to approximately 149,000 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 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:
(cid:120) Weather, and its impact on customer sales,
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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,
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, 2014, MGE Energy's earnings were $80.3 million or $2.32 per share compared to
$74.9 million or $2.16 per share for the same period in the prior year. MGE's earnings for the year ended December 31,
2014, were $55.6 million compared to $49.0 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)
Business Segment:
Electric Utility ........................... $
Gas Utility .................................
Nonregulated Energy ..................
Transmission Investments ...........
All Other ...................................
Net Income ................................ $
Year Ended December 31,
2013
2012
2014
41.4 $
15.8
19.3
5.5
(1.7)
80.3 $
36.7 $
13.4
20.7
5.6
(1.5)
74.9 $
36.7
5.1
18.1
5.4
(0.9)
64.4
Our net income during 2014 compared to 2013 primarily reflects the effects of the following factors:
(cid:120)
Electric net income increased compared to the prior period primarily related to ongoing efforts to manage electric
operating and maintenance expenditures.
(cid:120) Gas net income increased due to a 4.8% increase in gas retail sales reflecting higher customer demand due to a
colder winter. The average temperatures in January and February 2014 were 11.5 degrees and 12.5 degrees,
respectively, compared to 21.8 degrees and 21.3 degrees in the prior year. During 2014, heating degree days (a
measure for determining the impact of weather during the heating season) increased by 3.4% compared to the prior
year. In addition, gas operating and maintenance expenditures decreased over the prior year.
(cid:120)
In 2013, the PSCW approved recovery of the force majeure costs incurred during construction of the Elm Road
Units. The higher non-regulated revenue in 2013 reflects the one-time adjustment for the carrying costs incurred in
the prior periods on the force majeure costs.
Our net income during 2013 compared to 2012 primarily reflects the effects of the following factors:
(cid:120)
Retail electric sales decreased 0.8% driven by a return to more normal weather in 2013 compared to unusually
warm weather in 2012. The average temperature in July 2013 was 71.9 degrees compared to 79.7 degrees in
July 2012. The decrease in sales was partially offset by $2.7 million (after tax) recognized in AFUDC equity related
to the Columbia environmental project for the year ended December 31, 2013.
(cid:120) Gas net income increased due to a 25.7% increase in gas sales reflecting higher customer demand due to a colder
winter. Heating degree days increased by 27.9% compared to the prior period. In addition, operating and
maintenance expenditures decreased over the prior period.
(cid:120) Higher non-regulated revenues in 2013 due to the previously mentioned one-time adjustment for force majeure
costs associated with the Elm Road Units.
During 2014, the following events occurred:
Columbia Environmental Project: In early 2011, the PSCW authorized the construction of air emission reduction
systems and associated equipment on Columbia Units 1 and 2. These systems and equipment for Unit 2 and Unit 1 were
placed into service in April 2014 and July 2014, respectively. As of December 31, 2014, $129.0 million of the
capitalized project (excluding carrying costs) was transferred from Construction work in progress to Property, plant, and
equipment on MGE's balance sheet related to Unit 1 and Unit 2 being placed into service. MGE has incurred
$8.1 million of capital expenditures and recognized $3.0 million (after tax) in AFUDC equity related to this project for
the year ended December 31, 2014.
During 2015, several items may affect us, including:
2015 Rate Filing: In December 2014, the PSCW authorized MGE to increase 2015 rates for retail electric customers by
3.8% and to decrease rates for gas customers by 2.0 %. The increase in retail electric rates cover costs associated with
the construction of emission-reduction equipment at Columbia, improvements and reliability of the state's electric
transmission system, fuel and purchased power related to coal delivery costs, partially offset by lower cost as a result of
market conditions for pension and post-retirement benefit costs.
27
The PSCW approved a change in the electric and gas rate design as part of the recent rate order. The new rate design
better aligns the related fixed costs of providing gas and electric services. For example, the change will lower the gas
distribution variable rate (excluding purchased gas) by approximately two-thirds and increase the fixed customer
charge. Thus, gas earnings will be less sensitive to weather as a result of the change in rate design. Also, gas earnings
will be more evenly spread throughout the year rather than being predominantly recognized in the winter months. A
similar, but much smaller rate design shift was also approved for electric rates.
Environmental Initiatives: There are proposed legislation, 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. 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 45% of our electric generating capacity. 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. In addition, the Columbia owners, including MGE, resolved claims
surrounding the alleged failure, among other things, to obtain necessary air permits and implement necessary emission
controls associated with past activities at Columbia, which will require the installation of additional emission controls at
Columbia. See Columbia discussion in Footnote 18.d. in the Notes to Consolidated Financial Statements.
Pension and Other Post-Retirement Benefit Costs: Costs for pension and other post-retirement 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. Interest rates have experienced volatility since the end of the year which could
affect the value of the pension and post-retirement benefit obligations. The changes in the discount rates are not
expected to have an impact on the income statement for 2015. However, these changes may affect benefit costs in future
years. MGE expects any changes in the cost for employee benefit plans will be factored into future rate actions.
ATC Return on Equity: Several parties have filed a complaint with FERC seeking to reduce the base return on equity
(ROE) of MISO and numerous other MISO transmission owners, including ATC, "due to changes in the capital
markets." The complaint alleges 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. FERC
denied the portion of the complaint seeking to restrict the use of capital structures that include more than 50% common
equity and also denied the portion of the complaint requesting the termination of the incentive ROE adders used by
certain transmission owners. MISO's base ROE is 12.38% and ATC's base ROE is 12.2%. FERC ordered formal
hearing proceedings to begin, and an initial decision in the complaint is expected by November 30, 2015. ATC provided
MGE its 2014 earnings reflecting an adjustment for this matter representing ATC's estimate of its refund liability for the
period of November 2013 through December 2014. We derived approximately 6.7% of our net income for the year
ended December 31, 2014, from our investment in ATC.
General Economic Conditions: Economic conditions both inside and outside our service area are expected to continue to
affect the level of demand for our utility services and may affect the collection of our accounts receivable and the
creditworthiness of counterparties with whom we do business. We have in place lines of credit aggregating $150 million
for MGE Energy (including MGE) and $100 million for MGE to address our liquidity needs. As of December 31, 2014,
there was $7.0 million of commercial paper outstanding.
The following discussion is based on the business segments as discussed in Footnote 22 of the Notes to Consolidated
Financial Statements.
28
Results of Operations
Year Ended December 31, 2014, Versus the Year Ended December 31, 2013
Electric Utility Operations - MGE Energy and MGE
Electric sales and revenues
The following table compares MGE's electric revenues and electric kWh sales by customer class for each of the periods
indicated:
Revenues
Sales (kWh)
(In thousands, except cooling
degree days)
Residential ..................................$
Commercial .................................
Industrial ....................................
Other-retail/municipal ..................
Total retail ...............................
Sales to the market .......................
Other revenues ............................
Adjustments to revenues ...............
Total .......................................$
Cooling degree days (normal 665) .
2014
132,359 $
210,141
19,163
36,281
397,944
2,547
1,489
(7,131)
394,849 $
2013
135,597
214,033
19,872
39,143
408,645
1,134
1,312
(7,134)
403,957
% Change
(2.4)%
(1.8)%
(3.6)%
(7.3)%
(2.6)%
124.6 %
13.5 %
- %
(2.3)%
2014
807,265
1,834,473
246,267
409,737
3,297,742
68,727
-
-
3,366,469
2013
819,012
1,821,966
250,229
423,261
3,314,468
50,606
-
-
3,365,074
% Change
(1.4)%
0.7 %
(1.6)%
(3.2)%
(0.5)%
35.8 %
- %
- %
- %
620
709
(12.6)%
Electric operating revenues decreased $9.1 million or 2.3% for the year ended December 31, 2014, due to the following:
(In millions)
Fuel credit .................................................... $
Other ...........................................................
Volume ........................................................
Sales to the market........................................
Total ........................................................... $
(6.5)
(2.2)
(1.8)
1.4
(9.1)
In July 2013, the PSCW authorized MGE to freeze 2014 rates at 2013 levels for retail electric customers.
(cid:120)
Fuel Credit. During the year ended December 31, 2014, customers received a fuel credit on their bill related to the
2013 fuel savings of $6.5 million, which decreased electric revenues when compared to the same period in the prior
year.
(cid:120) Other. During the year ended December 31, 2014, other items affecting electric operating revenues decreased
$2.2 million primarily attributable to a decrease in demand charges, lower monthly on-peak sales, and a shift in
commercial customer rate classes.
(cid:120)
(cid:120)
Volume. During the year ended December 31, 2014, there was a 0.5% decrease in total retail sales volumes
compared to the same period in the prior year driven by cooler than normal weather.
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 the year ended December 31, 2014, market volumes increased compared to
the same period in the prior year, reflecting increased opportunities for sales. In addition, market settlement
resulted in higher revenue per kWh for the year ended December 31, 2014, reflecting higher market prices.
29
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 the prior period. Adjustments related to the regulatory recovery
for fuel costs, known as fuel rules, moderated the effects of that increased volume. These items are explained below.
Fuel for electric generation
The expense for fuel for internal electric generation decreased $3.2 million during the year ended December 31, 2014,
compared to the same period in the prior year, due to the following:
(In millions)
Decrease in volume ......................................... $
Increase in per-unit cost ...................................
Total .............................................................. $
(6.8)
3.6
(3.2)
This decrease in expense reflects a 13.7% decrease in internal generated volume delivered to the system primarily as a
result of reduced generation at Columbia to reduce coal use in order to maintain inventory levels, partially offset by a
7.7% increase in per-unit cost of internal electric generation.
Purchased power
Purchased power expense decreased $7.6 million during the year ended December 31, 2014, compared to the same
period in the prior year, due to the following:
(In millions)
Increase in volume ................................................... $
Decrease in per-unit cost...........................................
Fuel Rules Adjustments
Decrease in recorded fuel rule credit.......................
Amortization of 2012 fuel rule credits ....................
Return of 2013 fuel rule credits..............................
Total ....................................................................... $
17.3
(5.4)
(6.7)
(6.3)
(6.5)
(7.6)
The decrease in expense reflects a 5.9% decrease in the per-unit cost of purchased power and a 23.4% increase in the
volume of power purchased from third parties primarily as a result of the reduced generation at Columbia.
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. Cost savings that may be returned to customers are recorded as an increase to purchased power expense, and
higher costs that MGE is entitled to recover, after adjustment for excess revenues, are recorded as a reduction to
purchased power expense. Any over/under recovery of the deferred costs is determined on an annual basis and adjusted
in future billings to customers. During the year ended December 31, 2014, as part of its rate freeze, MGE was allowed
to amortize $6.3 million of the 2012 fuel rule credit against purchased power costs. In addition, MGE returned
$6.5 million on customer bills in October 2014 related to the 2013 fuel rules credit.
Electric operating and maintenance expenses
Electric operating and maintenance expenses decreased $8.1 million during the year ended December 31, 2014,
compared to the same period in 2013. The following changes contributed to the net change:
(In millions)
Decreased administrative and general costs...................... $
Decreased customer service costs....................................
Decreased distribution costs ...........................................
Decreased production costs ............................................
Decreased customer accounts costs .................................
Decreased transmission costs..........................................
Total ............................................................................ $
(5.9)
(0.8)
(0.7)
(0.4)
(0.2)
(0.1)
(8.1)
For the year ended December 31, 2014, decreased administrative and general costs are primarily due to decreased
pension and other postretirement benefits costs predominantly driven by a change in the discount rate.
30
Electric depreciation expense
Electric depreciation expense increased $1.2 million for the year ended December 31, 2014, compared to the same
period in the prior year. This increase was a result of Columbia assets going in to service in April and July 2014.
Gas Utility Operations - MGE Energy and MGE
Gas deliveries and revenues
The following table compares MGE's gas revenues and gas therms delivered by customer class during each of the
periods indicated:
(In thousands, except HDD and
average rate per therm of retail
customer)
Residential ..................................$
Commercial/Industrial ..................
Total retail ...............................
Gas transportation ........................
Other revenues ............................
Total .......................................$
Heating degree days (normal
7,047) .........................................
Average rate per therm of retail
customer .....................................$
Revenues
Therms Delivered
2014
117,523 $
100,338
217,861
3,373
486
221,720 $
2013
98,578
79,344
177,922
3,025
515
181,462
% Change
19.2 %
26.5 %
22.4 %
11.5 %
(5.6)%
22.2 %
2014
110,422
138,151
248,573
46,905
-
295,478
2013
102,599
134,619
237,218
37,778
-
274,996
% Change
7.6 %
2.6 %
4.8 %
24.2 %
- %
7.4 %
0.876 $
0.750
16.8 %
7,887
7,628
3.4 %
Gas revenues increased $40.3 million or 22.2% for the year ended December 31, 2014. These changes are related to the
following factors:
(In millions)
Rate/PGA changes .......................................... $
Volume ..........................................................
Transportation and other effects .......................
Total ............................................................. $
31.4
8.5
0.4
40.3
(cid:120)
(cid:120)
Rate/PGA changes. The average retail rate per therm for the year ended December 31, 2014, increased 16.8%
compared to the same period in 2013, reflecting higher natural gas commodity costs. 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.
Volume. For the year ended December 31, 2014, retail gas deliveries increased 4.8% compared to the same period
in 2013, as a result of colder weather during the winter months compared to milder weather in the prior year.
Cost of gas sold
For the year ended December 31, 2014, cost of gas sold increased by $36.3 million, compared to the same period in the
prior year. The cost per therm of natural gas increased 27.5%, which resulted in $31.0 million of increased expense. In
addition, the volume of purchased gas increased 5.0%, which resulted in $5.3 million of increased expense.
Gas operating and maintenance expenses
Gas operating and maintenance expenses decreased $1.6 million for the year ended December 31, 2014, compared to
the same period in 2013. The following changes contributed to the net change.
(In millions)
Decreased administrative and general costs...................... $
Decreased customer service costs....................................
Increased distribution costs ............................................
Increased customer accounts costs ..................................
Total ............................................................................ $
(2.5)
(0.4)
0.7
0.6
(1.6)
31
For the year ended December 31, 2014, decreased administrative and general costs are primarily due to decreased
pension and other postretirement benefit costs predominantly driven by a change in the discount rate.
Nonregulated Energy Operations - MGE Energy and MGE
For the years ended December 31, 2014 and 2013, net income at the nonregulated energy operations segment was
$19.3 million and $20.7 million, respectively. The nonregulated energy operations are conducted through
MGE Energy's subsidiaries: MGE Power Elm Road and MGE Power West Campus, which have been formed to own
and lease electric generating capacity to assist MGE.
In December 2012, as part of WEPCO's (the operator and primary owner of the Elm Road Units) 2013 Wisconsin rate
case, the PSCW determined that 100% of the construction costs for the Elm Road Units were prudently incurred, and
approved the recovery in rates of more than 99.5% of the force majeure costs. The recovery of the force majeure costs
began in 2013, including a one-time cumulative adjustment pertaining to affected periods prior to the PSCW order. The
portion pertaining to prior periods was fully reflected in 2013 results.
Transmission Investment Operations - MGE Energy and MGE
Transmission investment other income
For the years ended December 31, 2014 and 2013, other income at the transmission investment segment was
$9.2 million and $9.4 million, respectively. The transmission investment segment holds our interest in ATC, and its
income reflects our equity in the earnings of ATC. See Footnote 4.b. of the Notes to Consolidated Financial Statements
and Other Matters below for additional information concerning ATC and summarized financial information regarding
ATC.
Consolidated Income Taxes - MGE Energy and MGE
Both MGE Energy's and MGE's effective income tax rate for the years ended December 31, 2014 and 2013, was 37.5%.
Consolidated Other General Taxes
MGE Energy's and MGE's other general taxes increased $1.0 million or 5.6% for the year ended December 31, 2014,
when compared to the same period in 2013, due in part to increased Wisconsin license fee tax. The annual license fee
tax expense is based on the prior year's adjusted operating revenues. Tax rates have not changed.
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 and their results are consolidated with those of MGE, the primary beneficiary of the VIEs.
Also included in noncontrolling interest, net of tax, is MGE Energy's interest in MGE Transco, which holds our
investment in ATC. 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)
MGE Power Elm Road ............................ $
MGE Power West Campus ...................... $
MGE Transco ......................................... $
2014
16.2
7.7
2.4
$
$
$
2013
17.4
7.7
2.4
32
Results of Operations
Year Ended December 31, 2013, Versus the Year Ended December 31, 2012
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 periods
indicated:
(In thousands, except cooling
degree days)
Residential ..................................$
Commercial .................................
Industrial ....................................
Other-retail/municipal ..................
Total retail ...............................
Sales to the market .......................
Other revenues ............................
Adjustments to revenues ...............
Total .......................................$
Cooling degree days (normal 663) .
Revenues
Sales (kWh)
2013
135,597 $
214,033
19,872
39,143
408,645
1,134
1,312
(7,134)
403,957 $
2012
130,581
207,574
19,437
38,805
396,397
991
1,811
(6,834)
392,365
% Change
3.8 %
3.1 %
2.2 %
0.9 %
3.1 %
14.4 %
(27.6)%
(4.4)%
3.0 %
2013
819,012
1,821,966
250,229
423,261
3,314,468
50,606
-
-
3,365,074
2012
826,766
1,825,701
247,179
442,906
3,342,552
31,588
-
-
3,374,140
% Change
(0.9)%
(0.2)%
1.2 %
(4.4)%
(0.8)%
60.2 %
-%
-%
(0.3)%
709
1,068
(33.6)%
Electric operating revenues increased $11.6 million or 3.0% for the year ended December 31, 2013, due to the
following:
(In millions)
Rate changes ................................................ $
Sales to the market........................................
Volume ........................................................
Other revenues .............................................
Adjustments to revenues................................
Total ........................................................... $
15.6
0.1
(3.3)
(0.5)
(0.3)
11.6
(cid:120)
(cid:120)
(cid:120)
Rates changes. Rate changes resulted in $15.6 million of additional revenue in 2013 compared to the same period in
the prior year. The change primarily reflects an electric retail rate increase, which was authorized by the PSCW.
Effective January 1, 2013, the retail rate increased 3.8% or $14.9 million for electric retail customers. The increase in
retail electric rates was driven by costs for new environmental equipment at Columbia, final construction costs for
the Elm Road Units, transmission reliability enhancements, and purchased power costs.
Volume. During the year ended December 31, 2013, there was a 0.8% decrease in total retail sales volumes
compared to the same period in the prior year driven by a return to more normal weather in 2013 compared to
unusually warm weather in 2012.
Adjustments to revenues. The adjustments to revenues amount includes the elimination of carrying costs for the
Elm Road Units and the WCCF that were collected in electric rates, which are recognized as nonregulated energy
operating revenues in our Nonregulated Energy Operations segment.
Electric fuel and purchased power
The expense for fuel for electric generation decreased $0.4 million or 0.9% during the year ended December 31, 2013,
compared to the same period in the prior year. Internal electric generation costs decreased $1.1 million as a result of a
2.5% decrease in the per-unit cost (largely due to lower Elm Road coal costs). Internal electric generated volume
delivered to the system increased 1.6%, which resulted in $0.7 million of increased expense.
33
Excluding the fuel rules adjustments discussed below, purchased power expense increased $6.5 million during the year
ended December 31, 2013, compared to the same period in the prior year. This increase in expense reflects an
$8.9 million or 13.6% increase in per-unit cost of purchased power, partially offset by a $2.4 million or 3.6% decrease
in the volume of power purchased from third parties.
Based on PSCW 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. During the years ended December 31, 2013 and 2012, MGE's actual fuel costs fell below the lower end of this
tolerance band, which resulted in MGE deferring $6.7 million and $6.2 million, respectively, in fuel-related cost savings
to be returned to customers and MGE recording a corresponding increase in purchased power costs. Any over/under
recovery of the deferred costs is determined on an annual basis and adjusted in future billings to customers. After
combining the fuel rules adjustments with the actual savings discussed above, purchased power expense increased
$7.0 million ($6.5 million increase discussed above plus $0.5 million fuel rules difference) during the year ended
December 31, 2013, compared to the prior year.
Electric operating and maintenance expenses
Electric operating and maintenance expenses increased $1.2 million during the year ended December 31, 2013,
compared to the same period in 2012. The following changes contributed to the net change:
(In millions)
Increased transmission costs........................................... $
Increased production costs .............................................
Increased distribution costs ............................................
Increased customer accounts costs ..................................
Decreased administrative and general costs......................
Decreased customer service costs....................................
Total ............................................................................ $
3.4
1.1
1.0
0.1
(3.6)
(0.8)
1.2
For the year ended December 31, 2013, increased transmission costs were primarily due to an increase in transmission
reliability enhancements, increased production costs were primarily due to increased costs at Columbia, and increased
distribution costs were primarily due to increased conversion and overhead line maintenance expenses. The increase in
costs was partially offset by decreased administrative and general costs which were primarily due to decreased pension
costs.
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
periods indicated:
(In thousands, except HDD and
average rate per therm of retail
customer)
Residential ..................................$
Commercial/Industrial ..................
Total retail ...............................
Gas transportation ........................
Other revenues ............................
Total .......................................$
Heating degree days (normal
7,024) .........................................
Average rate per therm of retail
customer .....................................$
Revenues
Therms Delivered
2013
98,578 $
79,344
177,922
3,025
515
181,462 $
2012
78,411
58,374
136,785
2,465
477
139,727
% Change
25.7 %
35.9 %
30.1 %
22.7 %
8.0 %
29.9 %
2013
102,599
134,619
237,218
37,778
-
274,996
2012
79,936
106,653
186,589
32,202
-
218,791
% Change
28.4 %
26.2 %
27.1 %
17.3 %
- %
25.7 %
0.750 $
0.733
2.3 %
7,628
5,964
27.9 %
34
Gas revenues increased $41.7 million or 29.9% for the year ended December 31, 2013. These changes are related to the
following factors:
(In millions)
Volume .......................................................... $
Rate/PGA changes ..........................................
Transportation and other effects .......................
Total ............................................................. $
37.1
4.0
0.6
41.7
(cid:120)
(cid:120)
Volume. For the year ended December 31, 2013, retail gas deliveries increased 27.1% compared to the same period
in 2012, as a result of colder weather during the winter months compared to milder weather in the prior year.
Rate/PGA changes. The average retail rate per therm for the year ended December 31, 2013, increased 2.3%
compared to the same period in 2012, reflecting higher natural gas commodity costs. MGE recovers the cost of
natural gas in its gas segment through the 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.
Cost of gas sold
For the year ended December 31, 2013, cost of gas sold increased by $29.2 million, compared to the same period in the
prior year. The volume of purchased gas increased 27.4%, which resulted in $21.4 million of increased expense. In
addition, the cost per therm of natural gas increased 7.8%, which resulted in $7.8 million of increased expense.
Gas operating and maintenance expenses
Gas operating and maintenance expenses decreased $2.7 million for the year ended December 31, 2013, compared to
the same period in 2012. The following changes contributed to the net change.
(In millions)
Decreased administrative and general costs...................... $
Decreased customer service costs....................................
Increased distribution costs ............................................
Increased customer accounts costs ..................................
Total ............................................................................ $
(2.0)
(1.3)
0.4
0.2
(2.7)
For the year ended December 31, 2013, decreased administrative and general costs were primarily due to decreased
pension costs, and decreased customer service costs were primarily due to lower energy conservation spending.
Other Income (Deductions), Net - MGE Energy and MGE
For the year ended December 31, 2013, other income, net for the electric and gas segments increased by $1.7 million,
compared to the same period in the prior year related to AFUDC equity recognized on the Columbia environmental
project.
Nonregulated Energy Operations - MGE Energy and MGE
For the years ended December 31, 2013 and 2012, net income at the nonregulated energy operations segment was
$20.7 million and $18.1 million, respectively. The nonregulated energy operations are conducted through
MGE Energy's subsidiaries: MGE Power Elm Road and MGE Power West Campus, which have been formed to own
and lease electric generating capacity to assist MGE.
Results reflect the recovery of force majeure costs associated with the construction of the Elm Road Units. In
December 2012, as part of WEPCO's (the operator and primary owner of the Elm Road Units) 2013 Wisconsin rate
case, the PSCW determined that 100% of the construction costs for the Elm Road Units were prudently incurred, and
approved the recovery in rates of more than 99.5% of the force majeure costs. The recovery of the force majeure costs
began in 2013, including a one-time cumulative adjustment pertaining to affected periods prior to the PSCW order. The
portion pertaining to prior periods was fully reflected in 2013 results.
35
Transmission Investment Operations - MGE Energy and MGE
Transmission investment other income
For the years ended December 31, 2013 and 2012, other income at the transmission investment segment was
$9.4 million and $9.1 million, respectively. The transmission investment segment holds our interest in ATC, and its
income reflects our equity in the earnings of ATC. See Footnote 4.b. of the Notes to Consolidated Financial Statements
for additional information concerning ATC and summarized financial information regarding ATC.
Consolidated Income Taxes - MGE Energy and MGE
Both MGE Energy's and MGE's effective income tax rate for the years ended December 31, 2013 and 2012, was 37.5%
and 37.7%, respectively.
For 2011 tax return purposes, MGE Energy and MGE changed their income tax method of accounting for electric
transmission and distribution repairs and accounting for depreciation. The 2012 financial statement impact pertaining to
finalization of the electric transmission and distribution repairs is an increase to deferred tax expense and a
corresponding decrease in the current tax provision in the amount of $4.8 million. The 2012 financial statement impact
pertaining to finalization of the depreciation adjustment is an increase to deferred tax expense and a corresponding
decrease in the current tax provision in the amount of $38.6 million.
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 and their results are consolidated with those of MGE, the primary beneficiary of the VIEs.
Also included in noncontrolling interest, net of tax, is MGE Energy's interest in MGE Transco, which holds our
investment in ATC. 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)
MGE Power Elm Road ............................ $
MGE Power West Campus ...................... $
MGE Transco ......................................... $
2013
17.4
7.7
2.4
$
$
$
2012
14.8
7.5
2.1
Liquidity and Capital Resources
MGE Energy and MGE have adequate liquidity to fund future operations and capital expenditures. 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 the years ended 2014, 2013, and 2012:
(In thousands)
Cash provided by/(used for):
Operating activities ................. $
Investing activities ..................
Financing activities .................
2014
MGE Energy
2013
2012
2014
MGE
2013
2012
128,762 $
(96,158)
(35,662)
140,267 $
(121,922)
4,111
146,004
(101,353)
(39,463)
$
128,538 $
(95,597)
(43,187)
138,684 $
(120,597)
(9,629)
138,772
(101,083)
(45,237)
36
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.
2014 vs. 2013
Cash provided by operating activities for the year ended December 31, 2014, was $128.8 million, a decrease of
$11.5 million when compared to the same period in the prior year, primarily related to increased taxes paid.
MGE Energy's net income increased $5.4 million for the year ended December 31, 2014, when compared to the same
period in the prior year.
MGE Energy's federal and state taxes paid increased $12.2 million during the year ended December 31, 2014, when
compared to the same period in the prior year, primarily due to federal tax payments made in 2014. In December 2014,
bonus depreciation was extended for the current year. Tax payments were made earlier in the year before the additional
depreciation deduction was known. In 2013, the NOL from a prior year was fully utilized.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $14.8 million in cash used for operating
activities for the year ended December 31, 2014, primarily due to increased gas inventories, increased other current
assets, and decreased current liabilities, partially offset by increased accounts payable. The decrease in current liabilities
includes a fuel credit of $6.5 million that customers received on their bill in October 2014 related to the 2013 fuel
savings. Working capital accounts (excluding prepaid and accrued taxes) resulted in $4.5 million in cash provided by
operating activities for the year ended December 31, 2013, primarily due to increased other current liabilities, decreased
gas inventories, and decreased receivable – margin account, partially offset by increased receivables and increased
unbilled revenues.
A decrease in pension contribution resulted in an additional $31.4 million in cash provided by operating activities for
the year ended December 31, 2014, when compared to the same period in the prior year. Pension contributions reflect
amounts required by law and discretionary amounts. See Footnote 13 of Notes to Consolidated Financial Statements for
further discussion of MGE's pension and other postretirement benefits.
For the year ended December 31, 2013, MGE paid a make-whole premium equal to $6.8 million related to the
redemption of $40 million of long-term debt.
2013 vs. 2012
Cash provided by operating activities for the year ended December 31, 2013, was $140.3 million, a decrease of
$5.7 million when compared to the same period in the prior year, primarily related to the debt make-whole premium
paid in 2013.
MGE Energy's net income increased $10.5 million for the year ended December 31, 2013, when compared to the same
period in the prior year.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $4.5 million in cash provided by operating
activities for the year ended December 31, 2013, primarily due to increased other current liabilities, decreased gas
inventories, and decreased receivable – margin account, partially offset by increased receivables and increased unbilled
revenues. Working capital accounts (excluding prepaid and accrued taxes) resulted in $3.4 million in cash used for
operating activities for the year ended December 31, 2012, primarily due to increased accounts receivable and increased
unbilled revenues, partially offset by a decreased receivable – margin account and decreased gas inventories.
An increase in pension contribution resulted in an additional $5.9 million in cash used for operating activities for the
year ended December 31, 2013, when compared to the same period in the prior year. These contributions reflect
amounts required by law and discretionary amounts. See Footnote 13 of Notes to Consolidated Financial Statements for
further discussion of MGE Energy's pension and other postretirement benefits.
For the year ended December 31, 2013, MGE paid a make-whole premium equal to $6.8 million related to the
redemption of $40 million of long-term debt.
37
MGE
2014 vs. 2013
Cash provided by operating activities for the year ended December 31, 2014, was $128.5 million, a decrease of
$10.1 million when compared to the same period in the prior year, primarily related to increased taxes paid.
Net income increased $5.5 million for the year ended December 31, 2014, when compared to the same period in the
prior year.
MGE's federal and state taxes paid increased $13.8 million during the year ended December 31, 2014, when compared
to the same period in the prior year, primarily due to federal tax payments made in 2014. In December 2014, bonus
depreciation was extended for the current year. Tax payments were made earlier in the year before the additional
depreciation deduction was known. In 2013, the NOL from a prior year was fully utilized.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $20.9 million in cash used for operating
activities for the year ended December 31, 2014, primarily due to increased gas inventories, increased receivables, and
decreased current liabilities, partially offset by increased accounts payable. The decrease in current liabilities includes a
fuel credit of $6.5 million that customers received on their bill in October 2014 related to the 2013 fuel savings.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $2.0 million in cash provided by operating
activities for the year ended December 31, 2013, primarily due to increased other current liabilities, decreased gas
inventories, and decreased receivable – margin account, partially offset by increased receivables and increased unbilled
revenues.
A decrease in pension contribution resulted in an additional $31.4 million in cash provided by operating activities for
the year ended December 31, 2014, when compared to the same period in the prior year. These contributions reflect
amounts required by law and discretionary amounts. See Footnote 13 of Notes to Consolidated Financial Statements for
further discussion of MGE's pension and other postretirement benefits.
For the year ended December 31, 2013, MGE paid a make-whole premium equal to $6.8 million related to the
redemption of $40 million of long-term debt.
2013 vs. 2012
Cash provided by operating activities for the year ended December 31, 2013, was $138.7 million, a decrease of
$0.1 million when compared to the same period in the prior year, primarily related to the debt make-whole premium
paid in 2013.
Net income increased $11.1 million for the year ended December 31, 2013, when compared to the same period in the
prior year.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $2.0 million in cash provided by operating
activities for the year ended December 31, 2013, primarily due to primarily due to increased other current liabilities,
decreased gas inventories, and decreased receivable – margin account, partially offset by increased receivables and
increased unbilled revenues. Working capital accounts (excluding prepaid and accrued taxes) resulted in $6.7 million in
cash used for operating activities for the year ended December 31, 2012, primarily due to increased accounts receivable,
increased unbilled revenues, and decreased accounts payable, partially offset by decreased receivable – margin account
and decreased gas inventories.
An increase in pension contribution resulted in an additional $5.9 million in cash used for operating activities for the
year ended December 31, 2013, when compared to the same period in the prior year. These contributions reflect
amounts required by law and discretionary amounts. See Footnote 13 of Notes to Consolidated Financial Statements for
further discussion of MGE's pension and other postretirement benefits.
For the year ended December 31, 2013, MGE paid a make-whole premium equal to $6.8 million related to the
redemption of $40 million of long-term debt.
38
Capital Requirements and Investing Activities
MGE Energy
2014 vs. 2013
MGE Energy's cash used for investing activities decreased $25.8 million for the year ended December 31, 2014, when
compared to the same period in the prior year.
Capital expenditures for the year ended December 31, 2014, were $92.7 million. This amount represents a decrease of
$26.4 million from the expenditures made in the same period in the prior year. The decrease primarily reflects
$45.0 million of lower expenditures on the Columbia environmental project in 2014 versus 2013, offset by increased
expenditures in electric and gas distribution assets.
2013 vs. 2012
MGE Energy's cash used for investing activities increased $20.6 million for the year ended December 31, 2013, when
compared to the same period in the prior year.
Capital expenditures for the year ended December 31, 2013, were $119.0 million. This amount represents a
$20.6 million increase from the expenditures made in the same period in the prior year. This increase is due to increased
expenditures on the Columbia environmental project.
MGE
2014 vs. 2013
MGE's cash used for investing activities decreased $25.0 million for the year ended December 31, 2014, when
compared to the same period in the prior year.
Capital expenditures for the year ended December 31, 2014, were $92.7 million. This amount represents a decrease of
$26.4 million from the expenditures made in the same period in the prior year. The decrease primarily reflects
$45.0 million of lower expenditures on the Columbia environmental project in 2014 versus 2013, offset by increased
expenditures in electric and gas distribution assets.
2013 vs. 2012
MGE's cash used for investing activities increased $19.5 million for the year ended December 31, 2013, when compared
to the same period in the prior year.
Capital expenditures for the year ended December 31, 2013, were $119.0 million. This amount represents a
$20.6 million increase from the expenditures made in the same period in the prior year. This increase is due to increased
expenditures on the Columbia environmental project.
Capital expenditures
The following table shows MGE Energy's budgeted capital expenditures for 2015 and actual capital expenditures for
both 2014 and 2013:
(In thousands)
For the years ended December 31,
Electric ......................................................... $
Gas ...............................................................
Utility plant total ........................................
Nonregulated .................................................
MGE Energy total ...................................... $
2015
(Budget)
2014
(Actual)
2013
(Actual)
61,615 $
21,885
83,500
3,150
86,650 $
68,067 $
22,104
90,171
2,505
92,676 $
100,146
15,554
115,700
3,347
119,047
In early 2011, the PSCW authorized the construction of air emission reduction systems and associated equipment on
Columbia Units 1 and 2. For the year ended December 31, 2014, MGE had incurred $16.2 million (excluding carrying
costs) in construction expenditures at Columbia related to the project.
39
MGE Energy used funds received as dividend payments from MGE Power West Campus and MGE Power Elm Road,
internally generated cash, and short-term external financing to meet its 2014 capital requirements and cash obligations,
including dividend payments. External financing included short-term financing under existing lines of credit.
Financing Activities
MGE Energy
2014 vs. 2013
Cash used for MGE Energy's financing activities was $35.7 million for the year ended December 31, 2014, compared to
$4.1 million of cash provided by the year ended December 31, 2013.
For the year ended December 31, 2014, dividends paid were $38.4 million compared to $37.1 million in the prior year.
This increase was a result of a higher dividend per share ($1.11 vs. $1.07).
During the year ended December 31, 2013, MGE issued $85.0 million of long-term debt, which was used to retire
$40.0 million of long-term debt and to assist with the funding for the Columbia environmental project.
For the year ended December 31, 2014, short-term borrowings were $7.0 million.
2013 vs. 2012
Cash provided by MGE Energy's financing activities was $4.1 million for the year ended December 31, 2013, compared
to $39.5 million of cash used for the year ended December 31, 2012.
For the year ended December 31, 2013, dividends paid were $37.1 million compared to $36.0 million in the prior year.
This increase was a result of a higher dividend per share ($1.07 vs. $1.04).
During the year ended December 31, 2013, MGE issued $85.0 million of long-term debt, which was used to retire
$40.0 million of long-term debt and to assist with the funding for the Columbia environmental project. During the year
ended December 31, 2012, MGE issued and retired $28.0 million of long-term debt.
MGE
2014 vs. 2013
During the year ended December 31, 2014, cash used for MGE's financing activities was $43.2 million compared to
$9.6 million of cash used for MGE's financing activities in the prior year.
Dividends paid from MGE to MGE Energy were $26.5 million for the year ended December 31, 2014, compared to
$25.0 million in the prior year.
During the year ended December 31, 2013, MGE issued $85.0 million of long-term debt, which was used to retire
$40.0 million of long-term debt and to assist with the funding for the Columbia environmental project.
Distributions to parent from noncontrolling interest, which represent distributions from MGE Power Elm Road and
MGE Power West Campus, were $21.4 million for the year ended December 31, 2014, compared to $27.4 million in the
prior year.
For the year ended December 31, 2014, short-term borrowings were $7.0 million.
2013 vs. 2012
During the year ended December 31, 2013, cash used for MGE's financing activities was $9.6 million compared to
$45.2 million of cash used for MGE's financing activities in the prior year.
Dividends paid from MGE to MGE Energy were $25.0 million for the year ended December 31, 2013, compared to
$20.4 million in the prior year.
40
During the year ended December 31, 2013, MGE issued $85.0 million of long-term debt, which was used to retire
$40.0 million of long-term debt and to assist with the funding for the Columbia environmental project. During the year
ended December 31, 2012, MGE issued and retired $28.0 million of long-term debt.
Distributions to parent from noncontrolling interest, which represent distributions from MGE Power Elm Road and
MGE Power West Campus, were $27.4 million for the year ended December 31, 2013, compared to $23.5 million in the
prior year.
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 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 at December 31, 2014, is 56.9% as determined under the calculation used in the
rate proceeding. MGE was not restricted from paying cash dividends in 2014. Cash dividends of $26.5 million and
$25.0 million were paid by MGE to MGE Energy in 2014 and 2013, respectively. 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,
2014, approximately $334.8 million was available for the payment of dividends under this covenant.
Credit Facilities
At December 31, 2014, MGE Energy and MGE had the following aggregate bank commitments and available capacity
under their credit agreements and the indicated amounts of outstanding commercial paper:
Borrower
MGE Energy
MGE
Aggregate Bank
Commitments
Outstanding
Commercial
Paper
Outstanding
Borrowings
Available
Capacity
$
$
50.0
100.0
$
$
(Dollars in millions)
-
$
-
7.0
$
-
$
$
50.0
93.0
Expiration Date
July 31, 2017
July 31, 2017
Borrowings under each credit agreement may bear interest at a rate that floats daily based upon a prime rate or at a rate
fixed for a specified interest period based upon a LIBOR-based index, plus an adder. In the case of the LIBOR-based
rates, the adder is based upon the senior unsecured credit rating for MGE and does not exceed 0.75%.
The 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. At December 31, 2014, the ratio of consolidated debt to consolidated total capitalization for each of
MGE Energy and MGE, as calculated under the credit agreements' covenant, were 38.1% and 37.4%, respectively. See
Footnote 10 of Notes to Consolidated Financial Statements for additional information regarding the credit facilities.
Capitalization Ratios
MGE Energy's capitalization ratios were as follows:
MGE Energy
2014
2013
Common shareholders' equity................
Long-term debt* ..................................
Short-term debt ....................................
*Includes the current portion of long-term debt.
61.9 %
37.5 %
0.6 %
60.5 %
39.5 %
- %
41
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, 2014, representing cash obligations that are
considered to be firm commitments, are as follows:
(In thousands)
MGE Energy
Long-term debt(a) ............................................ $
Short-term debt(b) ............................................
Interest expense(c) ...........................................
Operating leases(d) ...........................................
Purchase obligations(e) ......................................
Other obligations(f) ..........................................
Total MGE Energy contractual obligations ........... $
MGE
Long-term debt(a) ............................................ $
Short-term debt(b) ............................................
Interest expense(c) ...........................................
Operating leases(d) ...........................................
Purchase obligations(e) ......................................
Other obligations(f) ..........................................
Total MGE contractual obligations ..................... $
Total
1 Year
Payment due within:
2-3 Years
4-5 Years
Due after
5 Years
399,690 $
7,000
297,169
12,386
509,989
15,202
1,241,436 $
399,690 $
7,000
297,169
12,386
509,989
13,553
1,239,787 $
4,182 $
7,000
19,611
1,553
122,841
3,652
158,839 $
4,182 $
7,000
19,611
1,553
122,841
2,003
157,190 $
38,626 $
-
37,053
2,218
142,237
3,538
223,672 $
38,626 $
-
37,053
2,218
142,237
3,538
223,672 $
29,005 $
-
33,052
677
99,188
1,488
163,410 $
29,005 $
-
33,052
677
99,188
1,488
163,410 $
327,877
-
207,453
7,938
145,723
6,524
695,515
327,877
-
207,453
7,938
145,723
6,524
695,515
(a) Long-term debt consisting of secured first mortgage bonds, unsecured medium-term notes, 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 10 of the Notes to Consolidated Financial
Statements.
(c) Amount represents interest expense on long-term debt. See Footnote 9 of the Notes to Consolidated Financial
Statements for further discussion of the long-term debt outstanding at December 31, 2014.
(d) Operating leases. See Footnote 18.c. of the Notes to Consolidated Financial Statements.
(e) 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 18.a. of the Notes to Consolidated Financial Statements.
(f) Other obligations are primarily related to investment commitments, easements, green energy projects,
environmental projects, fuel credit, and uncertain tax positions.
The above amounts do not include any contributions for MGE's pension and postretirement plans. Contributions to the
qualified plans for 2015 are expected to be $10 million, which was paid in January 2015. MGE does not expect to make
contributions to the plans for 2016. The contributions for years after 2016 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. These
contributions reflect amounts required by law and discretionary amounts.
42
The above amounts do not include future voluntary capital calls to ATC. On January 30, 2015, MGE Transco made a
voluntary $0.2 million capital contribution to ATC. The amount and timing of future voluntary capital calls is uncertain
and primarily dependent on the operations and expansion of ATC.
MGE Energy's and MGE's commercial commitments as of December 31, 2014, representing commitments triggered by
future events and including financing arrangements to secure obligations of MGE Energy and MGE, and guarantees by
MGE, are as follows:
(In thousands)
MGE Energy
Available Lines of Credit(a) ................$
Guarantees(b)..................................
MGE
Available Lines of Credit(c) ................$
Guarantees(b)..................................
Total
1 Year
Expiration within:
2-3 Years
4-5 Years
Due after
5 Years
150,000 $
4,416
- $
906
150,000 $
1,366
100,000 $
4,416
- $
906
100,000 $
1,366
- $
830
- $
830
-
1,314
-
1,314
(a) Amount includes the facility discussed in (c) plus an additional line of credit. MGE Energy has available at
any time a $50 million committed revolving credit agreement, expiring in July 2017. At December 31, 2014,
MGE Energy had no borrowings under this credit facility; however, there was $7.0 million of commercial
paper outstanding.
(b) MGE has guaranteed repayment of certain receivables it sold to a financial institution under a chattel paper
agreement. See Footnote 18.b. of the Notes to Consolidated Financial Statements.
(c) Amount includes a $100 million committed revolving credit agreement expiring in July 2017. This credit
facility is used to support commercial paper issuances. At December 31, 2014, no borrowings were
outstanding under this facility.
Other Matters
Elm Road
During 2013, WEPCO and Bechtel (the construction contractor for the Elm Road Units) were working through the
outstanding warranty claims. The warranty claim for the costs incurred to repair steam turbine corrosion damage
identified on both units was resolved through a binding arbitration in June 2013. Final acceptance of the Elm Road
Units occurred in June 2013 after all requirements stated in the contract with Bechtel were satisfied. All warranty claims
between WEPCO and Bechtel have now been resolved, none of which had a material impact on our financial
statements.
ATC
Several parties have filed a complaint with FERC seeking to reduce the base return on equity (ROE) of MISO and
numerous other MISO transmission owners, including ATC, "due to changes in the capital markets." The complaint
alleges 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. FERC denied the portion of the
complaint seeking to restrict the use of capital structures that include more than 50% common equity and also denied
the portion of the complaint requesting the termination of the incentive ROE adders used by certain transmission
owners. MISO's base ROE is 12.38% and ATC's base ROE is 12.2%. FERC ordered formal hearing proceedings to
begin, and an initial decision in the complaint is expected by November 30, 2015. ATC provided MGE its 2014
earnings reflecting an adjustment for this matter representing ATC's estimate of its refund liability for the period of
November 2013 through December 2014. We derived approximately 6.7% of our net income for the year ended
December 31, 2014, from our investment in ATC.
Joint Venture
MGE Energy has entered into a joint venture with Wisconsin Energy Corporation to evaluate the advisability and
feasibility of potentially bidding on generating assets owned by the State of Wisconsin, which might include the
University of Wisconsin's interest in the WCCF, which the Company co-owns and operates.
43
Should the State determine that the assets be sold, the joint venture would decide on a case-by-case basis whether to
submit a bid. If the bid is successful, the joint venture would finance the acquisition and would own and manage the
acquired assets. If those acquired assets include the State's interest in the WCCF, MGE would continue to operate the
WCCF as it does currently.
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.
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:
(cid:120)
(cid:120)
(cid:120)
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 and recovery in rates is expected.
44
We use 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.
(cid:120)
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 2014, MGE used an assumed return on assets of 8.10% for pension and 7.07% for other
postretirement benefits. In 2015, the pension asset assumption will decrease from 8.10% to 7.80%. MGE will
decrease the postretirement benefit assumption from 7.07% to 7.01% in 2015. 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 $3.1 million, before taxes.
(cid:120) 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.
(cid:120) Medical trend assumptions. The health care cost trend rate is the assumed rate of increase in per-capita health care
charges.
(cid:120) Mortality rate assumption. Expected mortality rates are used in the valuation to determine the expected duration of
future benefit payments to the plan participants. In October 2014, the Society of Actuaries released new mortality
tables and projection scales. At December 31, 2014, the Company adopted a modified version of these tables that
were developed by a third party actuary.
See Footnote 13 of the Notes to Consolidated Financial Statements 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. To the extent we believe recovery is not more likely than
not, we establish a valuation allowance. 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.
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 ten-year PPA which is valued utilizing an internally-developed pricing model. This model includes observable
and unobservable inputs.
45
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 MGE's regulated operations.
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 21 of the Notes to Consolidated Financial Statements 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 is determined on an annual basis and is adjusted 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 2015, fuel and purchased power costs included in MGE's base fuel
rates are $123.0 million. See Footnote 17 of the Notes to Consolidated Financial Statements for additional information.
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.
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.
46
MGE has financial gas and electric commodity contracts to hedge commodity price risk in the gas and electric
segments. These contracts are primarily comprised of exchange-traded option and future contracts. MGE also holds
FTRs, which are used to hedge the risk of increased transmission congestion charges. At December 31, 2014, the cost
basis of these instruments exceeded their fair value by $1.6 million. Under the PGA clause and electric fuel rules, MGE
may include in the costs of fuel (natural gas or power) the costs and benefits of the aforementioned fuel price risk
management tools. Because these costs/benefits are recoverable, the related unrealized loss/gain has been deferred on
the consolidated balance sheet as a regulatory asset/liability.
MGE has also entered into a ten-year 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 sheet. 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 at December 31, 2014, reflects a loss position of $53.4 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 2014 average interest rate under these borrowings, it is estimated that our
2014 interest expense and net income would have changed less than $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 $3.1 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 increased in value by approximately 8.04% during the year
ended December 31, 2014, and 19.4% during the year ended December 31, 2013.
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 on accrual contracts. As of December 31, 2014, 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 316 square-mile area in Dane County, Wisconsin, and MGE's franchised gas
territory includes a service area covering 1,649 square miles in Wisconsin. Based on results for the year ended
December 31, 2014, no one customer constituted more than 10% of total operating revenues for MGE Energy and
47
MGE. Credit risk for electric and gas is managed by MGE's credit and collection policies, which are consistent with
state regulatory requirements.
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.
48
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, 2014.
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, 2014, has been audited
by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which
appears herein.
February 26, 2015
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, 2014.
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 26, 2015
49
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of MGE Energy, Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of MGE Energy, Inc. and its subsidiaries at December 31, 2014 and 2013,
and the results of their operations and their cash flows for each of the three years in the period ended December 31,
2014, in conformity with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2014, based on criteria established in the Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is
responsible for these financial statements and financial statement schedules, 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 these financial statements, on the financial statement schedules, and on the Company's internal
control over financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. 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.
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
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 26, 2015
50
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of Madison Gas and Electric Company:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Madison Gas and Electric Company and its subsidiaries at December 31,
2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements and financial
statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 26, 2015
51
MGE Energy, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
For the years ended December 31,
2013
2012
2014
Operating Revenues:
Regulated electric revenues ............................................................ $
Regulated gas revenues ..................................................................
Nonregulated revenues ..................................................................
Total Operating Revenues ..........................................................
394,849 $
221,720
3,283
619,852
403,957 $
181,462
5,468
590,887
Operating Expenses:
Fuel for electric generation .............................................................
Purchased power ...........................................................................
Cost of gas sold ............................................................................
Other operations and maintenance ..................................................
Depreciation and amortization ........................................................
Other general taxes ........................................................................
Total Operating Expenses ..........................................................
Operating Income ...........................................................................
Other income, net .............................................................................
Interest expense, net ..........................................................................
Income before income taxes ...........................................................
Income tax provision .........................................................................
Net Income ..................................................................................... $
42,828
73,232
143,644
161,703
40,695
19,652
481,754
138,098
10,079
(19,673)
128,504
(48,185)
80,319 $
46,062
80,830
107,315
171,248
38,838
18,607
462,900
127,987
10,701
(18,924)
119,764
(44,859)
74,905 $
392,365
139,727
9,231
541,323
46,499
73,842
78,156
172,996
38,707
18,360
428,560
112,763
10,069
(19,467)
103,365
(38,919)
64,446
Earnings Per Share of Common Stock
(basic and diluted) ............................................................................ $
Dividends per share of common stock ................................................. $
2.32 $
1.11 $
2.16 $
1.07 $
1.86
1.04
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,
2013
2012
2014
Net Income ...................................................................................... $
Other comprehensive income, net of tax:
Unrealized gain (loss) on available-for-sale securities, net of
tax (($54), ($189), and $12) ...........................................................
Comprehensive Income ................................................................... $
80,319 $
74,905 $
64,446
81
80,400 $
283
75,188 $
(18)
64,428
The accompanying notes are an integral part of the above consolidated financial statements.
52
MGE Energy, Inc.
Consolidated Statements of Cash Flows
(In thousands)
For the years ended December 31,
2013
2014
2012
Operating Activities:
Net income ......................................................................................$
Items not affecting cash:
Depreciation and amortization .......................................................
Deferred income taxes ..................................................................
Provision for doubtful receivables ..................................................
Employee benefit plan expenses .....................................................
Equity earnings in ATC .................................................................
Other items ..................................................................................
Changes in working capital items:
Trade and other receivables ...........................................................
Inventories ...................................................................................
Unbilled revenues .........................................................................
Prepaid taxes ................................................................................
Other current assets ......................................................................
Accounts payable .........................................................................
Other current liabilities .................................................................
Dividend income from ATC..............................................................
Cash contributions to pension and other postretirement plans................
Debt make-whole premium ...............................................................
Other noncurrent items, net ...............................................................
Cash Provided by Operating Activities ........................................
Investing Activities:
Capital expenditures .........................................................................
Capital contributions to investments ...................................................
Purchase of investment - land ............................................................
Other ..............................................................................................
Cash Used for Investing Activities ..............................................
Financing Activities:
Cash dividends paid on common stock ...............................................
Repayment of long-term debt ............................................................
Issuance of long-term debt ................................................................
Increase in short-term debt ................................................................
Other ..............................................................................................
Cash (Used for) Provided by Financing Activities ........................
Change in Cash and Cash Equivalents: ...............................................
Cash and cash equivalents at beginning of period ................................
Cash and cash equivalents at end of period .....................................$
Supplemental disclosures of cash flow information:
Interest paid .....................................................................................$
Income taxes paid ............................................................................$
Income taxes received ......................................................................$
Significant noncash investing activities:
Accrued capital expenditures .........................................................$
80,319 $
74,905 $
64,446
40,695
49,884
1,898
(1,080)
(9,150)
729
2,115
(10,399)
720
(19,804)
(5,693)
2,756
(4,195)
7,740
(3,321)
-
(4,452)
128,762
(92,676)
(2,185)
-
(1,297)
(96,158)
(38,429)
(4,103)
-
7,000
(130)
(35,662)
(3,058)
68,813
65,755 $
20,478 $
19,579 $
(644) $
38,838
38,365
2,448
13,303
(9,434)
117
(3,827)
2,488
(3,720)
414
2,514
858
6,271
7,404
(34,765)
(6,757)
10,845
140,267
(119,047)
(1,660)
(10)
(1,205)
(121,922)
(37,107)
(43,012)
85,000
-
(770)
4,111
22,456
46,357
68,813 $
17,991 $
8,046 $
(1,339) $
38,707
44,797
2,498
18,353
(9,079)
1,283
(6,208)
1,457
(2,508)
2,731
4,093
(272)
425
7,146
(28,857)
-
6,992
146,004
(98,435)
(2,419)
(3)
(496)
(101,353)
(35,951)
(30,668)
28,000
-
(844)
(39,463)
5,188
41,169
46,357
19,499
3,544
(12,536)
1,569 $
9,892 $
10,317
The accompanying notes are an integral part of the above consolidated financial statements.
53
MGE Energy, Inc.
Consolidated Balance Sheets
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents .......................................................................................... $
Accounts receivable, less reserves of $4,329 and $4,219, respectively ............................
Other accounts receivable, less reserves of $420 and $750, respectively..........................
Unbilled revenues .....................................................................................................
Materials and supplies, at average cost ........................................................................
Fossil fuel ................................................................................................................
Stored natural gas, at average cost ...............................................................................
Prepaid taxes ............................................................................................................
Regulatory assets - current .........................................................................................
Deferred income taxes ...............................................................................................
Other current assets ...................................................................................................
Total Current Assets ..............................................................................................
Other long-term receivables ...........................................................................................
Regulatory assets ..........................................................................................................
Pension and other postretirement benefits ........................................................................
Other deferred assets and other.......................................................................................
Property, Plant, and Equipment:
Property, plant, and equipment, net .............................................................................
Construction work in progress ....................................................................................
Total Property, Plant, and Equipment ......................................................................
Investments ................................................................................................................
Total Assets ......................................................................................................... $
LIABILITIES AND CAPITALIZATION
Current Liabilities:
Long-term debt due within one year ............................................................................ $
Short-term debt .........................................................................................................
Accounts payable ......................................................................................................
Accrued interest and taxes ..........................................................................................
Accrued payroll related items .....................................................................................
Deferred income taxes ...............................................................................................
Regulatory liabilities - current ....................................................................................
Derivative liabilities ..................................................................................................
Other current liabilities ..............................................................................................
Total Current Liabilities .........................................................................................
Other Credits:
Deferred income taxes ...............................................................................................
Investment tax credit - deferred ..................................................................................
Regulatory liabilities .................................................................................................
Accrued pension and other postretirement benefits .......................................................
Derivative liabilities ..................................................................................................
Other deferred liabilities and other ..............................................................................
Total Other Credits ................................................................................................
Capitalization:
Common shareholders' equity:
Common Stock - $1 par value - 75,000 and 50,000 shares, respectively, authorized;
34,668 shares issued and outstanding .......................................................................
Additional paid-in capital .......................................................................................
Retained earnings ..................................................................................................
Accumulated other comprehensive income, net of tax ...............................................
Total Common Shareholders' Equity ........................................................................
Long-term debt .........................................................................................................
Total Capitalization ...............................................................................................
Commitments and contingencies (see Footnote 18) ..........................................................
Total Liabilities and Capitalization ...................................................................... $
At December 31,
2014
2013
65,755 $
41,614
7,610
31,262
17,121
8,098
21,036
38,910
8,360
3,482
10,711
253,959
2,181
156,823
-
4,837
68,813
44,890
5,352
31,982
16,662
5,206
13,988
19,106
6,377
-
8,225
220,601
2,193
107,166
15,071
5,853
1,189,077
19,029
1,208,106
71,760
1,697,666 $
1,018,809
141,415
1,160,224
67,952
1,579,060
4,182 $
7,000
41,655
5,086
11,241
-
-
6,901
13,931
89,996
342,045
1,223
22,715
90,201
46,560
50,269
553,013
4,102
-
43,684
5,661
10,731
1,711
13,538
7,750
9,489
96,666
284,791
1,413
19,792
49,184
57,930
52,360
465,470
34,668
316,268
308,007
458
659,401
395,256
1,054,657
-
1,697,666 $
34,668
316,268
266,197
377
617,510
399,414
1,016,924
-
1,579,060
The accompanying notes are an integral part of the above consolidated financial statements.
54
MGE Energy, Inc.
Consolidated Statements of Common Equity
(In thousands, except per share amounts)
Common Stock
Shares
Value
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)/Income
Total
2012
Beginning balance - December 31, 2011 ...........
Net income ...........................................
Other comprehensive loss ...........................
Common stock dividends declared
($1.04 per share) .....................................
Ending balance - December 31, 2012 ...............
2013
Net income ...........................................
Other comprehensive income .......................
Common stock dividends declared
($1.07 per share) .....................................
Ending balance - December 31, 2013 ...............
2014
Net income ...........................................
Other comprehensive income .......................
Common stock dividends declared
($1.11 per share) .....................................
Cash in lieu of fractional shares related to stock
split ...................................................
Ending balance - December 31, 2014 ...............
34,668 $
34,668 $
316,268 $
199,904 $
112 $
64,446
(35,951)
(18)
34,668 $
34,668 $
316,268 $
228,399 $
94 $
74,905
(37,107)
283
34,668 $
34,668 $
316,268 $
266,197 $
377 $
81
80,319
(38,429)
(80)
34,668 $
34,668 $
316,268 $
308,007 $
458 $
The accompanying notes are an integral part of the above consolidated financial statements.
550,952
64,446
(18)
(35,951)
579,429
74,905
283
(37,107)
617,510
80,319
81
(38,429)
(80)
659,401
55
Madison Gas and Electric Company
Consolidated Statements of Income
(In thousands)
For the years ended December 31,
2013
2012
2014
Operating Revenues:
Regulated electric revenues ............................................................ $
Regulated gas revenues ..................................................................
Nonregulated revenues ..................................................................
Total Operating Revenues ..........................................................
394,871 $
221,741
3,283
619,895
403,980 $
181,477
5,468
590,925
Operating Expenses:
Fuel for electric generation .............................................................
Purchased power ...........................................................................
Cost of gas sold ............................................................................
Other operations and maintenance ..................................................
Depreciation and amortization ........................................................
Other general taxes ........................................................................
Income tax provision .....................................................................
Total Operating Expenses ..........................................................
Operating Income ...........................................................................
Other Income and Deductions:
AFUDC - equity funds ...................................................................
Equity in earnings in ATC .............................................................
Income tax provision .....................................................................
Other deductions, net .....................................................................
Total Other Income and Deductions ............................................
Income before interest expense .......................................................
42,836
73,245
143,665
160,831
40,648
19,652
45,090
525,967
93,928
3,466
9,150
(4,055)
(704)
7,857
101,785
46,070
80,844
107,330
170,498
38,834
18,607
41,519
503,702
87,223
3,140
9,434
(4,303)
(18)
8,253
95,476
Interest Expense:
Interest on long-term debt ..............................................................
Other interest, net ..........................................................................
AFUDC - borrowed funds ..............................................................
Net Interest Expense ..................................................................
Net Income ..................................................................................... $
Less Net Income Attributable to Noncontrolling Interest, net of tax .......
Net Income Attributable to MGE .................................................... $
20,927
62
(1,142)
19,847
81,938 $
(26,310)
55,628 $
20,087
(21)
(1,035)
19,031
76,445 $
(27,438)
49,007 $
The accompanying notes are an integral part of the above consolidated financial statements.
392,365
139,727
9,231
541,323
46,499
73,842
78,156
171,965
38,707
18,360
35,334
462,863
78,460
1,731
9,079
(4,101)
(263)
6,446
84,906
20,386
(82)
(704)
19,600
65,306
(24,489)
40,817
Madison Gas and Electric Company
Consolidated Statements of Comprehensive Income
(In thousands)
For the years ended December 31,
2013
2012
2014
Net Income ...................................................................................... $
Other comprehensive income, net of tax:
Unrealized (loss) gain on available-for-sale securities, net of
tax ($33, ($126), and $29) ..............................................................
Comprehensive Income ................................................................... $
Less: Comprehensive Income Attributable to Noncontrolling
Interest, net of tax .........................................................................
Comprehensive Income Attributable to MGE.................................. $
81,938 $
76,445 $
65,306
(48)
81,890 $
188
76,633 $
(26,310)
55,580 $
(27,438)
49,195 $
(43)
65,263
(24,489)
40,774
The accompanying notes are an integral part of the above consolidated financial statements.
56
Madison Gas and Electric Company
Consolidated Statements of Cash Flows
(In thousands)
For the years ended December 31,
2013
2012
2014
Operating Activities:
Net income .....................................................................................$
Items not affecting cash:
Depreciation and amortization ......................................................
Deferred income taxes .................................................................
Provision for doubtful receivables .................................................
Employee benefit plan expenses ....................................................
Equity earnings in ATC ................................................................
Other items .................................................................................
Changes in working capital items:
Trade and other receivables ..........................................................
Inventories ..................................................................................
Unbilled revenues ........................................................................
Prepaid taxes ...............................................................................
Other current assets .....................................................................
Accounts payable ........................................................................
Accrued interest and taxes ............................................................
Other current liabilities ................................................................
Dividend income from ATC.............................................................
Cash contributions to pension and other postretirement plans...............
Debt make-whole premium ..............................................................
Other noncurrent items, net ..............................................................
Cash Provided by Operating Activities .......................................
Investing Activities:
Capital expenditures ........................................................................
Capital contributions to investments ..................................................
Other .............................................................................................
Cash Used for Investing Activities .............................................
Financing Activities:
Cash dividends paid to parent by MGE ..............................................
Distributions to parent from noncontrolling interest ............................
Equity contribution received by noncontrolling interest.......................
Repayment of long-term debt ...........................................................
Issuance of long-term debt ...............................................................
Increase in short-term debt ...............................................................
Other .............................................................................................
Cash Used for Financing Activities ............................................
Change in Cash and Cash Equivalents: ..............................................
Cash and cash equivalents at beginning of period ...............................
Cash and cash equivalents at end of period ....................................$
Supplemental disclosures of cash flow information:
Interest paid ....................................................................................$
Income taxes paid ...........................................................................$
Income taxes received .....................................................................$
Significant noncash investing activities:
Accrued capital expenditures ........................................................$
81,938 $
76,445 $
65,306
40,648
49,603
1,898
(1,080)
(9,150)
1,280
(4,455)
(10,398)
720
(15,169)
(5,693)
2,741
(1,001)
(3,144)
7,740
(3,321)
-
(4,619)
128,538
(92,676)
(1,775)
(1,146)
(95,597)
(26,500)
(21,359)
1,775
(4,103)
-
7,000
-
(43,187)
(10,246)
14,808
4,562 $
20,478 $
67 $
(644) $
38,834
37,462
2,448
13,303
(9,434)
651
(3,699)
2,488
(3,720)
(373)
2,518
126
2,065
2,975
7,404
(34,765)
(6,757)
10,713
138,684
(119,047)
(1,420)
(130)
(120,597)
(25,000)
(27,365)
1,420
(43,012)
85,000
-
(672)
(9,629)
8,458
6,350
14,808 $
17,991 $
144 $
- $
38,707
44,112
2,498
18,353
(9,079)
1,813
(7,219)
1,457
(2,508)
(1,584)
4,092
(1,658)
211
(714)
7,146
(28,857)
-
6,696
138,772
(98,435)
(2,140)
(508)
(101,083)
(20,404)
(23,500)
2,130
(30,668)
28,000
-
(795)
(45,237)
(7,548)
13,898
6,350
19,499
44
(448)
1,569 $
9,892 $
10,317
The accompanying notes are an integral part of the above consolidated financial statements.
57
Madison Gas and Electric Company
Consolidated Balance Sheets
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents ............................................................................................................ $
Accounts receivable, less reserves of $4,329 and $4,219, respectively ........................................
Affiliate receivables .....................................................................................................................
Other accounts receivable, less reserves of $420 and $750, respectively .....................................
Unbilled revenues.........................................................................................................................
Materials and supplies, at average cost.........................................................................................
Fossil fuel .....................................................................................................................................
Stored natural gas, at average cost ...............................................................................................
Prepaid taxes ................................................................................................................................
Regulatory assets - current ...........................................................................................................
Deferred income taxes ..................................................................................................................
Other current assets ......................................................................................................................
Total Current Assets .................................................................................................................
Affiliate receivable long-term ..........................................................................................................
Regulatory assets ..............................................................................................................................
Pension and other postretirement benefits ........................................................................................
Other deferred assets and other ........................................................................................................
Property, Plant, and Equipment:
Property, plant, and equipment, net ..............................................................................................
Construction work in progress .....................................................................................................
Total Property, Plant, and Equipment ......................................................................................
Investments .....................................................................................................................................
Total Assets ............................................................................................................................. $
LIABILITIES AND CAPITALIZATION
Current Liabilities:
Long-term debt due within one year ............................................................................................. $
Short-term debt ............................................................................................................................
Accounts payable .........................................................................................................................
Accrued interest and taxes ............................................................................................................
Accrued payroll related items .......................................................................................................
Deferred income taxes ..................................................................................................................
Regulatory liabilities - current ......................................................................................................
Derivative liabilities .....................................................................................................................
Other current liabilities.................................................................................................................
Total Current Liabilities ...........................................................................................................
Other Credits:
Deferred income taxes ..................................................................................................................
Investment tax credit - deferred ....................................................................................................
Regulatory liabilities ....................................................................................................................
Accrued pension and other postretirement benefits ......................................................................
Derivative liabilities .....................................................................................................................
Other deferred liabilities and other ...............................................................................................
Total Other Credits ..................................................................................................................
Capitalization:
Common shareholder's equity:
Common Stock - $1 par value - 50,000 shares authorized; 17,348 shares outstanding ............
Additional paid-in capital .........................................................................................................
Retained earnings .....................................................................................................................
Accumulated other comprehensive income, net of tax .............................................................
Total Common Shareholder's Equity .......................................................................................
Noncontrolling interest .................................................................................................................
Total Equity ..............................................................................................................................
Long-term debt .............................................................................................................................
Total Capitalization .................................................................................................................
Commitments and contingencies (see Footnote 18) .........................................................................
Total Liabilities and Capitalization ...................................................................................... $
At December 31,
2014
2013
4,562 $
41,614
7,112
7,524
31,262
17,121
8,098
21,035
39,103
8,360
1,271
10,683
197,745
5,295
156,823
-
4,977
14,808
44,890
534
5,274
31,982
16,662
5,206
13,988
23,934
6,377
-
8,197
171,852
5,825
107,166
15,071
6,138
1,188,351
19,029
1,207,380
68,402
1,640,622 $
1,017,877
141,415
1,159,292
65,299
1,530,643
4,182 $
7,000
41,654
5,039
11,241
-
-
6,901
11,350
87,367
334,773
1,223
22,715
90,201
46,560
50,267
545,739
4,102
-
43,684
6,040
10,731
2,723
13,538
7,750
6,446
95,014
279,085
1,413
19,792
49,184
57,930
52,357
459,761
17,348
192,417
276,662
144
486,571
125,689
612,260
395,256
1,007,516
-
1,640,622 $
17,348
192,417
247,534
192
457,491
118,963
576,454
399,414
975,868
-
1,530,643
The accompanying notes are an integral part of the above consolidated financial statements.
58
Madison Gas and Electric Company
Consolidated Statements of Common Equity
(In thousands)
2012
Beginning balance - December 31, 2011 .......
Net income .......................................
Other comprehensive loss .......................
Cash dividends paid to parent by MGE ........
Equity contribution received by
noncontrolling interest ..........................
Distributions to parent from
noncontrolling interest ..........................
Ending balance - December 31, 2012 ..........
2013
Net income .......................................
Other comprehensive income ...................
Cash dividends paid to parent by MGE ........
Equity contribution received by
noncontrolling interest ..........................
Distributions to parent from
noncontrolling interest ..........................
Ending balance - December 31, 2013 ..........
2014
Net income .......................................
Other comprehensive loss .......................
Cash dividends paid to parent by MGE ........
Equity contribution received by
noncontrolling interest ..........................
Distributions to parent from
noncontrolling interest ..........................
Ending balance - December 31, 2014 ..........
Additional
Common Stock
Shares
Value
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)/Income
Non-
Controlling
Interest
17,348 $
17,348 $
192,417 $
203,114 $
47 $
114,351 $
40,817
(20,404)
24,489
(43)
Total
527,277
65,306
(43)
(20,404)
2,130
2,130
17,348 $
17,348 $
192,417 $
223,527 $
4 $
117,470 $
(23,500)
49,007
(25,000)
27,438
188
(23,500)
550,766
76,445
188
(25,000)
1,420
1,420
17,348 $
17,348 $
192,417 $
247,534 $
192 $
118,963 $
(27,365)
55,628
(26,500)
26,310
(48)
(27,365)
576,454
81,938
(48)
(26,500)
17,348 $
17,348 $
192,417 $
276,662 $
144 $
125,689 $
(21,359)
(21,359)
612,260
1,775
1,775
The accompanying notes are an integral part of the above consolidated financial statements.
59
Notes to Consolidated Financial Statements
December 31, 2014, 2013, and 2012
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 it has
controlling influence. MGE is the majority owner of MGE Transco. MGE Transco is a nonregulated entity
formed to manage the investment in ATC.
Wholly owned subsidiaries of MGE Energy include CWDC, MAGAEL, MGE Power, MGE State Energy
Services, and NGV Fueling Services. 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 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 2 for more discussion of these entities.
The consolidated financial statements reflect the application of certain accounting policies described in this
note. All significant 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.
d. Cash Equivalents and Restricted Cash - MGE Energy and MGE.
MGE Energy and MGE consider all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
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.
These are included in other current assets.
60
e. Receivable – Margin Account - MGE Energy and MGE.
Cash amounts held by counterparties as margin for certain financial transactions are recorded as receivable –
margin account in other current assets on the consolidated balance sheet. As of December 31, 2014 and
2013, the receivable – margin account balance of $2.2 million and $0.5 million, respectively, is shown net of
any collateral posted against derivative positions. As of December 31, 2014 and 2013, there was $2.2 million
and $0.2 million, respectively, of collateral posted against derivative positions. Changes in this cash account
are considered cash flows from operating activities to match with the costs being hedged. The costs being
hedged are fuel for electric generation, purchased power, and cost of gas sold.
f. 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 is obligated to provide service to all electric and gas customers within its franchised territories. MGE's
franchised electric territory includes a 316 square-mile area in Dane County, Wisconsin, and MGE's
franchised gas territory includes a service area covering 1,678 square-miles in Wisconsin. MGE manages
this concentration and the related credit risk through its credit and collection policies, which are consistent
with state regulatory requirements.
g.
Inventories - MGE Energy and MGE.
Inventories consist of natural gas in storage, fossil fuels, materials and supplies, SO2 allowances, and
renewable energy credits (RECs). MGE values natural gas in storage, fossil fuels, and materials and supplies
using average cost.
SO2 emission allowances are included in material and supplies on the consolidated balance sheet and are
recorded at weighted average cost. These allowances are charged to fuel expense as they are used in
operations. MGE's emission allowance balance was $0.1 million as of December 31, 2014 and 2013.
REC allowances are included in materials and supplies on the consolidate balance sheet 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 balances as of December 31, 2014 and 2013, were $0.8 million and
$0.6 million, respectively.
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 6 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.
61
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 3 for further information.
Provisions at composite straight-line depreciation rates approximate the following percentages for the cost of
depreciable property:
Electric
Gas
Nonregulated
2014
2.6 %
1.7 %
2.4 %
2013
2.7 %
1.7 %
2.3 %
2012
2.9 %
1.7 %
2.3 %
k. Asset Retirement Obligations - MGE Energy and MGE.
MGE Energy and MGE are required to record a liability for the fair value of an 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 our balance sheets. MGE has
regulatory treatment and recognizes regulatory assets or liabilities for the timing differences between when
we recover legal AROs in rates and when we would recognize these costs. See Footnote 19 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. At December 31, 2014 and 2013, MGE had over
collected $1.2 million and $1.7 million, respectively. These amounts are included in other current liabilities
on the consolidated balance sheet.
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.
o. Utility Cost Recovery - MGE Energy and MGE.
MGE's rates include a provision for fuel costs. 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 is determined on an annual basis and will be adjusted in future billings to electric
retail customers. Such deferred amounts will be recognized in "Purchased Power Expense" in MGE Energy's
62
and MGE's income statement each period. The cumulative effects of these deferred amounts will be recorded
in "Regulatory assets" or "Regulatory liabilities" on MGE Energy's and MGE's consolidated balance sheets
until they are reflected in future billings to customers. See Footnote 17.b. for further information regarding
the regulatory rules applicable to the recovery of electric fuel costs.
p. 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 shareholders' capital used for construction
purposes. In the consolidated income statements, the cost of borrowed funds (AFUDC-debt) is presented as
an offset to interest expense and the return on shareholders' capital (AFUDC-equity funds) is shown as an
item within other income. For both 2014 and 2013, as approved by the PSCW, MGE capitalized AFUDC-
debt and equity on 50% of applicable average construction work in progress at 8.21%. For 2012, MGE
capitalized AFUDC-debt and equity on 50% of applicable average construction work in progress at 8.36%.
For both 2014 and 2012, MGE received specific approval to recover 100% AFUDC on certain
environmental costs for Columbia and 50% in 2013. Although the allowance does not represent current cash
income, it is recovered under the ratemaking process over the service lives of the related properties. See
Footnote 20 for further information regarding Columbia AFUDC.
q. 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 or at cost, as appropriate. See
Footnote 4 for further information.
r. Capitalized Software Costs - MGE Energy and MGE.
Property, plant, and equipment includes the net book value of capitalized costs of internal use software
totaling $8.4 million and $9.0 million at December 31, 2014 and 2013, respectively. During 2014, 2013, and
2012, MGE recorded $1.6 million, $1.5 million, and $1.3 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 ten years.
s.
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
is no impairment of long-lived assets at December 31, 2014, 2013, and 2012.
t.
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.
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.
63
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
$14.6 million, $13.8 million, and $13.5 million for the years ended December 31, 2014, 2013, and 2012,
respectively.
Operating income taxes, including tax credits and license fee tax, are included in rates for utility related
items.
u. 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. 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.
MGE Energy and MGE initially measure the cost of the employee or director services received in exchange
for a performance unit award based on the current market value of MGE Energy common stock. The fair
value of the award is subsequently re-measured at each reporting date through the settlement date. Changes
in fair value during the requisite period are recognized as compensation cost over that period.
See Footnote 14 for additional information regarding the plans.
v. Treasury Stock - MGE Energy.
Treasury shares are recorded at cost. Any shares of common stock repurchased are held as treasury shares
unless cancelled or reissued. No treasury shares are held as of December 31, 2014 and 2013.
w. Comprehensive Income - MGE Energy and MGE.
Total comprehensive income includes all changes in equity during a period except those resulting from
investments by and distributions to shareholders. Comprehensive income is reflected in the consolidated
statements of comprehensive income.
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 and gas revenues. 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 any resulting
loss or gain is 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.
64
2.
Variable Interest Entities - MGE Energy and MGE.
a. MGE Power Elm Road.
MGE Power Elm Road is not a subsidiary of MGE; however, it has been consolidated in the financial
statements of MGE. MGE Power Elm Road was created for the purpose of owning new generating assets. Its
sole principal assets are an undivided ownership interest in two coal-fired generating plants located in Oak
Creek, Wisconsin, which it leases to MGE pursuant to long-term leases. Based on the nature and terms of the
contractual agreements, MGE is expected to absorb a majority of the expected losses, residual value, or both,
associated with the ownership of MGE Power Elm Road and therefore holds a variable interest in MGE
Power Elm Road, even though it has no equity interest in MGE Power Elm Road. MGE Energy and MGE
consolidate VIEs for which they are the primary beneficiary. MGE has the power to direct the activities that
most significantly impact the Elm Road Units' economic performance and is also the party most closely
associated with MGE Power Elm Road. As a result, MGE is the primary beneficiary. At December 31, MGE
has included the following significant accounts on its consolidated balance sheet related to its interest in this
VIE:
(In thousands)
Property, plant, and equipment, net ........... $
Construction work in progress ..................
Affiliate receivables ................................
Deferred income tax asset - current ...........
Deferred income tax liability ....................
Long-term debt .......................................
Noncontrolling interest ............................
2014
179,620 $
1,976
1,742
-
40,044
67,972
72,537
2013
182,657
1,115
-
219
34,141
70,639
69,876
Long-term debt consists of $68.0 million of senior secured notes that require that MGE Power Elm Road
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 debt is secured by a collateral assignment of lease
payments that MGE is making to MGE Power Elm Road for use of the Elm Road Units pursuant to the
related long-term leases. As of December 31, 2014, MGE Power Elm Road is in compliance with the
covenant requirements.
MGE has been and will continue to recover in rates the lease payments made to MGE Power Elm Road.
MGE received approval from the PSCW to collect in rates the carrying costs incurred by MGE Power Elm
Road. The total carrying costs on the Elm Road Units is $62.5 million. MGE is collecting carrying costs in
rates over a six year period that began in 2010. Of these costs, $17.0 million relates to the capitalized interest
and the debt portion of the units. These costs will be recognized over the period in which the generating units
will be depreciated. The remaining $45.5 million represents the equity portion and is being recognized over
the period allowed for recovery in rates.
b. MGE Power West Campus.
MGE Power West Campus is not a subsidiary of MGE; however, it has been consolidated in the financial
statements of MGE. MGE Power West Campus was created for the purpose of owning new generating
assets. Its sole principal asset is the WCCF, which it leases to MGE pursuant to a long-term lease. MGE is
responsible for operation of the plant during the term of the lease. Based on the nature and terms of these
contractual relationships, MGE absorbs a majority of the expected losses, residual value, or both, associated
with the ownership and operation of the WCCF and therefore holds a variable interest in MGE Power West
Campus, even though it has no equity interest in MGE Power West Campus. MGE has the power to direct
the activities that most significantly impact WCCF's economic performance and is also the party most
closely associated with MGE Power West Campus.
65
As a result, MGE is the primary beneficiary. At December 31, MGE has included the following significant
accounts on its consolidated balance sheet related to its interest in this VIE:
(In thousands)
Property, plant, and equipment, net ............$
Affiliate receivables .................................
Accrued interest and taxes.........................
Deferred income taxes ..............................
Long-term debt ........................................
Noncontrolling interest .............................
2014
2013
86,763 $
5,862
569
23,813
48,218
30,755
89,564
6,767
4,888
23,154
49,653
29,089
Long-term debt consists of $48.2 million of senior secured notes that require that MGE Power West Campus
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 debt is secured by a collateral assignment of lease payments that
MGE is making to MGE Power West Campus for use of the cogeneration facility pursuant to the long-term
lease. As of December 31, 2014, MGE Power West Campus is in compliance with the covenant
requirements.
MGE has been and will continue to recover lease payments made to MGE Power West Campus in rates.
Also, MGE received approval from the PSCW to collect approximately $12.1 million in carrying costs
incurred by MGE Power West Campus during construction of the facility. The carrying costs are being
recovered in rates over a 10 year period that started in 2005.
c. Other Variable Interest Entities.
MGE has a variable interest in entities through purchase power agreements relating to purchased energy
from the facilities. As of December 31, 2014 and 2013, MGE had 61 megawatts 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.
3.
Property, Plant, and Equipment - MGE Energy and MGE.
Property, plant, and equipment consisted of the following at December 31:
(In thousands)
Utility:
MGE Energy
MGE
2014
2013
2014
2013
Electric ...................................................................... $
Gas ............................................................................
Total utility plant ........................................................
Less: Accumulated depreciation and amortization ..........
In-service utility plant, net ............................................
Nonregulated:
Nonregulated ..............................................................
Less: Accumulated depreciation and amortization ..........
In-service nonregulated plant, net .................................
Construction work in progress:
Utility construction work in progress .............................
Nonregulated construction work in progress ...................
Total property, plant, and equipment ............................. $
$
1,110,953 $
369,975
1,480,928
559,615
921,313
953,290
351,694
1,304,984
560,066
744,918
1,110,970 $
369,987
1,480,957
559,615
921,342
953,307
351,705
1,305,012
560,066
744,946
313,152
45,388
267,764
311,742
37,851
273,891
312,314
45,305
267,009
310,745
37,814
272,931
16,988
2,041
1,208,106 $
140,301
1,114
1,160,224
$
16,988
2,041
1,207,380 $
140,301
1,114
1,159,292
MGE's utility plant is subject to the lien of its Indenture of Mortgage and Deed of Trust. As of December 31,
2014 and 2013, there was $1.2 million of bonds outstanding under that indenture. See Footnote 9 for further
discussion of the mortgage indenture.
66
4.
Investments - MGE Energy and MGE.
a. Equity Method Investments, Available for Sale Securities, and Other Investments.
(In thousands)
Available for sale securities:
Cost basis ............................................. $
Gross unrealized gains ...........................
Fair value .................................................
Equity method investments:
ATC .....................................................
Other ....................................................
Total equity method investments .................
Other investments .....................................
Total ........................................................ $
MGE Energy
MGE
2014
2013
2014
2013
1,964 $
765
2,729
67,673
1,199
68,872
159
71,760 $
$
1,736
629
2,365
489 $
240
729
64,488
1,099
65,587
-
67,952
67,673
-
67,673
-
$
68,402 $
490
321
811
64,488
-
64,488
-
65,299
MGE Energy's and MGE's available for sale securities represent publicly traded securities and private equity
investments in common stock of companies in various industries.
During the years ended December 31, 2014 and 2013, certain investments were liquidated. As a result of
these liquidations, MGE Energy and MGE received the following:
(In thousands)
Cash proceeds ..............$
Gain (loss) on sale ........
2014
MGE Energy
2013
38 $
21
39 $
2
2012
2014
MGE
2013
- $
-
- $
-
16 $
(3)
2012
-
-
b. ATC.
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 jointly owned by
MGE Energy and MGE.
MGE Transco has accounted for its investment in ATC under the equity method of accounting. For the years
ended December 31, 2014, 2013, and 2012, MGE Transco recorded the following:
(In thousands)
Equity in earnings from investment in ATC ........................... $
Dividends received from ATC ..............................................
Capital contributions to ATC ................................................
2014
2013
2012
9,150 $
7,740
1,775
9,434 $
7,404
1,420
9,079
7,146
2,131
On January 30, 2015, MGE Transco made a $0.2 million capital contribution to ATC.
At December 31, 2014 and 2013, MGE Transco held a 3.6% ownership interest in ATC. MGE Transco's
investment balance is different from the amount of the underlying equity in the net assets of ATC. This
difference is attributable to the allocation of certain tax impacts related to the initial asset transfer.
At December 31, 2014 and 2013, MGE is the majority owner, and MGE Energy, the holding company, is the
minority owner of MGE Transco. MGE Energy's proportionate share of the equity and net income of MGE
Transco is classified within the MGE financial statements as noncontrolling interest.
67
ATC's summarized financial data for the years ended December 31, 2014, 2013, and 2012 is as follows:
(In thousands)
Income statement data for the year ended December 31,
Operating revenues .............................................................. $
Operating expenses ..............................................................
Other income (expense) .......................................................
Interest expense, net ............................................................
Earnings before members' income taxes ................................. $
Balance sheet data as of December 31,
Current assets ...................................................................... $
Noncurrent assets ................................................................
Total assets ......................................................................... $
Current liabilities ................................................................. $
Long-term debt ...................................................................
Other noncurrent liabilities ...................................................
Members' equity ..................................................................
Total members' equity and liabilities...................................... $
2014
2013
635,033 $
(307,451)
117
(88,970)
238,729 $
2014
66,410 $
3,728,675
3,795,085 $
313,065 $
1,701,000
163,818
1,617,202
3,795,085 $
626,336 $
(295,069)
831
(84,484)
247,614 $
2013
80,715 $
3,509,517
3,590,232 $
381,467 $
1,550,000
126,167
1,532,598
3,590,232 $
2012
603,254
(280,999)
(2,533)
(82,296)
237,426
2012
63,134
3,274,704
3,337,838
251,541
1,550,000
95,829
1,440,468
3,337,838
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 accounts for 31% (239 MW) of MGE's net summer rated capacity. Power from this
facility is shared in proportion to each company's ownership interest. MGE has a 22% 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 were $28.1 million, $37.5 million, and $36.3 million for
the years ended December 31, 2014, 2013, and 2012, respectively. See Footnote 20 for discussion of MGE's
future capital commitments in respect to the environmental projects at Columbia as a result of this ownership
interest.
Each owner provides its own financing and reflects its respective portion of facilities and operating costs in
its financial statements. MGE's interest in Columbia, included in its gross utility plant in service, and the
related accumulated depreciation reserves at December 31 were as follows:
(In thousands)
Utility plant .....................................................$
Accumulated depreciation.................................
Property, plant, and equipment, net ....................
Construction work in progress ...........................
Total property, plant, and equipment ..................$
2014
2013
268,597 $
(80,645)
187,952
6,941
194,893 $
123,097
(78,880)
44,217
120,858
165,075
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 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 were $20.3 million, $13.4 million, and $13.2 million for the years ended
December 31, 2014, 2013, and 2012, respectively.
68
MGE Power Elm Road's interest in the portion of the Elm Road Units in-service and the related accumulated
depreciation reserves at December 31 were as follows:
(In thousands)
Nonregulated plant ...........................................$
Accumulated depreciation.................................
Property, plant, and equipment, net ....................
Construction work in progress ...........................
Total property, plant, and equipment ..................$
2014
2013
199,582 $
(19,962)
179,620
1,976
181,596 $
198,198
(15,541)
182,657
1,115
183,772
c. WCCF.
MGE Power West Campus and the UW jointly own the West Campus Cogeneration Facility 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 at December 31 were as follows:
(In thousands)
Nonregulated plant ...........................................$
Accumulated depreciation.................................
Property, plant, and equipment, net ....................$
2014
111,453 $
(24,691)
86,762 $
2013
111,268
(21,704)
89,564
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 year ended December 31, 2014, the UW allocated share of fuel and
operating costs was $2.8 million. For the years ended December 31, 2013 and 2012, the UW allocated share
of fuel and operating costs was $4.9 million.
6.
Regulatory Assets and Liabilities - MGE Energy and MGE.
The following regulatory assets and liabilities are reflected in MGE's consolidated balance sheet as of
December 31:
(In thousands)
Regulatory Assets
Asset retirement obligation ..................................................... $
Debt related costs ..................................................................
Derivatives ...........................................................................
Environmental costs ..............................................................
Tax recovery related to AFUDC equity ...................................
Unfunded pension and other postretirement liability .................
Other ...................................................................................
Total regulatory assets ....................................................... $
Regulatory Liabilities
Conservation costs ................................................................ $
Deferred fuel savings .............................................................
Elm Road .............................................................................
Income taxes ........................................................................
Non-ARO removal costs ........................................................
Renewable energy credits .......................................................
Other ...................................................................................
Total regulatory liabilities .................................................. $
2014
2013
4,532
11,133
54,998
700
8,821
84,551
448
165,183
680
755
1,497
1,794
16,129
753
1,107
22,715
$
$
$
$
4,863
11,786
63,893
920
6,956
24,591
534
113,543
455
13,386
607
2,082
15,182
574
1,044
33,330
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. We believe
69
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, except for amounts expended for environmental costs.
Asset Retirement Obligation
See Footnote 19 for further discussion.
Debt Related Costs
This balance includes debt issuance costs of extinguished debt and other debt related expenses. 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.
In 2013, MGE issued long-term debt and used the net proceeds to redeem Medium-Term Notes and partially
redeem Senior Notes. Included in the redemption prices were make-whole premiums totalling $6.8 million. The
make-whole premiums are treated as a regulatory asset and will be amortized over the life of the long-term debt
issued.
Derivatives
MGE has physical and financial contracts that are defined 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 ten-year purchased power agreement that provides MGE with firm capacity
and energy during a base term from June 1, 2012, through May 31, 2022. This agreement is accounted for as a
derivative contract. See Footnote 16 for further discussion.
Environmental Costs
MGE has been allowed to defer actual costs on certain environmental matters, including clean up of two landfill
sites and legal expenditures pertaining to the response to the EPA Clean Air Act enforcement matter at
Columbia. For further discussion of the Columbia Clean Air Act litigation, see Footnote 18.d.
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. The unfunded status
represents future expenses that are expected to be recovered in rates. See Footnote 13 for further discussion.
Conservation Costs
MGE has received regulatory treatment for certain conservation expenditures. The expenditures are used for
Focus on Energy programs, 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 and amortize the amount over the rate case period.
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. 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. See Footnote 17.b. for further
discussion.
70
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. Also, MGE has deferred
payments made to MGE Power Elm Road for carrying costs during construction of the facility. MGE is
collecting carrying costs in rates over a six year period that began in 2010. All other 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.
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.
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.
7.
Common Equity.
a. Common Stock - MGE Energy and MGE.
On December 20, 2013, MGE Energy's Board of Directors declared a three-for-two stock split of
MGE Energy's outstanding shares of common stock, effective in the form of a stock dividend. Shareholders
of record at the close of business on January 24, 2014, received one additional share of MGE Energy
common stock for every two shares of common stock owned on that date. The additional shares were
distributed on February 7, 2014. Shareholders received cash in lieu of any fractional shares of common stock
they otherwise would have received in connection with the dividend. All share and per share data provided
in this report give effect to this stock split.
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, 2014 and 2013, MGE Energy did not issue any new shares of
common stock under the Stock Plan.
MGE Energy 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 a 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, 2014 and 2013, MGE Energy paid $38.4 million (or $1.11 per share)
and $37.1 million (or $1.07 per share), respectively, in cash dividends on its common stock. Dividends on
common stock at MGE are subject to restrictions imposed by the PSCW and the covenants of MGE's
outstanding first mortgage bonds. See Footnote 9 for further discussion of these covenants. During the years
ended December 31, 2014 and 2013, MGE paid $26.5 million and $25.0 million, respectively, in cash
dividends to MGE Energy.
b. Dilutive Shares Calculation - MGE Energy.
MGE Energy does not hold any dilutive securities.
71
8.
Noncontrolling Interest - MGE.
The noncontrolling interest on MGE's balance sheet at December 31 was as follows:
(In thousands)
MGE Power Elm Road (a) .......................................................... $
MGE Power West Campus (a).....................................................
MGE Transco (b) .......................................................................
Total noncontrolling interest ...................................................... $
2014
72,537 $
30,755
22,397
125,689 $
2013
69,876
29,089
19,998
118,963
The net income attributable to noncontrolling interest, net of tax, for the years ended December 31, 2014, 2013,
and 2012 was as follows:
(In thousands)
MGE Power Elm Road (a) ..........................................................$
MGE Power West Campus (a) .....................................................
MGE Transco (b) .......................................................................
Net income attributable to noncontrolling interest, net of tax.........$
2014
2013
2012
16,160 $
7,666
2,484
26,310 $
17,373 $
7,657
2,408
27,438 $
14,837
7,506
2,146
24,489
(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 2). 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 financial statements as noncontrolling interest.
(b) At December 31, 2014, MGE is the majority owner, and MGE Energy is the minority owner, of MGE
Transco. MGE Energy's proportionate share of the equity and net income of MGE Transco is classified
within the MGE financial statements as noncontrolling interest.
9.
Long-Term Debt - MGE Energy and MGE.
a. Long-Term Debt.
(In thousands)
First Mortgage Bonds: (a)
7.70%, 2028 Series .............................................. $
Tax Exempt Debt:
3.45%, 2027 Series,
Industrial Development Revenue Bonds ................
Medium-Term Notes: (b)
5.25%, due 2017 .................................................
6.12%, due 2028 .................................................
7.12%, due 2032 .................................................
6.247%, due 2037 ...............................................
Total Medium-Term Notes ................................
Other Long-Term Debt: (c)
5.59%, due 2018 (d) .............................................
3.38%, due 2020 (d) ..............................................
3.09%, due 2023 (d) .............................................
3.29%, due 2026 (d) .............................................
5.68%, due 2033 (e) ..............................................
5.19%, due 2033 (e) ..............................................
5.26%, due 2040 (d) ..............................................
5.04%, due 2040 (f) ..............................................
4.74%, due 2041 (f) ..............................................
4.38%, due 2042 (d) ..............................................
4.42%, due 2043 (d) .............................................
4.47%, due 2048 (d) .............................................
Total Other Long-Term Debt ............................
Long-term debt due within one year ......................
Unamortized discount ..........................................
Total Long-Term Debt...................................... $
2014
MGE
Energy
MGE
2013
MGE
Energy
MGE
1,200 $
1,200
$
1,200 $
1,200
19,300
19,300
19,300
19,300
30,000
20,000
25,000
25,000
100,000
20,000
15,000
30,000
15,000
28,954
19,264
15,000
41,805
26,167
28,000
20,000
20,000
279,190
(4,182)
(252)
395,256
$
30,000
20,000
25,000
25,000
100,000
20,000
15,000
30,000
15,000
29,797
19,857
15,000
43,472
27,167
28,000
20,000
20,000
283,293
(4,102)
(277)
399,414 $
30,000
20,000
25,000
25,000
100,000
20,000
15,000
30,000
15,000
29,797
19,857
15,000
43,472
27,167
28,000
20,000
20,000
283,293
(4,102)
(277)
399,414
30,000
20,000
25,000
25,000
100,000
20,000
15,000
30,000
15,000
28,954
19,264
15,000
41,805
26,167
28,000
20,000
20,000
279,190
(4,182)
(252)
395,256 $
72
(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, 2014, approximately $334.8 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) 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.
(d) 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,
2014, MGE is in compliance with the covenant requirements.
(e) 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 West Campus
Cogeneration Facility pursuant to a long-term lease. As of December 31, 2014, MGE Power West
Campus is in compliance with the covenant requirements.
(f) 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, 2014, MGE Power Elm Road is 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 the
December 31, 2014, consolidated balance sheets.
(In thousands)
2015 .......................... $
2016 ..........................
2017 ..........................
2018 ..........................
2019 ..........................
Future years ...............
Total.......................... $
MGE
Energy
4,182 $
4,268
34,358
24,452
4,553
327,877
399,690 $
MGE *
4,182
4,268
34,358
24,452
4,553
327,877
399,690
*Includes $48.2 million for MGE Power West Campus and $68.0 million for MGE Power Elm Road, all of
which are consolidated with MGE's debt (see Footnote 2 for further information).
73
10. Notes Payable to Banks, Commercial Paper, and Lines of Credit.
a. MGE Energy.
At December 31, 2014, MGE Energy had an unsecured, committed revolving line of credit of $50 million
expiring July 31, 2017. At December 31, 2014, no borrowings were outstanding under this facility.
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, 2014, MGE Energy is 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. At December 31, 2014,
MGE had an unsecured, committed revolving line of credit for $100 million expiring July 31, 2017. The
agreement requires MGE to have a period of at least one day, during any 365-day period, on which the
principal amount of all outstanding loans thereunder shall be zero. At December 31, 2014, no borrowings
were outstanding under this facility; however, there was $7.0 million in commercial paper outstanding.
The agreement requires 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 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, 2014,
MGE is in compliance with the covenant requirements.
c. MGE Energy and MGE.
Information concerning short-term borrowings for the past three years is shown below:
(In thousands)
MGE Energy(a)
Available lines of credit ........................................... $
Short-term debt outstanding ..................................... $
Weighted-average interest rate ..................................
During the year:
Maximum short-term borrowings .............................. $
Average short-term borrowings................................. $
Weighted-average interest rate ..................................
MGE
Available lines of credit ........................................... $
Commercial paper outstanding ................................. $
Weighted-average interest rate ..................................
During the year:
Maximum short-term borrowings .............................. $
Average short-term borrowings................................. $
Weighted-average interest rate ..................................
As of December 31,
2013
2014
2012
150,000 $
7,000 $
0.20%
9,000 $
182 $
0.24%
100,000 $
7,000 $
0.20%
9,000 $
182 $
0.24%
150,000 $
- $
-%
32,000 $
6,992 $
0.18%
100,000 $
- $
-%
32,000 $
6,992 $
0.18%
115,000
-
-%
16,000
1,154
0.17%
75,000
-
-%
16,000
1,154
0.17%
(a) MGE Energy short-term borrowings include MGE Energy and MGE lines of credit and MGE
commercial paper.
74
11. 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 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.
a. Fair Value of Financial Assets and Liabilities Recorded at the Carrying Amount.
At December 31, 2014 and 2013, 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 MGE Energy's and MGE long-term debt is based on quoted market prices for
similar financial instruments at 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 MGE Energy's and MGE's financial instruments are
as follows:
(In thousands)
MGE Energy
Assets:
Cash and cash equivalents ..................... $
Liabilities:
Short-term debt - commercial paper........
Long-term debt* ...................................
MGE
Assets:
Cash and cash equivalents ..................... $
Liabilities:
Short-term debt - commercial paper........
Long-term debt* ...................................
2014
2013
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
65,755 $
65,755
$
68,813 $
68,813
7,000
399,690
7,000
457,420
-
403,793
-
432,010
4,562 $
4,562
$
14,808 $
14,808
7,000
399,690
7,000
457,420
-
403,793
-
432,010
*Includes long-term debt due within one year.
75
b. Recurring Fair Value Measurements.
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis
for MGE Energy and MGE.
(In thousands)
MGE Energy
Assets:
Derivatives, net ........................................$
Exchange-traded investments .....................
Total Assets .............................................$
Liabilities:
Derivatives, net(a) .....................................$
Deferred compensation .............................
Total Liabilities ........................................$
MGE
Assets:
Derivatives, net ........................................$
Exchange-traded investments .....................
Total Assets .............................................$
Liabilities:
Derivatives, net(a) .....................................$
Deferred compensation .............................
Total Liabilities ........................................$
(In thousands)
MGE Energy
Assets:
Derivatives, net ........................................$
Exchange-traded investments .....................
Total Assets .............................................$
Liabilities:
Derivatives, net ........................................$
Deferred compensation .............................
Total Liabilities ........................................$
MGE
Assets:
Derivatives, net ........................................$
Exchange-traded investments .....................
Total Assets .............................................$
Liabilities:
Derivatives, net ........................................$
Deferred compensation .............................
Total Liabilities ........................................$
Fair Value as of December 31, 2014
Total
Level 1
Level 2
Level 3
642 $
927
1,569 $
55,640 $
2,832
58,472 $
642 $
350
992 $
55,640 $
2,832
58,472 $
- $
927
927 $
1,012 $
-
1,012 $
- $
350
350 $
1,012 $
-
1,012 $
- $
-
- $
- $
2,832
2,832 $
- $
-
- $
- $
2,832
2,832 $
642
-
642
54,628
-
54,628
642
-
642
54,628
-
54,628
Fair Value as of December 31, 2013
Total
Level 1
Level 2
Level 3
1,787 $
792
2,579 $
65,680 $
2,364
68,044 $
1,787 $
431
2,218 $
65,680 $
2,364
68,044 $
735 $
792
1,527 $
- $
-
- $
735 $
431
1,166 $
- $
-
- $
- $
-
- $
- $
2,364
2,364 $
- $
-
- $
- $
2,364
2,364 $
1,052
-
1,052
65,680
-
65,680
1,052
-
1,052
65,680
-
65,680
(a) These amounts are shown gross and exclude $2.2 million and $0.2 million of collateral that was posted
against derivative positions with counterparties as of December 31, 2014 and 2013, respectively.
No transfers were made in or out of Level 1 or Level 2 for the year ended December 31, 2014.
Investments include exchange-traded investment securities valued using quoted prices on active exchanges
and are therefore classified as Level 1.
76
Derivatives include exchange-traded derivative contracts, over-the-counter transactions, a ten-year
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 ten-year purchased power agreement (see Footnote 16) 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, where such exchange-traded
contracts exist, and upon calculations based on forward gas prices, where such exchange-traded contracts do
not exist. 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.
This model is prepared by members of MGE's Energy Accounting group. It is reviewed on a quarterly basis
by management in Energy Supply and Finance to review the assumptions, inputs, and fair value
measurements.
The following table presents the significant unobservable inputs used in the pricing model as of
December 31:
Significant Unobservable Inputs
Basis adjustment:
On peak ..............................................
Off peak .............................................
Counterparty fuel mix:
Internal generation ...............................
Purchased power .................................
Model Input
2014
98.1%
95.0%
2013
94.2%
92.6%
50%-70%
50%-30%
50%-70%
50%-30%
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.
77
The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a
recurring basis for both MGE Energy and MGE.
(In thousands)
Balance as of January 1,............................................................$
Realized and unrealized gains (losses):
Included in regulatory liabilities (assets) .................................
Included in other comprehensive income ................................
Included in earnings ..............................................................
Included in current assets ......................................................
Purchases ................................................................................
Sales .......................................................................................
Issuances .................................................................................
Settlements ..............................................................................
Transfers in and/or out of Level 3 ..............................................
Balance as of December 31, ......................................................$
Total gains (losses) included in earnings attributed to the
change in unrealized gains (losses) related to assets and
liabilities held at December 31,(b) ...............................................$
2014
(64,628) $
2013
(72,346) $
2012
(40,661)
10,642
-
5,129
-
26,382
(125)
-
(31,386)
-
7,718
-
(2,618)
(108)
23,726
(2)
-
(20,998)
-
(53,986) $
(64,628) $
(31,685)
-
(5,005)
-
13,370
92
-
(8,457)
-
(72,346)
- $
- $
-
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 for both MGE Energy and MGE (b).
(In thousands)
Year Ended December 31,
Purchased power expense ............................$
Cost of gas sold expense .............................
Total .........................................................$
2014
2013
2012
5,137 $
(8)
5,129 $
(2,618) $
-
(2,618) $
(5,005)
-
(5,005)
(b) MGE's exchange-traded derivative contracts, over-the-counter party transactions, ten-year 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.
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, MGE Energy's and MGE's income tax provision consists of
the following provision (benefit) components for the years ended December 31:
(In thousands)
Current payable:
Federal ..................................... $
State ........................................
Net-deferred:
Federal .....................................
State ........................................
Amortized investment tax credits ....
Total income tax provision ............. $
2014
MGE Energy
2013
2012
2014
MGE
2013
2012
(891) $
(589)
(1,508) $
8,213
(6,053) $
436
637 $
(451)
(448) $
8,322
(5,030)
613
39,284
10,600
(219)
48,185 $
37,203
1,163
(212)
44,859 $
37,178
7,618
(260)
38,919 $
38,553
10,625
(219)
49,145 $
36,937
1,223
(212)
45,822 $
36,589
7,523
(260)
39,435
78
MGE Energy's and MGE's consolidated income tax provision differs from the amount computed by applying
the statutory federal income tax rate to income before income taxes, as follows:
Statutory federal income tax rate ................
State income taxes, net of federal benefit ....
Amortized investment tax credits ...............
Credit for electricity from wind energy .......
Domestic manufacturing deduction ............
AFUDC equity, net ...................................
Other, net, individually insignificant ...........
Effective income tax rate ...........................
MGE Energy
2013
35.0 %
5.1 %
(0.2)%
(1.5)%
(0.2)%
(0.7)%
- %
37.5 %
2014
35.0 %
5.1 %
(0.2)%
(1.7)%
- %
(0.8)%
0.1 %
37.5 %
2012
35.0 %
5.0 %
(0.3)%
(1.6)%
0.3 %
(0.4)%
(0.3)%
37.7 %
2014
35.0 %
5.1 %
(0.2)%
(1.7)%
- %
(0.8)%
0.1 %
37.5 %
MGE
2013
35.0 %
5.1 %
(0.2)%
(1.5)%
(0.2)%
(0.7)%
- %
37.5 %
2012
35.0 %
5.0 %
(0.2)%
(1.5)%
0.3 %
(0.4)%
(0.5)%
37.7 %
The significant components of deferred tax liabilities (assets) that appear on MGE Energy's and MGE's
consolidated balance sheets as of December 31 as follows:
MGE Energy
MGE
(In thousands)
Property-related .................................................$
Investment in ATC .............................................
Bond transactions ...............................................
Pension and other postretirement benefits .............
Derivatives ........................................................
Tax deductible prepayments ................................
Other ................................................................
Gross deferred income tax liabilities .................
Future tax benefit ...............................................
Accrued expenses ..............................................
Pension and other postretirement benefits .............
Deferred tax regulatory account ...........................
Derivatives ........................................................
Other ................................................................
Gross deferred income tax assets ......................
Less valuation allowance .................................
Net deferred income tax assets .........................
Deferred income taxes ....................................$
2014
312,903 $
36,140
1,420
57,847
22,331
8,077
10,451
449,169
(4,092)
(32,091)
(44,994)
(1,211)
(22,331)
(5,957)
(110,676)
70
(110,606)
338,563 $
2013
263,881 $
32,696
1,553
34,478
26,361
7,508
1,995
368,472
-
(17,195)
(26,838)
(1,402)
(26,361)
(10,369)
(82,165)
195
(81,970)
286,502 $
2014
312,807 $
29,156
1,420
57,847
22,331
8,077
10,259
441,897
(4,092)
(32,091)
(44,994)
(1,211)
(22,331)
(3,746)
(108,465)
70
(108,395)
333,502 $
2013
263,881
27,073
1,553
34,478
26,361
7,508
1,911
362,765
-
(17,195)
(26,838)
(1,402)
(26,361)
(9,356)
(81,152)
195
(80,957)
281,808
As of December 31, 2014, MGE Energy and MGE have approximately $16.5 million and $5.4 million of
state net operating loss and federal tax carryforwards, respectively. The net operating loss and tax credit
carryforwards resulted in deferred tax assets of $0.8 million and $5.4 million, respectively, as of
December 31, 2014, that are shown net of $2.0 million of unrecognized tax benefits.
The 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, 2014, 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.
MGE Energy and MGE account for 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 as an unrecognized tax benefit.
79
A tabular reconciliation of unrecognized tax benefits and interest from January 1, 2012, to December 31,
2014, is as follows:
(In thousands)
Unrecognized tax benefits:
Unrecognized tax benefits, January 1, ............................................... $
Additions based on tax positions related to the current year .................
Additions based on tax positions related to the prior years ...................
Reductions based on tax positions related to the current year ...............
Reductions based on tax positions related to the prior years .................
Unrecognized tax benefits, December 31, .......................................... $
2014
2013
2012
2,363 $
610
618
-
(1,226)
2,365 $
3,204 $
377
424
(40)
(1,602)
2,363 $
2,364
401
580
-
(141)
3,204
(In thousands)
Interest on unrecognized tax benefits:
Accrued interest on unrecognized tax benefits, January 1, ................... $
Reduction in interest expense on uncertain tax positions......................
Interest expense on uncertain tax positions.........................................
Accrued interest on unrecognized tax benefits, December 31, .............. $
2014
2013
2012
101 $
(97)
88
92 $
314 $
(275)
62
101 $
216
-
98
314
Unrecognized tax benefits of $0.4 million and $2.4 million are liabilities shown with other deferred liabilities
on the December 31, 2014, and December 31, 2013, consolidated balance sheets, respectively. At
December 31, 2014, $2.0 of unrecognized tax benefits are netted with deferred tax assets on the consolidated
balance sheet. The interest component is offset by a regulatory asset.
During 2013, the IRS issued guidance on the treatment of electric generation repairs. This guidance
prompted the reversal of the unrecognized tax benefits for these repairs in 2013. With the adoption of this
new guidance in 2014 unrecognized tax benefits related to electric generation were added. At December 31,
2014 and 2012, MGE Energy and MGE have an unrecognized tax benefit 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. At December 31, 2013, MGE Energy and MGE had an unrecognized tax
benefit primarily related to temporary tax differences associated with the change in income tax method of
accounting for electric and gas distribution repairs. There were no unrecognized tax benefits at December 31,
2014, 2013, or 2012 related to federal permanent differences and tax credits.
The unrecognized tax benefits at December 31, 2014, 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
MGE Energy and consolidated subsidiaries in federal return .......................... 2011 through 2014
MGE Energy Wisconsin combined reporting corporation return ..................... 2010 through 2014
Open Years
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
$2.5 million, $2.3 million, and $2.1 million in 2014, 2013, and 2012, respectively. A measurement date of
December 31 is utilized for all pension and postretirement benefit plans.
All employees hired after December 31, 2006, have been enrolled in the defined contribution pension plan, rather
than the defined benefit pension plan previously in place.
80
a. Benefit Obligations and Plan Assets.
(In thousands)
Change in benefit obligations:
Net benefit obligation at beginning of year .............$
Service cost .........................................................
Interest cost .........................................................
Plan participants' contributions ..............................
Plan amendments(a) ..............................................
Actuarial (gain) loss(b) ..........................................
Gross benefits paid ...............................................
Less: federal subsidy on benefits paid(c) ..............
Benefit obligation at end of year ............................$
Change in plan assets:
Fair value of plan assets at beginning of year ..........$
Actual return on plan assets ..................................
Employer contributions ........................................
Plan participants' contributions ..............................
Gross benefits paid ...............................................
Fair value of plan assets at end of year ...................$
Funded Status at December 31 ..............................$
Pension Benefits
2014
283,958 $
6,179
13,574
-
-
48,162
(11,640)
-
340,233 $
277,398 $
21,907
883
-
(11,640)
288,548 $
(51,685) $
2013
315,505 $
7,705
12,656
-
-
(40,335)
(11,573)
-
283,958 $
212,277 $
45,816
30,878
-
(11,573)
277,398 $
(6,560) $
Other Postretirement
Benefits
2014
2013
66,100 $
1,339
3,166
708
-
10,090
(3,113)
188
78,478 $
37,602 $
2,558
1,197
708
(3,113)
38,952 $
(39,526) $
92,605
2,380
3,871
665
(20,915)
(9,687)
(2,998)
179
66,100
32,124
5,000
2,811
665
(2,998)
37,602
(28,498)
(a) In 2013, MGE capped the amount it pays each year toward retiree medical premiums at 175% of
the 2013 employer contribution for qualified employees.
(b) In 2014, lower discount rates and mortality table updates were the main drivers to the actuarial loss.
(c) 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, 2014 and 2013, the subsidy due to MGE was $0.2 million.
The accumulated benefit obligation for the defined benefit pension plans at the end of 2014 and 2013 was
$304.0 million and $254.5 million, respectively.
The amounts recognized in the consolidated balance sheets to reflect the funded status of the plans at
December 31 are as follows:
Pension Benefits
Other Postretirement
Benefits
(In thousands)
Long-term asset ...................................................$
Current liability ...................................................
Long-term liability ...............................................
Net liability .........................................................$
2014
2013
2014
2013
- $
(1,025)
(50,660)
(51,685) $
15,071 $
(945)
(20,686)
(6,560) $
- $
(65)
(39,461)
(39,526) $
-
(13)
(28,485)
(28,498)
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 our consolidated balance sheets:
Pension Benefits
Other Postretirement
Benefits
(In thousands)
Net actuarial loss .................................................$
Prior service cost .................................................
Transition obligation ............................................
Total ...................................................................$
2014
2013
2014
2013
85,102 $
(413)
-
84,689 $
37,499 $
(209)
-
37,290 $
17,657 $
(17,827)
32
(138) $
7,761
(20,495)
35
(12,699)
81
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)
Projected benefit obligation in excess of plan assets
Projected benefit obligation, end of year........................................ $
Fair value of plan assets, end of year.............................................
Pension Benefits
2014
340,233 $
288,548
2013
21,631
-
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension
plans with a projected benefit obligation in excess of plan assets and an accumulated benefit obligation in
excess of plan assets were as follows:
(In thousands)
Accumulated benefit obligation in excess of plan assets
Projected benefit obligation, end of year........................................ $
Accumulated benefit obligation, end of year ..................................
Fair value of plan assets, end of year.............................................
Pension Benefits
2014
340,233 $
304,023
288,548
2013
21,631
19,795
-
b. Net Periodic Cost.
MGE has elected to recognize the cost of its transition obligation (the accumulated postretirement benefit
obligation as of January 1, 1993) by amortizing it on a straight-line basis over 20 years.
(In thousands)
Components of net periodic (benefit)
Service cost ........................................... $
Interest cost ...........................................
Expected return on assets........................
Amortization of:
Transition obligation ..........................
Prior service (benefit) cost ..................
Actuarial loss .....................................
Net periodic (benefit) cost ...................... $
c. Plan Assumptions.
Pension Benefits
2013
7,705 $
12,656
(19,027)
2012
7,139 $
12,704
(15,182)
Other Postretirement Benefits
2012
2013
2014
2,528
2,380 $
1,339 $
4,431
3,166
3,871
(1,741)
(2,176)
(2,615)
2014
6,179 $
13,574
(22,051)
-
204
703
(1,391) $
-
314
8,014
9,662 $
-
430
8,288
13,379 $
3
(2,669)
252
(524) $
3
110
1,236
5,424 $
425
110
2,346
8,099
The weighted-average assumptions used to determine the benefit obligations were as follows for the years
ended December 31:
Discount rate .......................................................
Rate of compensation increase ..............................
Assumed health care cost trend rates:
Health care cost trend rate assumed for next year ...
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate) .........................
Year that the rate reaches the ultimate trend rate ....
Pension Benefits
Other Postretirement Benefits
2014
2013
2014
2013
4.11%
3.85%
4.88%
3.90%
N/A
N/A
N/A
N/A
N/A
N/A
3.96%
N/A
6.5%
5.0%
2021
4.69%
N/A
7.0%
5.0%
2018
The weighted-average assumptions used to determine the net periodic cost were as follows for the years
ended December 31:
Discount rate .........................................
Expected rate of return on plan assets ......
Rate of compensation increase ................
Pension Benefits
2013
4.09%
8.10%
4.60%
2014
4.88%
8.10%
3.93%
2012
4.50%
8.10%
4.59%
Other Postretirement Benefits
2012
2013
2014
4.55%
4.14%
4.69%
7.26%
6.79%
7.07%
N/A
N/A
N/A
82
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 2014 dollars:
(In thousands)
Effect on other postretirement benefit obligation
Effect on total service and interest cost components
$
1% Increase 1% Decrease
(1,852)
(101)
1,465 $
75
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.
The asset allocation for MGE's pension plans at the end of 2014 and 2013, and the target allocation for 2015,
by asset category, follows:
Equity securities(a) ..................................
Fixed income securities ..........................
Real estate .............................................
Total .....................................................
Target
Allocation
63.0 %
30.0 %
7.0 %
100.0 %
Percentage of Plan
Assets at Year End
2014
2013
62.0 %
31.0 %
7.0 %
100.0 %
66.0 %
28.0 %
6.0 %
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 $39.0 million and $37.6 million at the end
of 2014 and 2013, respectively. Of this amount, $32.8 million and $31.1 million at the end of 2014 and
2013, 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 is
held either in an insurance continuance fund for the payment of retiree life benefits or a health benefit trust
for payment of retiree health claims. There is no formal target asset allocation for these assets, but the intent
is to seek interest income and maintain stability of principal.
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, 2014. 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, 2014, there were no significant concentrations (defined as greater than
10 percent of plan assets) of risk in MGE pension and postretirement benefit plan assets.
83
f. Fair Value Measurements of Plan Assets.
Pension and other postretirement benefit plan investments are recorded at fair value. See Footnote 11 for
more information regarding the fair value hierarchy.
The following is a description of the valuation methodologies used for assets measured at fair value as of
December 31, 2014:
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 – The fair value of real estate properties is determined through an external appraisal process.
Insurance Continuance Fund (ICF) – The fair value of the ICF is based on largely unobservable inputs,
which are based on a commingled interest.
Fixed Rate Fund – The fair value of the Fixed Rate fund is determined based on the type of assets held.
Public market data and GAAP reported market values are used when available. For all other assets,
discounted cash flows are calculated using treasury rates and spreads based on the cash flow timing and
quality of assets.
The fair value of MGE's plan assets, by asset category are as follows:
(In thousands)
Equity Securities:
U.S. Large Cap ........................................$
U.S. Mid Cap ...........................................
U.S. Small Cap ........................................
International Blend ...................................
Fixed Income Securities:
Short-Term Fund ......................................
High Yield Bond ......................................
Long Duration Bond .................................
Real Estate ..................................................
Insurance Continuance Fund .........................
Fixed Rate Fund ..........................................
Total .......................................................$
(In thousands)
Cash and Cash Equivalents ...........................$
Equity Securities:
U.S. Large Cap ........................................
U.S. Mid Cap ...........................................
U.S. Small Cap ........................................
International Blend ...................................
Fixed Income Securities:
Short-Term Fund ......................................
High Yield Bond ......................................
Long Duration Bond .................................
Real Estate ..................................................
Insurance Continuance Fund .........................
Total .......................................................$
Fair Value as of December 31, 2014
Total
Level 1
Level 2
Level 3
99,256 $
22,926
29,353
47,650
3,776
15,492
79,603
23,480
1,518
4,446
327,500 $
- $
-
-
-
-
-
-
-
-
-
- $
99,256 $
22,926
29,353
47,650
3,776
15,492
79,603
-
-
-
298,056 $
-
-
-
-
-
-
-
23,480
1,518
4,446
29,444
Fair Value as of December 31, 2013
Total
Level 1
Level 2
Level 3
5,109 $
5,109 $
- $
-
-
-
-
-
-
-
-
-
5,109 $
96,258
22,741
28,854
54,873
4,789
15,127
66,193
-
-
288,835 $
96,258
22,741
28,854
54,873
4,789
15,127
66,193
19,628
1,428
315,000 $
84
-
-
-
-
-
-
-
-
19,628
1,428
21,056
No transfers were made in or out of Level 1 or Level 2 for the year ended December 31, 2014.
The following table summarizes the changes in the fair value of the Level 3 plan assets.
(In thousands)
Balance as of January 1, 2013 ..................................................... $
Actual return on plan assets:
Relating to assets still held at the reporting date ......................
Purchases, sales, and settlements ...............................................
Transfers in and/or out of Level 3 .............................................
Balance as of December 31, 2013 .................................................
Actual return on plan assets:
Relating to assets still held at the reporting date ......................
Purchases, sales, and settlements ...............................................
Transfers in and/or out of Level 3 .............................................
Balance as of December 31, 2014 ................................................. $
g. Expected Cash Flows.
Level 3 Assets
Insurance
Continuance
Fund
1,466 $
Real Estate
17,141 $
1,565
922
-
19,628
1,561
2,291
-
23,480 $
42
(80)
-
1,428
44
46
-
1,518 $
Fixed Rate
Fund
-
-
-
-
-
54
4,392
-
4,446
Contributions to the qualified plans for 2015 are expected to be $10 million, which was paid in
January 2015. MGE does not expect to make contributions to the plans for 2016. The contributions for years
after 2016 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 2014, MGE made $3.3 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
Pension
Benefits
Other Postretirement Benefits
Gross
Postretirement
Benefits
Expected
Medicare Part D
Subsidy
Net
Postretirement
Benefits
11,944 $
12,631
13,408
14,613
15,559
92,915
3,101 $
3,338
3,757
4,272
4,776
29,871
(211) $
(237)
(258)
(282)
(306)
(2,005)
2,890
3,101
3,499
3,990
4,470
27,866
(In thousands)
2015
2016
2017
2018
2019
2020 - 2024
14.
Share-Based Compensation - MGE Energy and MGE.
Under MGE Energy's Performance Unit Plan, eligible employees 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. In accordance with
the plan's provisions, these awards are subject to a prescribed vesting schedule and must be settled in cash.
Accordingly, no shares of common stock will be issued in connection with the plan.
85
On the grant date, MGE Energy and MGE measure the cost of the employee services received in exchange for a
performance unit award based on the current market value of MGE Energy common stock. The fair value of the
awards is re-measured quarterly, including at December 31, 2014, 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 re-measured throughout the vesting period, the compensation cost is subject to variability. These units
are subject to a five year graded vesting schedule.
Grant Date
February 20, 2015 ..........................
February 21, 2014 ..........................
February 15, 2013 ..........................
February 17, 2012 ..........................
January 21, 2011 ...........................
MGE Energy
Units Granted
18,948
21,991
22,884
25,040
23,483
For nonretirement eligible employees, 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.
In December 2013, a Director Incentive Plan was approved for the non-employee members of the Board of
Directors. This plan is similar to MGE Energy's Performance Unit Plan for eligible employees described above.
Under the plan, a non-employee director can 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
payments, at the end of the set performance period. The units are subject to a three year graded vesting schedule.
Grant Date
January 16, 2015 ...........................
January 17, 2014 ...........................
MGE Energy
Units Granted
3,794
4,683
During the years ended December 31, 2014, 2013, and 2012, MGE recorded $2.0 million, $1.5 million, and
$1.4 million, respectively, in compensation expense as a result of awards under the plans. In January 2014, cash
payments of $1.2 million were distributed relating to awards that were granted in 2009. No forfeitures occurred
during the years ended December 31, 2014, 2013, and 2012. At December 31, 2014, $5.2 million of outstanding
awards are vested, and of this amount no cash settlements have occurred.
15. Regional Transmission Organizations - MGE Energy and MGE.
MGE reports on a net basis transactions on the MISO and PJM markets in which it buys and sells power within
the same hour to meet electric energy delivery requirements. This treatment resulted in a $91.1 million and
$78.0 million reduction to sales to the market and purchase power expense for MISO markets for the years ended
December 31, 2014 and 2013, respectively, and a $75.9 million reduction to sales to the market and purchased
power expense for MISO and PJM markets for the year ended December 31, 2012.
16. 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 and gas revenues. 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, MGE Energy and MGE recognize
such derivatives in the consolidated balance sheets at fair value. The majority of MGE's 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. 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.
86
b. Notional Amounts.
The gross notional volume of open derivatives is as follows:
Commodity derivative contracts ...........................
Commodity derivative contracts ...........................
FTRs .................................................................
December 31, 2014
448,000 MWh
4,405,000 Dth
1,854 MW
December 31, 2013
458,660 MWh
3,750,000 Dth
1,984 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 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. At
December 31, 2014, the cost basis of exchange traded derivatives and FTRs exceeded their fair value by
$1.6 million. At December 31, 2013, the fair value of exchange traded derivatives and FTRs exceeded their
cost basis by $1.8 million.
MGE is a party to a ten-year 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 sheet. 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 at December 31, 2014 and 2013,
reflects a loss position of $53.4 million and $65.7 million, respectively. The actual fuel cost will be
recognized in purchased power expense in the month of purchase and collected in rates.
The following table summarizes the fair value of the derivative instruments on the consolidated balance
sheet. 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, MGE Energy and MGE have netted instruments with the same
counterparty under a master netting agreement as well as the netting of collateral. At December 31, 2014,
MGE Energy and MGE had the right to reclaim collateral (a receivable) of $2.2 million.
Asset Derivatives
Liability Derivatives
Fair Value Balance Sheet Location
Fair Value
Balance Sheet Location
(In thousands)
December 31, 2014
Commodity derivative contracts ..... Other current assets
Commodity derivative contracts ..... Other deferred charges
FTRs ........................................... Other current assets
Ten-year PPA ............................... N/A
Ten-year PPA ............................... N/A
$
130 Derivative liability (current)
93 Derivative liability (long-term)
642 Derivative liability (current)
N/A Derivative liability (current)
N/A Derivative liability (long-term)
$
December 31, 2013
Commodity derivative contracts ..... Other current assets
Commodity derivative contracts ..... Other deferred charges
FTRs ........................................... Other current assets
Ten-year PPA ............................... N/A
Ten-year PPA ............................... N/A
$
1,356 Derivative liability (current)
$
167 Derivative liability (long-term)
363 Derivative liability (current)
N/A Derivative liability (current)
N/A Derivative liability (long-term)
87
2,262
171
-
6,870
46,560
51
48
-
7,750
57,930
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 balance sheet.
Offsetting of Derivative Assets
(In thousands)
December 31, 2014
Commodity derivative contracts .... $
FTRs ..........................................
December 31, 2013
Commodity derivative contracts .... $
FTRs ..........................................
Offsetting of Derivative Liabilities
(In thousands)
December 31, 2014
Gross amounts
Gross amounts
offset in
balance sheet
Collateral
posted against
derivative positions
Net amount
presented in
balance sheet
223 $
642
1,523 $
363
(223) $
-
(99) $
-
- $
-
-
642
(175) $
-
1,249
363
Gross amounts
Gross amounts
offset in
balance sheet
Collateral
posted against
derivative positions
Net amount
presented in
balance sheet
Commodity derivative contracts .... $
Ten-year PPA ..............................
2,433 $
53,430
December 31, 2013
Commodity derivative contracts .... $
Ten-year PPA ..............................
99 $
65,680
(223) $
-
(99) $
-
(2,179) $
-
31
53,430
- $
-
-
65,680
The following tables summarize the unrealized and realized gains (losses) related to the derivative
instruments on the consolidated balance sheet at December 31, 2014 and 2013, and the consolidated income
statement for the year ended December 31, 2014 and 2013.
(In thousands)
2014
2013
Current and
Long-Term
Regulatory
Asset
Other Current
Assets
Current and
Long-Term
Regulatory
Asset
Other Current
Assets
Balance at January 1, ........................................... $
Change in unrealized loss .....................................
Realized gain (loss) reclassified to a deferred
account ...............................................................
Realized gain (loss) reclassified to income
statement .............................................................
Balance at December 31, ...................................... $
63,893 $
(14,518)
411 $
-
72,329 $
(5,069)
595
(595)
(823)
5,028
54,998 $
1,185
1,001 $
(2,544)
63,893 $
574
-
823
(986)
411
(In thousands)
Year Ended December 31:
Commodity derivative contracts .................... $
FTRs ..........................................................
Ten-year PPA ..............................................
2014
Fuel for electric
generation/
purchased power
Realized losses (gains)
2013
Fuel for electric
generation/
Cost of gas sold
purchased power Cost of gas sold
(5,515) $
(1,110)
1,515
(1,103) $
-
-
(564) $
(983)
4,209
868
-
-
MGE's commodity derivative contracts, FTRs, and ten-year 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 sheet 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.
88
The ten-year 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, 2014,
no collateral 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, 2014, certain
counterparties were in a net liability of less than $0.1 million. As of December 31, 2013, 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, 2014, no counterparties have defaulted.
17. Rate Matters - MGE Energy and MGE.
a. Rate Proceedings.
On December 23, 2014, the PSCW authorized MGE to increase 2015 rates for retail electric customers by
3.8% or $15.4 million and to decrease gas rates by 2.0% or $3.8 million. The increase in retail electric rates
cover costs associated with the construction of emission-reduction equipment at Columbia, improvements
and reliability of the state's electric transmission system, fuel and purchased power related to coal delivery
costs, partially offset by lower cost as a result of market conditions for pension and post-retirement benefit
costs. The authorized return on common stock equity is 10.2%.
On July 26, 2013, the PSCW authorized MGE to freeze electric and natural gas rates at 2013 levels for 2014.
The order includes authorizing 100% AFUDC on the Columbia scrubber construction project and deferral of
increased costs related to ATC and MISO network upgrade fees. As part of the rate freeze plan authorized by
the PSCW, effective January 1, 2014, approximately $6.3 million associated with a 2012 fuel rule surplus
credit was required to be refunded to customers and was amortized in 2014. The fuel credit accrued interest
at MGE's weighted cost of capital. The authorized return on equity remained unchanged at 10.3%.
On December 14, 2012, the PSCW authorized MGE to increase 2013 rates for retail electric customers by
3.8% or $14.9 million and to increase gas rates by 1.0% or $1.6 million. The change in retail electric rates
was driven by costs for new environmental equipment at Columbia, final construction costs for the Elm
Road Units, transmission reliability enhancements, and purchased power costs. The authorized return on
common stock equity remained unchanged at 10.3%.
On December 15, 2011, under a limited reopener of MGE's last rate order, the PSCW authorized MGE to
increase 2012 rates for retail electric customers by 4.3% or $15.7 million and to increase gas rates by 0.3%
or $0.6 million. The change in retail electric rates was driven by MGE's electric fuel and purchased power
costs, increased transmission costs, an update to the Elm Road Units' costs, and an increase for energy
efficiency programs. The PSCW also approved deferral of CSAPR costs.
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 most recent base rate
proceedings. Any over/under recovery of the actual costs is determined on an annual basis and will be
adjusted 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.
As of December 31, 2014, MGE's fuel costs are within the range authorized by the PSCW in the most recent
rate order; therefore, no fuel credits or surcharges were necessary. As part of the rate freeze plan authorized
by the PSCW for 2014, $6.3 million associated with the 2012 fuel rule credit was amortized against
purchased power expense during the year ended December 31, 2014. The 2013 fuel rule credit of
$6.5 million was returned to customers in October 2014.
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18. 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. As of December 31, 2014, the
future minimum commitments related to these purchase contracts were as follows:
(In thousands)
Coal(a) .......................................... $
Natural Gas ...................................
Transportation and storage(b) .......
Supply(c)....................................
Purchase Power(d) ..........................
Other ............................................
$
2015
22,630 $
2016
16,436 $
2017
10,664 $
2018
2019
6,560 $
3,850
18,074
14,971
50,714
16,452
122,841 $
9,938
-
51,437
723
78,534 $
273
-
52,043
723
63,703 $
192
-
50,752
324
57,828 $
-
-
37,367
143
41,360
(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 are handled by WPL and
WEPCO, respectively, who are the operators of those facilities. If any minimum purchase obligations
must be paid under these contracts, management believes these obligations would be considered costs of
service and recoverable in rates.
(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.
(c) These commitments include market-based pricing. Management expects to recover these costs in future
customer rates.
(d) MGE has several purchase power agreements to help meet future electric supply requirements.
Management expects to recover these costs in future customer rates. In October 2008, MGE entered into
a ten-year purchase power agreement to help meet future electric supply requirements. Under this
agreement, MGE has agreed to purchase 50 MW of wind power from Osceola Windpower II, LLC,
which is located in Iowa. This facility became operational in October 2008. MGE does not have any
capacity payment commitments under this agreement. However, MGE is obligated to purchase its
ratable share of the energy produced by the project. MGE's commitment related to its ratable share of
energy produced by the project has been estimated and is included in the above numbers.
b. Chattel Paper Agreement and Other Guarantees - 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.
MGE is party to a chattel paper purchase agreement with a financial institution under which it can sell or
finance an undivided interest with recourse, in up to $10.0 million of the financing program receivables, until
July 31, 2015. At December 31, 2014, 2013, and 2012, respectively, MGE had sold a $4.4 million,
$5.4 million, and $4.5 million interest in these receivables. MGE retains the servicing responsibility for these
receivables.
MGE accounts for servicing rights under the amortization method. Initial determination of the servicing asset
fair value is based on the present value of the estimated future cash flows. The discount rate is based on the
PSCW authorized weighted cost of capital.
MGE maintains responsibility for collecting and remitting loan payments from customers to the financial
institution and does not retain any interest in the assets sold to the financial institution. At December 31,
2014, 2013, and 2012, MGE recorded a servicing asset of $0.2 million, $0.3 million, and $0.2 million,
respectively. MGE recognized gains of $0.1 million, $0.2 million, and $0.1 million for the years ended
December 31, 2014, 2013, and 2012, respectively, in connection with the sale of loan assets. The servicing
asset amount amortized in 2014 was less than $0.1 million. The loan assets are sold to the financial
institution at cost, which approximates fair value in view of their market rates of interest. During 2014, 2013,
and 2012, MGE received approximately $0.5 million, $1.6 million, and $1.2 million, respectively, from the
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financial institution for the sale of loan assets. During those same years, payments of $1.5 million,
$0.8 million, and $1.2 million, respectively, were made by MGE to the financial institution.
MGE would be required to perform under its guarantee if a customer defaulted on its loan. The energy-
related equipment installed at the customer sites is used to secure the customer loans. The loan balances
outstanding at December 31, 2014, approximate the fair value of the energy-related equipment acting as
collateral. 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. Principal payments for the next five years on the
loans are:
(In thousands)
Principal payments ........................ $
2015
2016
2017
2018
2019
906 $
884 $
482 $
420 $
410
c. 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 at December 31, 2014, under agreements classified as operating leases
with noncancelable terms in excess of one year are as follows:
(In thousands)
2015
2016
2017
2018
2019
Minimum lease payments .........$
1,553 $
1,346 $
872 $
419 $
Thereafter
7,938
258 $
Rental expense under operating leases totaled $2.5 million, $2.7 million, and $2.6 million for 2014, 2013,
and 2012, respectively.
d. 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 to ensure compliance
with these discharge limits.
EPA's Proposed Effluent Limitations Guidelines (ELG) and Standards for Steam Electric Power Generating
Point Source Category
In June 2013, the EPA published a proposed rule that would amend the current ELG rule and lower the
existing permissible water discharge of metals and other pollutants in wastewater from new and existing
steam electric generation plants. The proposed rule focuses mainly on water discharges associated with
certain air pollution control systems and ash handling systems at coal-burning power plants. Under the
proposed rule, the EPA asked for comments on four regulatory options, varying in their compliance
stringency and cost. The EPA is under a consent decree to finalize the rule by September 2015. Once
finalized, the rule will apply to power plants as they renew their WPDES permits beginning in July 2017.
The ELG rule as proposed would require specific treatments and/or technologies to meet the water discharge
requirements. Sites that already have these technologies will be deemed to meet the requirements of the rule.
Sites without these technologies would need to install them to be in compliance. The proposed rule as
written will likely affect wastewater systems at Columbia and the Elm Road Units. For Columbia, the rule
may affect bottom ash handling systems. For the Elm Road Units, the rule may affect its flue gas
desulfurization systems.
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Based on our current evaluation of the proposed rule and its alternatives, we may need to add treatment
systems or additional equipment at our Elm Road and Columbia facilities. However, MGE cannot estimate
those costs with any certainty until we are able to evaluate the final version of this rule further.
EPA Cooling Water Intake Rules (Section 316(b))
Section 316(b) of the CWA 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
316(b) rule for existing facilities in 2014; however, the rule is the subject of a pending legal challenge.
Section 316(b) requirements are implemented in Wisconsin through modifications to plants' WPDES
permits, which govern plant water discharges. WDNR is developing rules to implement the EPA 316(b) rule.
Existing facilities under the 316(b) rule (for MGE that includes our Blount, WCCF, and Columbia plants)
will need to meet impingement and entrainment reduction standards or take one of seven actions to meet the
reduction requirements. Compliance with 316(b) requirements will coincide with permit renewals.
MGE has studied its options and expects that it will meet requirements at its affected facilities with minimal
cost. Our WCCF facility already employs a "closed cycle" cooling (CCC) system as defined under the rule.
The Columbia plant may need to address multiple intake structures. Our Blount plant has conducted studies
regarding options for compliance with the rule. The exact requirements, however, will not be known until
those facilities' WPDES permits are modified to account for this rule. Nonetheless, MGE expects that the
316(b) rule will not have material effects on its existing plants.
Energy Efficiency and Renewables
The Wisconsin Energy Efficiency and Renewables Act requires that, by 2015, 10% of the state's electricity
be generated from renewable resources. As of December 31, 2014, MGE is in compliance with the 2015
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 emission of mercury, particulates (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. Several EPA
initiatives, including the EPA's proposed greenhouse gas regulations, EPA's efforts to regulate methane from
natural gas lines, the Cross-State Air Pollution Rule (CSAPR), and revised National Ambient Air Quality
Standards (NAAQS) 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 111d Rule
In June 2014, the EPA developed a proposed rule called the Clean Power Plan that set guidelines for states
to use in developing plans to control GHG emissions from existing fossil fuel fired electric generating units
(EGUs). The EPA's proposal includes reductions in GHG emissions from EGUs by a national average of
30% by 2030 as measured from a 2012 baseline. Each state is given its own emission reduction targets to
meet this goal, and States' goals can be higher or lower than the national average. The State of Wisconsin's
reduction goal is 34%. These targets are expressed as a "rate-based" emission average to be achieved by the
combined fleet of EGUs within the state. States would be expected to make "meaningful progress" towards
these reductions by 2020 and to meet their respective targets by 2030.
The EPA's proposal establishes guidelines for states and encourages the use of four "building blocks" for
achieving these reductions. These "building blocks" are: (1) increasing the efficiency of EGUs; (2) re-
dispatching of gas-fired generation in lieu of coal; (3) expanding the use of low and no carbon power
sources, such as wind, nuclear and solar; and (4) improving demand side energy efficiency to reduce electric
use.
MGE has been studying the EPA's proposed rule to determine what compliance in Wisconsin would look
like. MGE has also participated in discussions on the proposed rule with the Wisconsin Department of
Natural Resources, Public Service Commission of Wisconsin, Wisconsin utilities, and industry experts.
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The rule is expected to be finalized mid-summer 2015. States will then have up to two years to prepare
compliance plans. While there is currently no certainty regarding the terms of the final rule, it is reasonable
to assume that this rule will have a material impact on MGE. The parameters of the final rule, however, will
determine the extent to which this rule will affect MGE.
National Ambient Air Quality Standards (NAAQS)
The EPA's NAAQS regulations have been developed to set ambient levels of six pollutants to protect
sensitive populations (primary NAAQS) and the environment (secondary NAAQS) from the negative effects
of exposure to these pollutants at higher levels. The NAAQS regulations govern 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 standards set by the SIP (which could
result in significant capital expenditures), and the company may have additional expenses and/or difficulties
expanding or building new facilities. The process from determining acceptable primary and/or secondary
NAAQS to executing SIPs can take years. Nonetheless, because 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 our operations.
MGE is monitoring developments in the Ozone NAAQS rule. In November 2014, the EPA published
proposed regulations to lower the Ozone NAAQS to between 65 to 70 parts per billion (ppb). In this
proposed rule, the EPA has stated they are also considering leaving the standard at its current level of 75
ppb, or lowering it further to 60 ppb. EPA is seeking comments on these options. Milwaukee County (where
our Elm Road Units are located) and Dane and Columbia Counties (where several of our facilities are
located) may not meet the Ozone NAAQS if it is lowered to 70 ppb or below. These counties could then be
subject to a SIP that could potentially affect MGE facilities, as described above. The EPA plans to have a
final Ozone NAAQS rule completed by October 2015. After the rule is finalized, there are several State and
Federal actions that need to take place before the Wisconsin SIP will be implemented. Without a SIP in
place, it is too soon to tell how a lowered Ozone NAAQS will affect our facilities. MGE will continue to
monitor rule developments and subsequent state actions and implementation plans.
MGE is also monitoring developments in the SO2 NAAQS rule. The EPA's SO2 NAAQS rule has been in
place for some time and initial attainment/nonattainment designations by states were due in 2013. However,
there was no mechanism for determining attainment and thus, the majority of areas across the U.S.,
including most of Wisconsin, were unable to be classified as either in attainment or nonattainment. In 2014,
the EPA proposed a data requirements rule with procedures for states to use to determine attainment and
nonattainment areas. The proposed procedures include analyzing a state's highest emitting SO2 sources to
determine through measurement and/or modeling if those sources are contributing to SO2 NAAQS
exceedances. Based on the proposed data requirements rule, the State of Wisconsin will likely include our
Columbia plant and may include the Elm Road Units, in the list of larger sources that require further
evaluation through modeling and/or monitoring. Both Columbia and the Elm Road Units already have
effective SO2 pollution controls installed and should be in compliance with the final rule, however, we will
not know with any certainty if the rule will affect our plants until the State of Wisconsin completes its
evaluation. MGE will continue monitoring further actions under this rule to better evaluate the effect it may
have on Columbia and the Elm Road Units.
EPA's Cross-State Air Pollution Rule
The EPA's Cross-State Air Pollution Rule (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 affected
by pollution from neighboring and upwind states. The EPA has identified 27 eastern states that are
contributing to pollution in other states. CSAPR aims to achieve ozone and PM2.5 reductions by reducing
NOx and/or SO2 air emissions, which contribute to ozone and PM2.5, from qualifying electric power plants
in the 27 "contributing" states. The rule has been designed so that qualifying power plants will be allocated
NOx and SO2 allowances in two phases, with the second phase including further emissions reductions. These
plants will need to reduce their emissions and/or purchase allocations from the marketplace to meet their
obligations.
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CSAPR, as well as its precursor rules, the Clean Air Interstate Rule (CAIR) and the NOx SIP Call, have been
subject to litigation. EPA rule adjustments and several court rulings, including recent court and EPA actions,
continue to impart a level of uncertainty heading into 2015. See below for additional information on recent
developments and uncertainties associated with this rule.
In July 2011, the EPA finalized CSAPR as a court-ordered replacement rule for its CAIR that had been
remanded in 2008. The D.C. Circuit Court of Appeals stayed CSAPR in December 2011, then vacated
CSAPR and conditionally reinstated CAIR in August 2012. The U.S. Supreme Court issued a decision in
April 2014, reversing the D.C. Circuit Court's vacature of CSAPR and remanded the matter back to the D.C.
Circuit for further proceedings. In October 2014, the D.C. Circuit lifted its stay of CSAPR and set a briefing
schedule for remaining litigation issues that were not resolved by the Supreme Court's decision. The briefing
schedule with oral arguments is planned for 2015. Additionally, the State of Wisconsin has filed pleadings
with the D.C. Circuit Court reiterating its contention that Wisconsin be removed from CSAPR.
The EPA has interpreted the October 2014 lifting of the stay by the D.C. Circuit as granting the EPA the
ability to reset deadlines that have since passed (CSAPR was originally designed to begin in 2012). The EPA
instituted an interim final rule effective January 1, 2015, that tolls the CSAPR's deadlines by three years. The
tolling of three years under the interim final rule introduces Phase I of CSAPR in 2015, and Phase II of
CSAPR in 2017. The EPA is accepting comments on other aspects of the rule through February 2015.
The ongoing litigation in the D.C. Circuit, including the EPA's interpretation of tolling rule deadlines and the
State of Wisconsin's arguments to be removed from the rule, leaves unresolved issues that may affect
whether, when, and how MGE's facilities will need to comply with this rule. We have worked to achieve
compliance with Phase I requirements, should those requirements be confirmed as being effective as of
January 1, 2015, while monitoring the court proceedings, which will extend into 2015, as well as any
additional actions taken by the EPA in response to its request for comments on the reinstated rule. Further,
MGE expects to be able to meet CSAPR requirements by applying reductions achieved from recent pollution
control installations at Columbia and early reduction efforts at Blount. We will continue to monitor and
evaluate the D.C. Circuit Court remand proceedings and the implementation of the interim rule by the EPA.
Clean Air Visibility Rule (CAVR)
Air modeling indicates that SO2 and NOx emissions from Columbia may impair visibility at certain Class I
Scenic Areas. Columbia may, therefore, be subject to the best available retrofit technology (BART)
regulations, a subsection of the EPA's Clean Air Visibility Rule (CAVR), which may require pollution
control retrofits. The EPA has issued rules directing that compliance with emissions limitations in the
CSAPR could also serve as compliance with the BART for SO2 and NOx emissions at electric plants such as
Columbia. However, these rules are subject to a legal challenge pending before the D.C. Circuit. In addition,
an environmental group had sought, then dismissed without prejudice to refile, a federal appellate court
review of Wisconsin's implementation plan for the BART portion of CAVR. These BART rules remain
uncertain while subject to the pending legal challenges and while regulatory uncertainty surrounds the
CSAPR. Thus, at this time, the BART regulatory obligations, compliance strategies, and costs remain
uncertain.
Solid Waste
EPA's Coal Combustion Residuals Rule
In December 2014, the EPA finalized its Disposal of Coal Combustion Residuals from Electric Utilities rule.
The rule will go into effect six months after it is published in the Federal Register. The rule provides that
coal ash will be regulated as a special waste rather than a hazardous waste and more strictly defines what ash
use activities would be exempt from solid waste disposal and considered beneficial use of coal ash. The rule
also regulates landfills, ash ponds, and other surface impoundments for coal combustion residuals (CCRS or
coal ash) by regulating their design, location, monitoring, and operation.
The final rule is intended to reduce the risk of structural failure of impoundments (ash ponds) and protect
groundwater from both impoundment and landfill operations by setting new standards. The rule requires
closure of active coal ash ponds and landfills that do not upgrade to meet these standards. Facilities with
landfills and/or surface impoundments will be subject to various timeframes for meeting new regulatory
requirements depending on the type of landfill or surface impoundment onsite, whether the site has failed
any required integrity testing, and whether the facility intends to upgrade to meet regulatory requirements or
begin closure proceedings. Timeframes to meet various compliance parameters can vary from 18 months to
over 5 years.
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The Columbia and Elm Road Units co-owners and plant operators are evaluating the final rule to determine
what changes may be necessary at those facilities and the associated timeframes. We anticipate that some
design and operational changes may need to be made at these facilities; however, evaluation of this rule is
not completed so we are unable to estimate with any certainty the costs to MGE operations at this time.
Management believes any compliance costs will be recovered in future rates.
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
In December 2009, the EPA sent a notice of violation (NOV) to MGE and the other co-owners of Columbia.
The NOV alleged that WPL, as owner-operator, and the other co-owners failed to comply with appropriate
pre-construction review and permitting requirements and, as a result, violated the PSD program
requirements, the Title V operating permit requirements of the CAA, and the Wisconsin State
Implementation Plan (SIP). In April 2013, the EPA filed a lawsuit against the co-owners of Columbia
asserting similar allegations. In September 2010 and April 2013, Sierra Club filed lawsuits against WPL
alleging violations of the CAA at Columbia and other WPL-operated Wisconsin facilities.
In April 2013, WPL, as owner-operator, along with the other owners of Columbia, entered into a consent
decree with the EPA and the Sierra Club to resolve these claims, while admitting no liability. In June 2013,
the consent decree was approved and entered by the Court. The consent decree requires installation of the
following emission controls at Columbia: SO2 scrubbers and baghouses at Columbia Units 1 and 2 by
December 31, 2014 (which have now been installed) and an SCR system at Columbia Unit 2 by
December 31, 2018. Installation of the SCR was recently authorized by the PSCW. In addition, the consent
decree establishes emission rate limits for SO2, NOx, and particulate matter for Columbia Units 1 and 2. The
consent decree also includes annual plant-wide emission caps for SO2 and NOx for Columbia. MGE also
paid approximately $0.2 million as its share of a civil penalty and will complete approximately $0.6 million
in environmental mitigation projects. MGE intends to seek recovery in rates of the costs associated with its
compliance with the terms of the final consent decree and currently expects to recover any material
compliance costs.
e. 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.
f. Elm Road - MGE Energy and MGE.
During 2013, WEPCO and Bechtel (the construction contractor for the Elm Road Units) were working
through the outstanding warranty claims. The warranty claim for the costs incurred to repair steam turbine
corrosion damage identified on both units was resolved through a binding arbitration in June 2013. Final
acceptance of the Elm Road Units occurred in June 2013 after all requirements stated in the contract with
Bechtel were satisfied. All warranty claims between WEPCO and Bechtel have now been resolved, none of
which had a material impact on our financial statements.
g. Other Commitments.
MGE Energy holds investments in nonpublic entities. From time to time, these entities require additional
capital infusions from their investors. MGE Energy has committed to contribute $1.4 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 2016.
MGE Energy has committed to invest up to a total of $1.0 million into this fund. As of December 31, 2014,
MGE Energy has $0.2 million remaining in commitments. The timing of infusions is dependent on the needs
of the fund and is therefore uncertain at this time.
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MGE has several other commitments related to various projects. Payments for these commitments are
expected to be as follows:
(In thousands)
2015
2016
2017
2018
2019
Other Commitments .................$
474 $
475 $
433 $
435 $
19. Asset Retirement Obligations - MGE Energy and MGE.
Thereafter
6,524
437 $
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 generating 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 recorded by MGE at December 31, 2014, as
well as the regulatory asset recorded.
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 shows a rollforward of the AROs from January 1, 2013, to December 31, 2014. Amounts
include conditional AROs.
(In thousands)
Balance at January 1, ................................. $
Liabilities incurred ....................................
Accretion expense .....................................
Liabilities settled .......................................
Revisions in estimated cash flows ...............
Balance at December 31,............................ $
2014
19,359 $
68
1,077
(343)
(417)
19,744 $
2013
18,768
296
1,015
(744)
24
19,359
20. Columbia Environmental Project Construction - MGE Energy and MGE.
MGE and two other utilities jointly own Columbia, a coal-fired generating facility. WPL is the plant operator and
permit holder, and owns 46.2% of Columbia. WPSC owns a 31.8% interest and MGE owns a 22% interest in
Columbia. In early 2011, the PSCW issued a Certificate and Order authorizing the construction of scrubbers and
baghouses and associated equipment on Columbia Units 1 and 2 to reduce SO2 and mercury emissions. The
modifications to Unit 2 were placed into service in April 2014, and the modifications to Unit 1 were placed into
service in July 2014. The scrubbers and baghouses are expected to support compliance obligations for current
and anticipated air quality regulations, including CAIR, CSAPR, MATS, and the Wisconsin Mercury Rule. As of
December 31, 2014, $138.8 million of the capitalized project was transferred from Construction work in progress
to Property, plant, and equipment on MGE's balance sheet related to Units 1 and 2 being placed into service. This
total amount consisted of $129.0 million of capital expenditures and $9.8 million of AFUDC. MGE's share of
various contractual commitments entered for the project as of December 31, 2014, is $0.5 million. For the years
ended December 31, 2014 and 2013, MGE has recognized after tax $3.0 million and $2.7 million, respectively, in
AFUDC equity related to this project.
MGE expects that the costs pertaining to this project will be fully recoverable through rates. For 2014, the PSCW
authorized MGE 100% AFUDC on this project during construction. For 2013, the PSCW authorized MGE a 50%
current return (included in customer rates) and the remaining 50% as AFUDC.
96
21. Adoption of Accounting Principles and Recently Issued Accounting Pronouncements - MGE Energy and
MGE.
a. Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of
the Obligation is Fixed at the Reporting Date.
In February 2013, the FASB issued authoritative guidance within the Codification's Balance Sheet topic that
provides guidance on the recognition, measurement, and disclosure of obligations resulting from joint and
several liability arrangements for which the total amount of the obligation is fixed at the reporting date. This
authoritative guidance became effective January 1, 2014. The authoritative guidance did not have a financial
or disclosure impact.
b. Presentation of an Unrecognized Tax Benefit.
In July 2013, the FASB issued authoritative guidance within the Codification's Income Statement topic that
provides guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward,
a similar tax loss, or a tax credit carryforward exists. The authoritative guidance was issued to eliminate
diversity in practice by providing guidance on the presentation of unrecognized tax benefits. This
authoritative guidance became effective January 1, 2014. The authoritative guidance will not have a financial
statement or disclosure impact, unless MGE Energy or its subsidiaries are in a net operating loss position.
MGE Energy or its subsidiaries are currently not in a net operating loss position.
c. Revenue from Contracts with Customers.
In May 2014, 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. This authoritative guidance will become effective January 1, 2017. MGE Energy and MGE are
currently assessing the impact this pronouncement will have on their financial statements.
d. Transfers and Servicing Assets.
In June 2014, the FASB issued authoritative guidance within the Codification's Transfers and Servicing topic
that provides guidance on the accounting and disclosures for repurchase-to-maturity transactions, securities
lending transactions, and repurchase financings. This authoritative guidance is effective January 1, 2015. The
authoritative guidance will change the accounting for the Chattel Paper program. Prior to adoption of the
standard, Chattel Paper was treated as an off-balance sheet arrangement. Upon adoption, assets and liabilities
will increase approximately $4.4 million and additional disclosures will be required. The cumulative impact
of this guidance on our financial statements is not expected to be material.
22.
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, through MGE Transco, in ATC, a company that provides electric
transmission services primarily in Wisconsin. See Footnote 4 for further discussion of MGE Transco and the
investment in ATC.
The "All Others" segment includes: corporate, CWDC, MAGAEL, MGE State Energy Services, and NGV
Fueling Services. 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.
97
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. Assets not allocated consist primarily of cash and cash equivalents,
restricted cash, investments, other accounts receivable, and prepaid assets.
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.
The following table shows segment information for MGE Energy's and MGE's operations:
(In thousands)
MGE Energy
Year Ended December 31, 2014
Operating revenues .................... $
Interdepartmental revenues ............
Total operating revenues ..............
Depreciation and amortization ........
Other operating expenses ..............
Operating income (loss) ...............
Other (deductions) income, net .......
Interest (expense) income, net ........
Income (loss) before taxes .............
Income tax (provision) benefit ........
Net income (loss) ...................... $
Year Ended December 31, 2013
Operating revenues .................... $
Interdepartmental revenues ............
Total operating revenues ..............
Depreciation and amortization ........
Other operating expenses ..............
Operating income (loss) ...............
Other (deductions) income, net .......
Interest (expense) income, net ........
Income (loss) before taxes .............
Income tax (provision) benefit ........
Net income (loss) ...................... $
Year Ended December 31, 2012
Operating revenues .................... $
Interdepartmental revenues ............
Total operating revenues ..............
Depreciation and amortization ........
Other operating expenses ..............
Operating income (loss) ...............
Other (deductions) income, net .......
Interest (expense) income, net ........
Income (loss) before taxes .............
Income tax (provision) benefit ........
Net income (loss) ...................... $
Electric
Gas
Non-
Regulated
Energy
Transmission
Investment
All Others
Consolidation/
Elimination
Entries
Consolidated
Total
394,849 $
221,720 $
3,283 $
509
8,366
395,358
230,086
(26,933)
(6,308)
(297,409)
(194,203)
42,692
45,975
(7,407)
(139)
71,016
2,847
(10,410)
63,453
29,575
38,429
(86)
(3,229)
26,260
-
(6,208)
32,221
(22,070)
(10,480)
(12,932)
- $
-
-
-
-
-
- $
-
-
(47)
(875)
(922)
9,150
(1,832)
-
9,150
(3,664)
174
(2,580)
961
41,383 $
15,780 $
19,289 $
5,486 $
(1,619) $
- $
619,852
(51,567)
(51,567)
-
51,567
-
-
-
-
-
- $
-
619,852
(40,695)
(441,059)
138,098
10,079
(19,673)
128,504
(48,185)
80,319
403,957 $
181,462 $
5,468 $
- $
- $
- $
590,887
537
12,629
404,494
194,091
(25,780)
(5,898)
(316,277)
(162,661)
62,437
3,062
(9,645)
55,854
(19,176)
25,532
59
(2,986)
22,605
(9,168)
42,591
48,059
(7,156)
(128)
40,775
-
(6,400)
34,375
(13,682)
-
-
-
(1)
(1)
9,434
-
9,433
(3,796)
-
-
(4)
(752)
(756)
(1,854)
107
(2,503)
963
(55,757)
(55,757)
-
55,757
-
-
-
-
-
36,678 $
13,437 $
20,693 $
5,637 $
(1,540) $
- $
-
590,887
(38,838)
(424,062)
127,987
10,701
(18,924)
119,764
(44,859)
74,905
392,365 $
139,727 $
9,231 $
- $
- $
- $
541,323
487
12,814
392,852
152,541
(26,031)
(5,569)
(300,149)
(136,567)
66,672
1,145
(10,189)
57,628
(20,906)
10,405
323
(2,874)
7,854
(2,769)
34,714
43,945
(7,107)
(121)
36,717
-
(6,537)
30,180
(12,113)
-
-
-
-
-
9,080
-
9,080
(3,648)
-
-
-
(1,031)
(1,031)
(479)
133
(1,377)
517
(48,015)
(48,015)
-
48,015
-
-
-
-
-
36,722 $
5,085 $
18,067 $
5,432 $
(860) $
- $
-
541,323
(38,707)
(389,853)
112,763
10,069
(19,467)
103,365
(38,919)
64,446
98
(In thousands)
MGE
Year Ended December 31, 2014
Operating revenues ............................... $
Interdepartmental revenues .......................
Total operating revenues .........................
Depreciation and amortization ...................
Other operating expenses* .......................
Operating income* ................................
Other (deductions) income, net* .................
Interest expense, net ..............................
Net income ........................................
Less: Net income attributable to
noncontrolling interest, net of tax ...............
Net income attributable to MGE ................. $
Year Ended December 31, 2013
Operating revenues ............................... $
Interdepartmental revenues .......................
Total operating revenues .........................
Depreciation and amortization ...................
Other operating expenses* .......................
Operating income (loss)* .........................
Other (deductions) income, net* .................
Interest expense, net ..............................
Net income ........................................
Less: net income attributable to
noncontrolling interest, net of tax ................
Net income attributable to MGE ................. $
Year Ended December 31, 2012
Operating revenues ............................... $
Interdepartmental revenues .......................
Total operating revenues .........................
Depreciation and amortization ...................
Other operating expenses* .......................
Operating income* ................................
Other income, net* ................................
Interest expense, net ..............................
Net income ........................................
Less: Net income attributable to
noncontrolling interest, net of tax ................
Net income attributable to MGE ................. $
Electric
Gas
Nonregulated
Energy
Transmission
Investment
Consolidation/
Elimination
Entries
Consolidated
Total
394,871 $
221,741 $
3,283 $
- $
- $
619,895
487
395,358
(26,933)
(319,175)
49,250
2,543
(10,410)
41,383
8,345
230,086
(6,308)
(204,597)
19,181
(172)
(3,229)
15,780
42,692
45,975
(7,407)
(13,071)
25,497
-
(6,208)
19,289
-
-
-
-
-
5,486
-
5,486
(51,524)
(51,524)
-
51,524
-
-
-
-
-
-
-
-
(26,310)
41,383 $
15,780 $
19,289 $
5,486 $
(26,310) $
-
619,895
(40,648)
(485,319)
93,928
7,857
(19,847)
81,938
(26,310)
55,628
403,980 $
181,477 $
5,468 $
- $
- $
590,925
514
404,494
(25,780)
(335,059)
43,655
2,668
(9,645)
36,678
12,614
194,091
(5,898)
(171,717)
16,476
(53)
(2,986)
13,437
42,591
48,059
(7,156)
(13,810)
27,093
-
(6,400)
20,693
-
-
-
(1)
(1)
5,638
-
5,637
(55,719)
(55,719)
-
55,719
-
-
-
-
-
-
-
-
(27,438)
36,678 $
13,437 $
20,693 $
5,637 $
(27,438) $
-
590,925
(38,834)
(464,868)
87,223
8,253
(19,031)
76,445
(27,438)
49,007
392,365 $
139,727 $
9,231 $
- $
- $
541,323
487
392,852
(26,031)
(320,701)
46,120
791
(10,189)
36,722
12,814
152,541
(5,569)
(139,236)
7,736
223
(2,874)
5,085
34,714
43,945
(7,107)
(12,234)
24,604
-
(6,537)
18,067
-
-
-
-
-
5,432
-
5,432
(48,015)
(48,015)
-
48,015
-
-
-
-
-
-
-
-
(24,489)
36,722 $
5,085 $
18,067 $
5,432 $
(24,489) $
-
541,323
(38,707)
(424,156)
78,460
6,446
(19,600)
65,306
(24,489)
40,817
*Amounts are shown net of the related tax expense, consistent with the presentation on the consolidated MGE Income Statement.
99
The following table shows segment information for MGE Energy's and MGE's assets and capital expenditures:
(In thousands)
MGE Energy
Assets:
December 31, 2014 ........... $
December 31, 2013 ...........
December 31, 2012 ...........
Capital Expenditures:
Year ended Dec. 31, 2014 .... $
Year ended Dec. 31, 2013 ....
Year ended Dec. 31, 2012 ....
Utility
Consolidated
Electric
Gas
Assets
not
Allocated
Nonregulated
Energy
Transmission
Investment
All Others
Consolidation/
Elimination
Entries
Total
948,241 $
308,499 $
41,346 $
281,410 $
67,697 $
441,109 $
(390,636) $
1,697,666
899,257
265,694
888,444
285,468
19,853
18,559
288,116
323,216
64,504
61,064
431,436
413,291
(389,800)
1,579,060
(403,118)
1,586,924
68,067 $
22,104 $
- $
2,505 $
100,146
81,965
15,554
13,812
-
-
3,347
2,658
- $
-
-
- $
-
-
- $
-
-
92,676
119,047
98,435
(In thousands)
MGE
Utility
Consolidated
Electric
Gas
Assets
not
Allocated
Nonregulated
Energy
Transmission
Investment
Consolidation/
Elimination
Entries
Total
Assets:
December 31, 2014 ........... $
December 31, 2013 ...........
December 31, 2012 ...........
Capital Expenditures:
Year ended Dec. 31, 2014 .... $
Year ended Dec. 31, 2013 ....
Year ended Dec. 31, 2012 ....
948,241 $
308,499 $
41,346 $
281,360 $
67,697 $
(6,521) $
1,640,622
899,257
888,444
265,694
285,468
19,853
18,559
288,066
323,166
64,504
61,064
(6,731)
1,530,643
(23,050)
1,553,651
68,067 $
22,104 $
- $
2,505 $
100,146
81,965
15,554
13,812
-
-
3,347
2,658
- $
-
-
- $
92,676
-
-
119,047
98,435
23. Quarterly Summary of Operations - MGE Energy (unaudited).
(In thousands, except per share amounts)
2014
Operating revenues:
Regulated electric revenues ......................... $
Regulated gas revenues ..............................
Nonregulated revenues ...............................
Total Operating Revenues ........................
Operating expenses .......................................
Operating income .........................................
Interest and other income, net ........................
Income tax provision ....................................
Earnings on common stock ............................ $
Earnings per common share ........................... $
Dividends per share ...................................... $
2013
Operating revenues:
Regulated electric revenues ......................... $
Regulated gas revenues ..............................
Nonregulated revenues ...............................
Total Operating Revenues ........................
Operating expenses .......................................
Operating income .........................................
Interest and other income, net ........................
Income tax provision ....................................
Earnings on common stock ............................ $
Earnings per common share ........................... $
Dividends per share ...................................... $
March 31
June 30
September 30 December 31
Quarters Ended
96,697 $
31,218
850
128,765
104,324
24,441
(1,320)
(9,034)
14,087 $
0.41 $
0.272 $
96,846 $
30,042
1,400
128,288
103,791
24,497
(1,946)
(8,660)
13,891 $
0.40 $
0.263 $
112,869 $
21,404
862
135,135
95,015
40,120
(2,505)
(14,286)
23,329 $
0.67 $
0.283 $
119,836 $
18,864
1,399
140,099
100,199
39,900
(855)
(14,692)
24,353 $
0.70 $
0.272 $
86,431
58,385
891
145,707
116,141
29,566
(5,780)
(8,600)
15,186
0.44
0.283
93,781
60,089
1,393
155,263
129,301
25,962
(4,056)
(7,829)
14,077
0.41
0.272
98,852 $
110,713
680
210,245
166,274
43,971
11
(16,265)
27,717 $
0.80 $
0.272 $
93,494 $
72,467
1,276
167,237
129,609
37,628
(1,366)
(13,678)
22,584 $
0.65 $
0.263 $
100
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.
24. Related Party Transactions - MGE Energy and MGE.
ATC
During 2014, 2013, and 2012, MGE recorded $26.8 million, $27.7 million, and $25.3 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. For the year ended December 31, 2014, MGE had a
receivable due from ATC of $0.1 million. For the years ended December 31, 2013 and 2012, MGE had a
receivable due from ATC of $0.2 million.
For additional discussion on MGE's relationship with ATC, see Footnote 4.
101
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 2014, 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, 2014, 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, 2014, 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, 2014. As a result of that assessment, management determined that there were no
material weaknesses as of December 31, 2014 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.
102
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 (2015 Proxy Statement) to be filed with the SEC on or
before March 27, 2015. 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 2015 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 for Items 11 and 12 is included in the 2015 Proxy Statement, which will be filed with the SEC
on or before March 27, 2015, under the section "EXECUTIVE COMPENSATION," not including "Compensation
Committee Report," and "Company Performance," and under the section "BENEFICIAL OWNERSHIP," which is
incorporated herein by reference.
MGE Energy does not have or maintain any equity compensation plans.
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 2015 Proxy Statement, which will be filed with the SEC on or before March 27, 2015.
103
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 2015 Proxy Statement, which will be filed with the SEC on or before March 27, 2015.
MGE
Independent Registered Public Accounting Firm Fees Disclosure
Audit Fees (a) .......................................................................................... $
Audit-Related Fees (b) ..............................................................................
Tax Fees (c) ............................................................................................
All Other Fees (d) .....................................................................................
2014
803,913 $
50,000
204,367
69,100
2013
735,399
100,000
45,413
194,172
(a) Audit Fees were for professional services rendered for the audits of the financial statements, review of the
interim financial statements, 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 were for professional services rendered in connection with utility commission-mandated
obligations and a Department of Energy smart grid grant compliance audit.
(c) Tax Fees were for review of federal and state income tax returns and tax planning. The increase in 2014 fees
reflects services rendered to change the tax method of accounting for repairs and for other tax planning.
(d) All Other Fees were for generation project advisory services, computer system implementation assurance
review, and access to the PwC online accounting standards library.
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.
104
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, 2014, 2013, and 2012 .................. 51
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013, and
2012 ............................................................................................................................................................ 51
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012 ............ 52
Consolidated Balance Sheets as of December 31, 2014 and 2013 .............................................................. 53
Consolidated Statements of Common Equity as of December 31, 2014, 2013, and 2012 .......................... 54
Notes to Consolidated Financial Statements ............................................................................................... 59
MGE
Consolidated Statements of Income for the years ended December 31, 2014, 2013, and 2012 .................. 55
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013, and
2012 ............................................................................................................................................................ 55
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012 ............ 56
Consolidated Balance Sheets as of December 31, 2014 and 2013 .............................................................. 57
Consolidated Statements of Common Equity as of December 31, 2014, 2013, and 2012 .......................... 58
Notes to Consolidated Financial Statements ............................................................................................... 59
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, as indicated by the parenthetical reference. 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.
3.1
3.2
3.3
3.4
4.1
4.2
Amended and Restated Articles of Incorporation of MGE Energy, Inc. (Exhibit 4.1 to MGE Energy's
Registration Statement on Form S-3, Registration No. 333-197423.)
Amended and Restated Bylaws of MGE Energy, Inc. (Exhibit 3.2 to MGE Energy's Registration
Statement on Form S-4, Registration No. 333-72694.)
Restated Articles of Incorporation of Madison Gas and Electric Company as in effect at October 25,
2012. (Exhibit 3.1 to Form 8-K dated October 25, 2012, File No. 0-1125.)
Amended Bylaws of Madison Gas and Electric Company as in effect at August 16, 2002. (Exhibit 3.4 to
Form 10-K for year ended December 31, 2002, File No. 0-1125.)
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, dated as of January 1, 1946. (Exhibit 7-
D to Registration Statement, Registration No. 2-6059.)
Supplemental Indenture dated as of February 1, 1993 to aforementioned Indenture of Mortgage and
Deed of Trust. (Exhibit 4F to Form 10-K for year ended December 31, 1992, File No. 0-1125.)
105
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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, dated as of September 1, 1998. (Exhibit
4B to Form 10-K for year ended December 31, 1999, File No. 0-1125.)
Credit Agreement dated as of July 30, 2010, among MGE Energy, Inc., the Lenders party thereto and
JPMorgan Chase Bank, N.A., as Administrative Agent. (Exhibit 10.1 to Form 10-Q for the quarter
ended June 30, 2010, File No. 0-49965.)
Third Amendment dated as of June 19, 2013, to Credit Agreement dated as of July 30, 2010, among
MGE Energy, Inc., various financial institutions, and JPMorgan Chase Bank, N.A., as Administrative
Agent. (Exhibit 10.1 to Form 8-K dated June 27, 2013, File No. 0-49965.)
Credit Agreement dated as of July 30, 2010, among Madison Gas and Electric Company, the Lenders
party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. (Exhibit 10.2 to Form 10-Q for
the quarter ended June 30, 2010, File No. 0-1125.)
Third Amendment dated as of June 19, 2013, to Credit Agreement dated as of July 30, 2010, among
Madison Gas and Electric Company, various financial institutions, and JPMorgan Chase Bank, N.A., as
Administrative Agent. (Exhibit 10.2 to Form 8-K dated June 27, 2013, File No. 0-1125.)
Copy of Joint Power Supply Agreement with Wisconsin Power and Light Company and Wisconsin
Public Service Corporation dated February 2, 1967. (Exhibit 4.09 to Registration Statement,
Registration No. 2-27308.)
Copy of Joint Power Supply Agreement (Exclusive of Exhibits) with Wisconsin Power and Light
Company and Wisconsin Public Service Corporation dated July 26, 1973. (Exhibit 5.04A to Registration
Statement, Registration No. 2-48781.)
Copy of Amended and Restated Agreement for Construction and Operation of Columbia Generating
Plant dated January 17, 2007. (Exhibit 10.9 to Form 10-K for the year ended December 31, 2006, File
No. 0-1125.)
10.8 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. (Exhibit 10.19 to Form 10-Q for the quarter ended September 30,
2005, File No. 0-1125.)
10.9 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. (Exhibit 10.20 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)
10.10 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. (Exhibit 10.21 to
Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.11 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. (Exhibit 10.22 to
Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.12 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. (Exhibit 10.23 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-
1125.)
10.13 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. (Exhibit
10.24 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
106
10.14 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. (Exhibit 10.7 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-
1125.)
10.15 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. (Exhibit 10.8 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)
10.16 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. (Exhibit
10.9 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.17 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. (Exhibit 10.10 to
Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.18 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. (Exhibit
10.11 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.19 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. (Exhibit 10.12 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)
10.20 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. (Exhibit 10.16 to Form 10-K for the year ended December 31, 2005, File No. 0-1125.)
10.21 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. (Exhibit
10.13 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.22 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. (Exhibit 10.14 to
Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.23 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.
(Exhibit 10.15 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.24 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. (Exhibit 10.16 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)
10.25 Operating Agreement, dated as of October 28, 2005, among MGE Energy, Inc., Madison Gas and
Electric Company, and MGE Transco Investment LLC. (Exhibit 10.17 to Form 10-Q for the quarter
ended September 30, 2005, File No. 0-1125.)
107
10.26 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. (Exhibit 10.6 to Form 10-Q for the quarter ended September 30, 2006, File No. 0-
1125.)
10.27 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. (Exhibit
10.7 to Form 10-Q for the quarter ended September 30, 2006, File No. 0-1125.)
10.28* Form of Severance Agreement. (Exhibit 10.37 to Form 10-K for the year ended December 31, 2008,
File No. 0-49965.)
10.29* Form of Amendment to Severance Agreement. (Exhibit 10.29 to Form 10-K for the year ended
December 31, 2010, File No. 0-49965.)
10.30* Form of Deferred Compensation Agreement. (Exhibit 10.38 to Form 10-K for the year ended
December 31, 2008, File No. 0-49965.)
10.31* Form of Amended and Restated Deferred Compensation Agreement. (Exhibit 10.39 to Form 10-K for
the year ended December 31, 2008, File No. 0-49965.)
10.32* Form of Income Continuation Agreement. (Exhibit 10.40 to Form 10-K for the year ended
December 31, 2008, File No. 0-49965.)
10.33* MGE Energy, Inc., 2006 Performance Unit Plan. (Exhibit 10.41 to Form 10-K for the year ended
December 31, 2008, File No. 0-49965.)
10.34* Amendment Number One to MGE Energy, Inc., 2006 Performance Unit Plan, dated March 18, 2011.
(Exhibit 10.2 to Form 8-K dated March 24, 2011, File No. 0-49965.)
10.35* Form of Performance Unit Award Agreement. (Exhibit 10.42 to Form 10-K for the year ended
December 31, 2008, File No. 0-49965.)
10.36* Form of Amendment to Performance Unit Award Agreement. (Exhibit 10.1 to Form 8-K dated
April 15, 2011, File No. 0-49965.)
10.37* MGE Energy, Inc., 2013 Director Incentive Plan. (Exhibit 10.37 to Form 10-K for the year ended
December 31, 2013, File No. 0-49965.)
10.38* Form of 2013 Director Incentive Plan Award Agreement. (Exhibit 10.38 to Form 10-K for the year
ended December 31, 2013, File No. 0-49965.)
12
21
23
31
Statements regarding computation of ratio of earnings to fixed charges:
12.1 MGE Energy, Inc.
12.2 Madison Gas and Electric Company
Subsidiaries of MGE Energy, Inc.
Consent of Independent Registered Public Accounting Firm
23.1 MGE Energy, Inc.
23.2 Madison Gas and Electric Company
Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 as to the
Annual Report on Form 10-K for the year ended December 31, 2014, filed by the following officers for
the following companies:
31.1 Filed by Gary J. Wolter for MGE Energy, Inc.
31.2 Filed by Jeffrey C. Newman for MGE Energy, Inc.
31.3 Filed by Gary J. Wolter for Madison Gas and Electric Company
31.4 Filed by Jeffrey C. Newman for Madison Gas and Electric Company
108
32
Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley
Act of 2002) as to the Annual Report on Form 10-K for the year ended December 31, 2014, filed by the
following officers for the following companies:
32.1 Filed by Gary J. Wolter for MGE Energy, Inc.
32.2 Filed by Jeffrey C. Newman for MGE Energy, Inc.
32.3 Filed by Gary J. Wolter for Madison Gas and Electric Company
32.4 Filed by Jeffrey C. Newman for Madison Gas and Electric Company
101
Interactive Data Files:
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.
109
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,
2013
2012
2014
Operating Expenses:
Other operations and maintenance ..................................................... $
Total Operating Expenses .............................................................
Operating Loss ..................................................................................
Equity in earnings of investments ..........................................................
Other income/(loss), net .......................................................................
Other interest ......................................................................................
Income before income taxes ..............................................................
Income tax provision ............................................................................
Net Income ........................................................................................
Other Comprehensive Income, Net of Tax:
Unrealized gain (loss) on available-for-sale securities, net of
tax (($54), ($189), and $12) ..............................................................
Comprehensive Income ...................................................................... $
689 $
689
(689)
81,811
(1,879)
93
79,336
983
80,319
613 $
613
(613)
76,362
(1,863)
55
73,941
964
74,905
649
649
(649)
65,132
(496)
45
64,032
414
64,446
81
80,400 $
283
75,188 $
(18)
64,428
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,
2013
2012
2014
Net Cash Flows Provided by Operating Activities ............................... $
Investing Activities:
Other investing ................................................................................
Cash Used for Investing Activities ..................................................
Financing Activities:
Cash dividends paid on common stock ...............................................
Other financing ................................................................................
Cash Used for Financing Activities .................................................
Change in Cash and Cash Equivalents: ...............................................
Cash and cash equivalents at beginning of period ................................
Cash and cash equivalents at end of period ..................................... $
48,165 $
53,952 $
49,819
(2,422)
(2,422)
(2,425)
(2,425)
(38,429)
(89)
(38,518)
7,225
51,204
58,429 $
(37,107)
(97)
(37,204)
14,323
36,881
51,204 $
(1,558)
(1,558)
(35,951)
(49)
(36,000)
12,261
24,620
36,881
The accompanying notes are an integral part of the above consolidated financial statements.
110
Schedule I
Condensed Parent Company Financial Statements (continued)
MGE Energy, Inc.
Balance Sheets
(Parent Company Only)
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents .......................................................................................... $
Accounts receivable, net:
Accounts receivable from affiliates ..........................................................................
Other current assets
Total Current Assets ..............................................................................................
Other deferred assets and other .......................................................................................
Investments:
Investments in affiliates .............................................................................................
Other investments .....................................................................................................
Total Investments ...................................................................................................
Total Assets ......................................................................................................... $
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable to affiliates ..................................................................................... $
Accrued taxes ...........................................................................................................
Other current liabilities ..............................................................................................
Total Current Liabilities .........................................................................................
Other Credits:
Deferred income taxes ...............................................................................................
Accounts payable to affiliates .....................................................................................
Total Other Credits .................................................................................................
Shareholders' Equity:
Common shareholders' equity .....................................................................................
Retained income .......................................................................................................
Other comprehensive income ......................................................................................
Total Shareholders' Equity ......................................................................................
Commitments and contingencies (see Footnote 3) ............................................................
Total Liabilities and Shareholders' Equity............................................................ $
At December 31,
2014
2013
58,429 $
51,204
64
2,809
61,302
140
619,563
1,177
620,740
682,182 $
7,096 $
663
2,601
10,360
7,125
5,296
12,421
350,936
308,007
458
659,401
-
682,182 $
125
1,015
52,344
157
583,435
948
584,383
636,884
530
4,297
3,076
7,903
5,646
5,825
11,471
350,936
266,197
377
617,510
-
636,884
The accompanying notes are an integral part of the above consolidated financial statements.
111
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, 2014.
2.
Credit Agreements.
As of December 31, 2014, MGE Energy had access to an unsecured, committed credit facility with aggregate
bank commitments of $50.0 million. At December 31, 2014, no borrowings were outstanding under this facility.
See Footnote 10 of the Notes to Consolidated Financial Statements for further information regarding
MGE Energy's credit agreements.
3.
Commitments and Contingencies.
See Footnote 18 of the Notes to Consolidated Financial Statements for commitments and contingencies.
4.
Dividends from Affiliates.
(In thousands)
MGE ............................................................................... $
MGE Construct ................................................................
MGE Power Elm Road......................................................
MGE Power .....................................................................
MGE Power West Campus ................................................
MGE Transco ..................................................................
Total ............................................................................... $
Dividends from Affiliates
2013
2014
2012
26,500 $
-
13,500
-
6,000
1,859
47,859 $
25,000 $
-
17,300
-
9,250
816
52,366 $
20,404
239
16,000
200
7,500
-
44,343
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 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 at December 31, 2014, is 56.9% as determined under
the calculation used in the rate proceeding. MGE paid cash dividends of $26.5 million to MGE Energy in 2014.
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, 2014, approximately $334.8 million was available for the payment of dividends under this
covenant.
See Footnotes 9 and 10 of the Notes to Consolidated Financial Statement for long-term debt and lines of credit
dividend restrictions.
112
Schedule II
MGE Energy, Inc. and Madison Gas and Electric Company
Valuation and Qualifying Accounts
Additions
Balance at
beginning of
period
(1)
Charged to
costs and
expenses
(2)
Charged
to other
accounts
Net Accounts
written off
Balance at
end of period
Fiscal Year 2012:
Accumulated provision for uncollectibles
Fiscal Year 2013:
Accumulated provision for uncollectibles
Fiscal Year 2014:
Accumulated provision for uncollectibles
$
4,100,333
2,825,300
44,400
(2,153,915) $
4,816,118
$
4,816,118
2,373,342
37,200
(2,256,949) $
4,969,711
$
4,969,711
1,898,300
15,092
(2,134,446) $
4,748,657
113
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 26, 2015
/s/ Gary J. Wolter
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 26, 2015.
/s/ Gary J. Wolter
/s/ Jeffrey C. Newman
Gary J. Wolter
Chairman, President and Chief Executive Officer and Director
(Principal Executive Officer)
Jeffrey C. Newman
Vice President, Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
/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/ John R. Nevin
John R. Nevin, Director
/s/ James L. Possin
James L. Possin, Director
/s/ Thomas R. Stolper
Thomas R. Stolper, Director
114
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 26, 2015
/s/ Gary J. Wolter
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 26, 2015.
/s/ Gary J. Wolter
/s/ Jeffrey C. Newman
Gary J. Wolter
Chairman, President and Chief Executive Officer and Director
(Principal Executive Officer)
Jeffrey C. Newman
Vice President, Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
/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/ John R. Nevin
John R. Nevin, Director
/s/ James L. Possin
James L. Possin, Director
/s/ Thomas R. Stolper
Thomas R. Stolper, Director
115
Corporate profile
MGE Energy, Inc.
MGE Energy is the parent company of
Madison Gas and Electric Co. (MGE) and
its divisions, which serve natural gas and
electric customers in south-central and
western Wisconsin.
MGE Transco Investment owns interest in
the American Transmission Co. through
its members, MGE and MGE Energy.
MGE Power owns assets in the West
Campus Cogeneration Facility at
Madison, Wis., and the Elm Road
Generating Station at Oak Creek, Wis.
MAGAEL holds title to properties
acquired for future utility plant expansion.
Madison Gas and
Electric Company
MGE Power LLC
MAGAEL, LLC
Central Wisconsin
Development
Corporation
MGE Services, LLC
MGE Transco
Investment LLC
MGE Power
West Campus, LLC
MGE Power
Elm Road, LLC
North Mendota
Energy &
Technology
Park, LLC
NGV Fueling
Services, LLC
Central Wisconsin Development Corp.
promotes business growth in MGE’s service area.
North Mendota Energy & Technology Park owns property
and serves as the development entity for the property.
MGE Services provides construction and other services. Its
subsidiary NGV Fueling Services, LLC, installs, owns and
maintains equipment used to fuel natural gas-powered vehicles.
Learn more at mgeenergy.com
MGE Electric Services
Generation and Distribution
Customers: 143,000
Population: 309,214
Area: 316 square miles
Communities served: Cross Plains,
Fitchburg, Madison, Maple Bluff,
McFarland, Middleton, Monona and
Shorewood Hills
Generating facilities:
Blount Station, West Campus
Cogeneration Facility, combustion
turbines and solar units at Madison,
Columbia Energy Center at Portage,
natural gas combustion turbine at
Marinette, MGE wind farm in Kewaunee
County, Top of Iowa Wind Farm in north-
central Iowa and Elm Road Generating
Station at Oak Creek
MGE Natural Gas Services
Purchase and Distribution
Customers: 149,000
Population: 429,682
Area: 1,678 square miles
Counties served: Columbia, Crawford,
Dane, Iowa, Juneau, Monroe and Vernon
Learn more at mge.com
Wisconsin
MGE Combustion Turbine
MGE Wind Farm
Elroy
Viroqua
Columbia Plant
MGE Gas/Electric Service
MGE Gas Service
Top of Iowa Wind Farm
Iowa
Prairie du Chien
Madison
Elm Road Plant
Des Moines
• Blount Station
• West Campus Cogeneration
• Combustion turbines
• Solar units
U.S. Department of Energy Acknowledgement and Disclaimer:
Acknowledgement: References in this 2014 MGE Energy Annual Report to electric vehicle
charging stations, and distribution system management software cover material based upon work
supported by the Department of Energy award number DE-DE0000279.
Disclaimer: This report was prepared in part as an account of work sponsored by an agency of
the United States Government. Neither the United States Government nor any agency thereof,
nor any of their employees, makes any warranty, express or implied, or assumes any legal liability
or responsibility for the accuracy, completeness, or usefulness of any information, apparatus,
product, or process disclosed, or represents that its use would not infringe privately owned
rights. Reference herein to any specific commercial product, process, or service by trade name,
trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement,
recommendation, or favoring by the United States Government or any agency thereof. The views
and opinions of authors expressed herein do not necessarily state or reflect those of the United
States Government or any agency thereof.
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