Building your
community
energy company
of the future
2015 ANNUAL REPORT
MGE Energy
2015 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 2015,
revenue was approximately $564 million. See the
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Table of Contents
1. 2015 Highlights
2. Letter to our shareholders
6. Charting our future course
8. Working together
10. Ensuring reliability
12. Growing innovation
14. Corporate leadership
16. Shareholder information
Financials: Form 10-K
About the cover
As we build a community energy company of the
future, we will work toward meeting new
strategic energy goals and objectives. Innovative
technologies, products and services provide
opportunities to work with our customers and
provide a cleaner energy future for the
next generations.
40 years of dividend increases
and signifi cant growth
In 2015, we marked 40 years of consistent dividend increases. This performance
refl ects our steadfast commitment to shareholder value. During the last 40 years,
we have grown assets by nearly eight times as we have invested to ensure reliability
and take advantage of new technology.
Corporate profi le
1975
to
1984
During this 10-year period, MGE invested in building
infrastructure such as electric generation and distribution
systems to serve our growing service area. Energy reliability
always has been core to our mission. We also began researching
new technology to develop renewable resources for the future.
• Commissioned the Columbia Energy
1975 Dividend Rate: $0.36
Center, which MGEE co-owns
• Completed 170 miles of gas
main upgrades
• Built two experimental wind turbines
1975 Assets: $221 million
1985
to
1994
MGE expanded natural gas operations and continued its
emphasis on energy reliability. Meanwhile, high-tech businesses
began to grow as computing options became more mainstream.
MGE implemented its own new technology and worked with
the community to establish a foothold for technology-based
companies in Madison.
• Installed new online system to manage
1985 Dividend Rate: $0.66
our electric grid
• Expanded our natural gas operations
and suppliers
• Opened the MGE Innovation Center
business incubator
1985 Assets: $377 million
1995
to
2004
MGE began establishing our leadership in renewable energy.
Our fi rst wind farm allowed us to launch our green power
program. We also installed solar units to better understand how
photovoltaic technology performs. MGE Energy invested in one of
the cleanest Midwest power plants to serve the community and
University of Wisconsin-Madison.
• Built the fi rst commercial wind farm
1995 Dividend Rate: $0.84
in Wisconsin
• Constructed the West Campus
Cogeneration Facility
• Launched our Technology Demonstration
Program with solar installations
1995 Assets: $494 million
2005
to
2014
2015
MGE set strategic and ambitious goals under our Energy 2015
framework for a cleaner, reliable future. We established
these goals following our fi rst round of Community Energy
Conversations. We listened to our customers, set our framework
and met our goals.
• Discontinued coal at our Blount
2005 Dividend Rate: $0.92
Generating Station
• Commissioned the Elm Road Generating
Station, which MGEE co-owns
• Completed our 30-megawatt Top of
Iowa Wind Farm
2005 Assets: $917 million
MGE continues to change and innovate as we work toward
building the community energy company of the future. Following
a second round of Community Energy Conversations, we
announced our Energy 2030 framework that sets goals to
increase renewable energy and further decrease
carbon emissions.
• Completed extensive customer
2015 Dividend Rate: $1.16
engagement about our energy future
• Developed a set of strategic goals under
our Energy 2030 framework
• Maintained one of the best electric
reliability records in the nation
2015 Assets: $1.7 billion
Madison Gas and
Electric Company
MGE Transco
Investment LLC
MGE Power LLC
MAGAEL, LLC
Central Wisconsin
Development
Corporation
MGE Services, LLC
MGE Power
West Campus, LLC
MGE Power
Elm Road, LLC
North Mendota
Energy & Technology
Park, LLC
NGV Fueling
Services, LLC
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 Energy, Inc.
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.
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: 146,000
Population: 312,500
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: 152,000
Population: 434,600
Area: 1,682 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
MGE Energy (MGEE)
Year at a Glance
(Thousands, except per share amounts and shares outstanding)
2015
2014
Increase/(Decrease) % Change
Total Market Value (Dec. 31)
$ 1,608,612
$ 1,581,224
$ 27,388
Market Price Per Share (Dec. 31)
Book Value Per Share
$
$
46.40
19.92
$
$
45.61
19.02
$
$
0.79
0.90
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
$
$
$
$
564,028
71,343
2.06
1.16
$
$
$
$
619,852
$ (55,824 )
80,319
2.32
1.11
$
$
$
(8,976 )
(0.26 )
0.05
Dividend Payout Ratio
56.3%
47.8%
8.5 %
Total Assets
$ 1,730,673
$ 1,694,184
$ 36,489
Total Retail Electric Sales (kWh)
3,288,623
3,297,742
(9,119 )
1.7
1.7
4.7
0.0
0.0
-9.0
-11.2
-11.2
4.5
17.8
2.2
-0.3
Total Gas Deliveries (therms)
257,031
295,478
(38,447 )
-13.0
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Four Decades of Dividend Increases
(Rounded - Dividends Paid Per Share)
Four Decades of Asset Increases
($ millions)
$1.16
$1,731
$0.92
$0.84
$0.66
$0.36
$917
$494
$377
$221
1975
1985
1995
2005
2015
1975
1985
1995
2005
2015
1
“ We are dedicated
to producing
long-term
value for our
shareholders.”
Gary J. Wolter,
MGE Energy Chairman,
President and Chief Executive Offi cer
Letter to our
shareholders
We are moving forward to build the
community energy company of the future.
As the energy world is changing around us, we have established a
new framework—Energy 2030—that sets our direction for the next
15 years. Throughout our report, we have details about Energy
2030 including our ambitious goals and objectives. Energy 2030
builds on our previous accomplishments and continues our
commitment to provide value to shareholders, customers and the
communities we serve.
Strong fi nancial performance
Long-term value is important to our shareholders. At MGE Energy,
we understand the important role dividend growth and stock price
appreciation play in our investors’ portfolios.
Our company has increased dividends for 40 consecutive years.
Only four other combination, investor-owned utilities nationwide
share this accomplishment.
Annual dividends paid per share have increased from $0.36 in 1975
to $1.16 in 2015. Our Board of Directors most recently increased
the dividend by 4.4%. MGE Energy dividend increases for each of
the last four years have been larger than any increase in the prior
two decades.
We also have seen steady stock price appreciation. At the closing
bell in 2015, our stock price was $46.40—up from $45.61 at the
close of 2014. Over the last 10 years, our stock price has outpaced
the national indices of the Dow Jones Industrial Average and the
S&P 500. In the last decade, our stock price has nearly doubled.
The combination of stock price appreciation and reinvested
dividends results in shareholder total return. Once again, MGE
Energy’s total return surpassed other indices. A $1,000 investment
in MGE Energy at the end of 2010 grew to $1,900 by the close of
2015 with reinvested dividends.
In 2015, we reported earnings of $2.06 per share, compared to
$2.32 per share in 2014. Earnings were down due to a 27%
decrease in gas retail sales resulting from warmer winter weather
in 2015 compared to extremely cold weather in 2014. Electric net
income also was lower due in part to lower customer demand.
2
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• Madison Gas and Electric, the main regulated subsidiary
of MGE Energy, has maintained the highest credit rating
of any investor-owned electric and gas utility in the nation
from both Standard and Poor’s (S&P) and Moody’s. These
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the company.
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performance has ranked among the top 10 U.S.-based
power and gas companies in a study by the journal Public
Utilities Fortnightly. For 2015, MGE Energy was ranked
eighth nationwide. The journal reviewed the shareholder
value of the 71 largest investor-owned utilities over a
four-year period. The study evaluates dividend yield, cash
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consistently rates MGE Energy as a Dividend Achiever
nationwide. In Wisconsin, no other major utility can match
our history of consistent dividend increases.
• Value Line, Inc., gave us its highest ratings for investment
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these highest ratings for more than a decade.
Cumulative Total Return Comparison
(assumes $1,000 investment on 12/31/10 with dividends reinvested)
$2,000
MGEE $1,900
$1,000
Investment
2010
2011
2012
2013
2014
2015
MGE Energy
13.69%
EEI Investor-Owned Electrics
11.39%
Russell 2000
9.19%
MGE Top Credit Quality
S&P
Corporate Credit: AA-
Outlook: Stable
MGEE’s Ranking in
Public Utilities
Fortnightly’s Financial Study
Year
Ranking
Moody’s
Secured: Aa2
Unsecured: A1
Outlook: Stable
2015
2014
2013
#8
#9
#7
100.0
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%
Change
0.0
-40.0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
MGEE
S&P 500
DJIA
MGE Energy compared to the S&P 500 and the Dow Jones Industrial Average.
MGEE
93%
69%
62%
3
Letter to our
shareholders
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We have introduced an ambitious framework for our energy future.
Energy 2030 builds on our now completed Energy 2015 framework
that we launched 10 years ago.
Under Energy 2015, MGE eliminated coal at its downtown
Madison power plant and increased energy from renewable
resources by almost 12 times. MGE also reduced carbon emissions
by approximately 20% since 2005—even with a growing population
in our service area.
Historically for MGE, as for other Midwestern utilities, the majority
of our electricity has been generated from coal. Our Energy 2015
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power plants. We do not plan to build new coal facilities to meet
future energy needs. Instead, our Energy 2030 framework
continues our transition to a more environmentally sustainable
energy supply.
With Energy 2030, we have set new long-range goals and objectives
to continue moving toward a cleaner energy future. We began by
listening to those we serve. Energy 2030 was informed by customer
and stakeholder meetings and surveys. We also conducted our own
industry research, planning and analysis.
Currently, the utility industry is facing transformative change with
new technology for customers—from more affordable solar power
units to smart thermostats and appliances. Technology also is
transforming our electric grid—allowing us to make it smarter and
more advanced.
Our Energy 2030 framework consists of six long-term objectives
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• Transition toward supplying 30% of retail electricity sales with
renewable resources by 2030. As a milestone goal, we plan to
supply 25% of retail electricity sales with renewable resources
by 2025.
• Work with customers to reduce carbon dioxide emissions by
40% from 2005 levels by 2030.
Our Energy 2030 framework will seize the opportunities that new
technology and products offer while providing our customers with
affordable, reliable energy to serve the 21st century economy.
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improvements help make MGE one of the most reliable
utilities in the nation.
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thermostat to stay comfortable in their recently remodeled
1940s home. By 2030, Joe will be 17—part of the next
generation of energy consumers who will take advantage
of evolving technologies and renewable resources for a
cleaner future.
4
Guided by Energy 2030, we will invest in new technology and
to make our energy supply more sustainable while enhancing
the value we provide to our customers and shareholders.
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In 2015, we had our best year ever for electric reliability.
We achieved the fewest number of outages since we began
recording this data in 2002. For every year since 2007,
MGE has ranked in the top four utilities nationwide for
electric reliability.
Natural gas reliability and safety are critical to our
customers. We are there when our customers need us. In a
nationwide survey of over 80 utilities, MGE recorded the
third fastest response times to customer calls reporting
natural gas leaks. We averaged a 17-minute response time,
compared to a national average of 28 minutes. The survey,
released in 2015, is based on 2014 statistics.
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who served as general counsel; Scott Neitzel, who served
as a senior vice president; and Peter Waldron, who served as
a vice president. We value the expertise they brought to
our organization.
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Renlund, who joined as general counsel, and three internal
promotions to assistant vice president—Jared Bushek,
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help us as we build the community energy company of
the future—taking advantage of new technology,
making strategic investments and developing new
customer products and services to advance our
Energy 2030 framework.
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We work hard to measure and continually improve our
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Gary J. Wolter
• MGE is the only Wisconsin utility to achieve the highest
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participation level in Green Tier, an environmental
leadership program led by the state Department of
Natural Resources.
• MGE received the Green Master designation from the
Wisconsin Sustainable Business Council for the second
consecutive year. The Green Masters program evaluates
businesses in nine operational areas. Only the top 20% of
the companies considered for this honor achieve the
Green Master designation. MGE is one of 36 companies
and the only utility to be named a Green Master.
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toward supplying 30% of retail electricity sales with
renewable resources by 2030.
5
Charting our future course
We are continuing our transition to a cleaner energy
future and working with our customers to take
advantage of evolving technologies.
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sources are connected to MGE’s electric
grid, such as this solar installation. MGE
owns some solar units, while others are
owned by customers.
6
Our vision for the future is a bold framework called
Energy 2030, which advances our company’s
long-standing commitment to cleaner energy,
innovative products and services, and customer engagement.
Energy 2030 builds on our now completed Energy 2015
framework. Like our new energy framework, Energy 2015
was informed by customer engagement. Under Energy
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• Eliminated coal at its downtown power plant.
• Increased energy from renewable resources by almost
12 times.
• Reduced carbon emissions by about 20% since 2005—
despite a growing population in our service area.
For our Energy 2030 framework, we once again gathered
extensive customer input. We held community meetings,
conducted customer surveys, met with numerous
stakeholders and completed our own planning and analysis.
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From all of this input, we developed our Energy 2030
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• Transition toward supplying 30% of retail electricity sales
with renewable resources by 2030. As a milestone goal,
we plan to supply 25% of retail electricity sales with
renewable resources by 2025.
• Work with customers to reduce carbon dioxide emissions
by 40% from 2005 levels by 2030.
•(cid:3) (cid:3)(cid:44)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:72)(cid:81)(cid:74)(cid:68)(cid:74)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:85)(cid:82)(cid:88)(cid:81)(cid:71)(cid:3)(cid:72)(cid:81)(cid:72)(cid:85)(cid:74)(cid:92)(cid:3)(cid:72)(cid:73)(cid:262)(cid:3)(cid:70)(cid:76)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
conservation to reduce our community’s overall energy
and peak electric use to reduce long-term costs
for everyone.
• Create a more dynamic, integrated electric grid that
supports and integrates new technology.
• Develop and test new products and services to offer
customers more control over their energy use.
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farm in the eastern half of the United States.
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also launched in 1999, remains a national leader
in customer participation. The Dane County
Humane Society is one of the many customers
who purchase green energy.
• Deepen our engagement with customers to inform our
next steps and determine over time, as technologies
evolve, how best to meet customer needs and accomplish
our long-term goals.
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Throughout 2016 and beyond, we will further engage with
customers and stakeholders as we explore new ideas and
ways to advance Energy 2030.
Technological advancements, such as affordable solar
photovoltaics and smart appliances, will give us the
opportunity to work with customers and learn how we can
serve them with new products and services. We want to use
new technology to add value for customers, shareholders
and our communities.
Our Energy 2030 framework may evolve as customer
preferences, technology, markets and regulatory
requirements change over time. With strong customer
participation and the continuing rapid development of
technology, we hope to meet and, if possible, exceed the
goals set in Energy 2030.
We remain steadfast in our commitment to meet our
fundamental obligation to serve customers and deliver
critical services to our communities as we create a more
sustainable future with new technologies, initiatives
and investments.
Building your
community
energy company
of the future
7
Working together
Listening to and partnering with our customers allow us
to better understand their priorities and how to meet
their needs going forward.
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Conversations, facilitated by Justice
and Sustainability Associates (JSA),
to gather customer input about our
collective energy future. JSA CEO
Don Edwards designed and led our
community-wide effort.
8
(cid:47)(cid:72)(cid:73)(cid:87)(cid:29)(cid:3)MGE works with customers who own electric
vehicles to learn more about vehicle charging and
how it impacts the electric distribution grid.
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Madison Fire Department personnel while their
downtown station was undergoing renovation.
W e are committed to engaging with our customers
and stakeholders. We work hard to listen, be
responsive and balance the needs and
preferences of everyone we serve. As we work toward
becoming the community energy company of the future, we
are deepening our opportunities for customer engagement.
In 2015, we embarked upon unprecedented customer
engagement that included nearly 100 meetings with various
customers. These “Community Energy Conversations” were
small-group sessions that provided opportunity for input
about our collective energy future and helped inform our
Energy 2030 framework.
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As we move forward with Energy 2030, we will continue to
engage and partner with our customers and others to meet
our goals and objectives—especially for the innovative
products and services that our customers want.
For example, as solar energy installation costs decrease and
customer interest in solar continues to rise, MGE plans to
integrate more solar energy into the electric grid. MGE is
exploring new options for solar energy, such as community
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from renewable energy generated right here at home.
We also will explore more options for customers to manage
the way they use energy. These may include home energy
automation systems, smart-appliance programs and electric
vehicle charging choices. We will work to take advantage of
evolving technologies and will work to design new programs
that provide value to customers.
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For nearly a decade, MGE has encouraged alternatives to
gasoline- and diesel-fueled vehicles. In addition to our
extensive network of public charging stations for electric
vehicles (EV), we are creating and developing new
transportation programs with our customers’ help.
In 2015, MGE launched a pilot program for EV owners.
Customers can choose to enroll for a service fee. In
exchange, MGE will install and own 240-volt EV charging
equipment at their homes. The systems, tied to cloud-based
software, allow MGE to learn more about EV charging and
controlling energy demand. This type of pilot program
helps us develop a smarter grid that can better integrate
evolving technology.
In addition, we work with local employers to help them
implement workplace charging programs. We also help
customers who are interested in fueling vehicles with
compressed natural gas, which is cleaner than gasoline
or diesel fuel.
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MGE is an essential partner in keeping our community safe.
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community-wide safety planning. And, when a downtown
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“MGE’s willingness to provide a location for Engine 1 during
our recent reconstruction allowed us to provide service to
downtown with minimal interruption in response times,” said
Fire Chief Steven Davis. “MGE is and will always be a critical
partner in public safety and our community.”
Building your
community
energy company
of the future
9
Ensuring reliability
Through training and continuous improvement, we
maintain one of the most reliable energy systems in
the country.
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training center that includes extensive
indoor and outdoor facilities for our
electric and gas operations.
10
A t MGE, reliability and safety are values we have
been committed to for decades. We will remain
committed to them as we build the community
energy company of the future.
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MGE consistently ranks among the top utilities in the
country for electric service reliability. MGE has placed in the
top four utilities for electric reliability every year since 2007,
according to an industry survey.
Most recently, MGE was ranked second in the category of
fewest number of outages and fourth in the category of
shortest duration of outages in this nationwide survey of
more than 100 electric utilities. The survey, released in 2015,
is based on 2014 statistics. In Wisconsin, MGE earned the
No. 1 spot in both categories of shortest and fewest
service interruptions.
We achieve these high marks by continually improving and
investing in our systems and training.
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(cid:44)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:86)(cid:76)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:73)(cid:262)(cid:3)(cid:70)(cid:76)(cid:72)(cid:81)(cid:87)(cid:79)(cid:92)(cid:15)(cid:3)(cid:86)(cid:68)(cid:73)(cid:72)(cid:79)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:71)(cid:72)(cid:83)(cid:72)(cid:81)(cid:71)(cid:68)(cid:69)(cid:79)(cid:92)(cid:3)
deliver electricity. We make improvements to maintain a
strong electric grid and deploy new technology for
increased reliability.
For example, MGE is installing switching automation to
reduce the potential for power outages. When loss of electric
supply is detected, the automatic switchgear quickly shifts
the electric load to an alternate available power supply. This
limits our customers’ exposure to outages.
We are making the grid smarter by investing in advanced
sensors and equipment. These upgrades will provide more
real-time information for our new Integrated Distribution
Management System. This online system combines different
programs into a comprehensive, single tool that provides
real-time analysis to prevent and minimize electric outages.
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can quickly shift electric loads when an
outage occurs. MGE continually makes
improvements for a reliable grid.
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natural gas system and take proactive
measures to ensure system and
customer safety.
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integrated system.
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We maintain exact requirements for our underground
natural gas system. MGE now uses a sophisticated, proactive
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projects. Using a robotic camera, we can detect problems
that may arise during gas installations. The robotic camera
checks other buried facilities in order to avoid any potential
damage and possible gas leaks. MGE’s new inspection
process is an effective way to keep safety in the forefront.
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Training is a key component in ensuring reliable service.
Our new state-of-the-art training facility centralizes
our operations training. Concentrating our training
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technical trainers.
The new facility features classroom and hands-on training
areas. Since most of our gas and electric crews work in the
elements, we also developed extensive outdoor training
areas to practice safe installation and maintenance
techniques. These areas include the space and equipment to
train on underground gas installations, valves and gas leak
detection. For electric operations, the facility provides
training ranging from overhead electric lines to
underground equipment.
Our training enables employees to do their jobs safely, which
in turn helps keep our customers and communities safe and
well served.
Building your
community
energy company
of the future
11
Growing innovation
The Madison area is a hotbed of economic growth, new
technology and entrepreneurship. MGE champions
smart development for a bright future.
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growing our local economy. Pam
Christenson, MGE’s Economic
Development Director, meets with
a group of entrepreneurs about
development in Madison’s Capitol
East District.
12
(cid:47)(cid:72)(cid:73)(cid:87)(cid:29)(cid:3)StartingBlock, an innovative workspace
for entrepreneurs, will be located in a new
250,000-square-foot commercial project as
shown in this architect’s rendering.
(cid:53)(cid:76)(cid:74)(cid:75)(cid:87)(cid:29)(cid:3)Otto Gebhardt, of Gebhardt Development,
LLC, has completed two high-rise, mixed-use
projects and will begin a third project, which will
include StartingBlock.
MGE plays an important role in helping to shape our
service area’s strong economy. We actively
support business development and the
entrepreneurial engine that helps keep our economy
vibrant and growing.
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Our business community is continually expanding with new
ideas and innovations that seed new companies right here at
home. Startup companies spin off from the University of
Wisconsin-Madison and from already-established
information technology and biotech companies. MGE helps
support this robust entrepreneurial scene.
In 2015, the MGE Foundation provided a $150,000 donation
to StartingBlock Madison, a proposed entrepreneurial hub in
Madison’s growing Capitol East District. StartingBlock will
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physical space and support services to grow their businesses.
Construction is expected to begin in late 2016.
StartingBlock is part of a renaissance in the Capitol East
District—an area once dominated by factories and car lots.
Now, it is home to high-rise apartments, restaurants and
businesses. More redevelopment is on the horizon. In total,
this corridor could see more than $400 million in
redevelopment by 2030. This projected business growth
will help return the district to a vibrant employment center.
This corridor is the type of smart growth that MGE fosters
and facilitates.
UW-Madison is a research powerhouse, ranking among the
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25 years. It recently launched Discovery to Product (D2P),
a new program to bring ideas and research to market. D2P
provides the resources to UW faculty, staff and students to
turn their ideas into jobs and businesses. The University
Research Park has more than 120 tenants, including a large
percentage of UW-Madison startups. Our MGE Innovation
Center, located in the park, has helped grow more than
70 early-stage companies since 1989.
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We extend funding to develop local businesses. MGE and
other investment partners formed a venture fund 11 years
ago. The Venture Debt Fund targets startup technology
companies and is vital in helping launch businesses. Through
the fund, we have helped 27 new companies.
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(cid:72)(cid:81)(cid:72)(cid:85)(cid:74)(cid:92)(cid:16)(cid:72)(cid:73)(cid:262)(cid:3)(cid:70)(cid:76)(cid:72)(cid:81)(cid:87)(cid:3)(cid:76)(cid:80)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:17)(cid:3)(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:71)(cid:3)(cid:54)(cid:68)(cid:89)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:89)(cid:82)(cid:79)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)
loan program that assists local business owners who want to
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Over the last 10 years, we have loaned more than $9 million
for 87 Shared Savings projects.
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Our service area is home to multiple, energy-intensive data
centers. Two are expanding to add capacity for new
customers. Facility Gateway Corp. recently completed its
new corporate campus in Madison. OneNeck IT Solutions
data center is undertaking a $5.2 million expansion to its
large facility. MGE works with data centers to provide
reliable power sources and backup generation that provide
the critical 24/7 reliability they need.
MGE also works with successful manufacturers that are
expanding in our area. Sub-Zero Group, Inc., the maker of
Sub-Zero and Wolf kitchen appliances, announced a
$62 million expansion of its manufacturing facility. Also, the
biotech company Promega Corp. completed construction of
its new $30 million, 100,000-square-foot processing and
production facility. The expansion is located in a state-
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(cid:90)(cid:82)(cid:85)(cid:78)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:72)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:76)(cid:262)(cid:3)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17)
Building your
community
energy company
of the future
13
Corporate leadership
Directors of MGE Energy and MGE
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Retired Director of University Research Park,
University of Wisconsin-Madison
Age 67
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President of QTI Management Services, Inc.,
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Age 55
MGEE Director since 2010
MGEE Director since 2008
(cid:41)(cid:17)(cid:3)(cid:38)(cid:88)(cid:85)(cid:87)(cid:76)(cid:86)(cid:3)(cid:43)(cid:68)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:86)
Retired Chairman of J. H. Findorff
& Son, Inc., commercial and
industrial general contractors
Age 70
MGEE Director since 1999
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Retired President of RMM Enterprises Inc.
Attorney, analyst and broker
Age 71
MGEE Director since 1996
(cid:45)(cid:82)(cid:75)(cid:81)(cid:3)(cid:53)(cid:17)(cid:3)(cid:49)(cid:72)(cid:89)(cid:76)(cid:81)
Grainger Professor and Executive Director of
Grainger Center for Supply Chain Management
at the School of Business, UW-Madison
Age 72
MGEE Director since 1998
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(cid:38)(cid:72)(cid:85)(cid:87)(cid:76)(cid:262)(cid:3)(cid:72)(cid:71)(cid:3)(cid:51)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:68)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)
tax consultant with James L. Possin
CPA, LLC. Former partner at
Grant Thornton LLP
Age 64
MGEE Director since 2009
(cid:55)(cid:75)(cid:82)(cid:80)(cid:68)(cid:86)(cid:3)(cid:53)(cid:17)(cid:3)(cid:54)(cid:87)(cid:82)(cid:79)(cid:83)(cid:72)(cid:85)
Executive Vice President and a Director of
ProActive Solutions USA LLC, a cleaning and
sanitizing products manufacturer
(cid:42)(cid:68)(cid:85)(cid:92)(cid:3)(cid:45)(cid:17)(cid:3)(cid:58)(cid:82)(cid:79)(cid:87)(cid:72)(cid:85)
Chairman, President and Chief Executive
(cid:50)(cid:73)(cid:262)(cid:3)(cid:70)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:42)(cid:40)(cid:3)(cid:40)(cid:81)(cid:72)(cid:85)(cid:74)(cid:92)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:48)(cid:68)(cid:71)(cid:76)(cid:86)(cid:82)(cid:81)(cid:3)
Gas and Electric Co.
Age 67
Age 61
MGEE Director since 2008
MGEE Director since 2000
(cid:49)(cid:82)(cid:87)(cid:72)(cid:29)(cid:3)(cid:36)(cid:74)(cid:72)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:39)(cid:72)(cid:70)(cid:17)(cid:3)(cid:22)(cid:20)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:17)
For detailed information on board members, see the MGE Energy Proxy Statement.
14
(cid:50)(cid:73)(cid:262)(cid:3)(cid:70)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:42)(cid:40)(cid:3)(cid:40)(cid:81)(cid:72)(cid:85)(cid:74)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:48)(cid:42)(cid:40)
(cid:42)(cid:68)(cid:85)(cid:92)(cid:3)(cid:45)(cid:17)(cid:3)(cid:58)(cid:82)(cid:79)(cid:87)(cid:72)(cid:85)(cid:13)
Chairman, President and
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Age 61
Years of Service, 31
(cid:38)(cid:85)(cid:68)(cid:76)(cid:74)(cid:3)(cid:36)(cid:17)(cid:3)(cid:41)(cid:72)(cid:81)(cid:85)(cid:76)(cid:70)(cid:78)
Senior Vice President –
Energy Operations
Age 56
Years of Service, 33
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Senior Vice President –
Marketing and
Communications
Age 57
Years of Service, 30
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Senior Vice President –
Energy Supply and Planning
Age 44
Years of Service, 20
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Senior Vice President,
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Secretary and Treasurer
Age 53
Years of Service, 31
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Vice President and
General Counsel
Age 42
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Assistant Vice President –
Energy Planning
Age 55
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Assistant Vice President and
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Age 35
Years of Service, 1 year
Years of Service, 33
Years of Service, 5
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Assistant Vice President
and Controller
Age 51
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Assistant Vice President –
Strategic Products and Services
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Assistant Vice President –
Gas Operations
Age 56
Age 58
Years of Service, 22
Years of Service, 33
Years of Service, 35
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15
Shareholder information
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Tuesday, May 17, 2016
Marriott Madison West
1313 John Q. Hammons Drive
Greenway Center
Middleton, Wis.
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• MGE Energy common stock trades on
The Nasdaq Stock Market®
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• Listed in newspaper stock tables as MGE
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We welcome inquiries from shareholders.
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• A dividend check or statement is not received within
10 days of the scheduled payment date.
• Your name or address changes.
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MGE Energy’s Direct Stock Purchase and Dividend
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• Buy common stock directly through the company.
• Reinvest dividends.
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website including the Direct Stock Purchase and Dividend
Reinvestment Plan.
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MGE Energy is a corporate sponsor of the NAIC, which
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information, education and support to help create successful
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MGEE Common Stock
Record Dates
March 1
June 1
Sept. 1
Dec. 1
Payment Dates
March 15
June 15
Sept. 15
Dec. 15
16
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Monday through Friday
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PO Box 1231, Madison WI 53701-1231
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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 (cid:80)(cid:74)(cid:72)(cid:72)(cid:81)(cid:72)(cid:85)(cid:74)(cid:92)(cid:17)(cid:70)(cid:82)(cid:80) and click the
My Shareholder Account link.
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If you receive more than one proxy mailing from MGE Energy,
you can reduce the mailbox clutter.
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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 (cid:80)(cid:74)(cid:72)(cid:72)(cid:81)(cid:72)(cid:85)(cid:74)(cid:92)(cid:17)(cid:70)(cid:82)(cid:80)(cid:18)(cid:83)(cid:68)(cid:83)(cid:72)(cid:85)(cid:79)(cid:72)(cid:86)(cid:86). If your MGEE shares
are held in a brokerage account, contact your broker.
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PricewaterhouseCoopers LLP
MGE Energy Shareholder
Services (left to right)
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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, 2015
[ ] 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. [ ]
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, 2015, was as follows:
MGE Energy, Inc. ....................................... $1,338,879,665
Madison Gas and Electric Company .......... $0
The number of shares outstanding of each registrant's common stock as of February 1, 2016, 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 28, 2016, 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
Forward-Looking Statements .................................................................................................................................................................. 4
Where to Find More Information ............................................................................................................................................................ 4
Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report .......................................................................... 5
PART I. ................................................................................................................................................................................................... 7
Item 1. Business. ............................................................................................................................................................................. 7
Item 1A. Risk Factors. .................................................................................................................................................................. 14
Item 1B. Unresolved Staff Comments. ......................................................................................................................................... 19
Item 2. Properties. ......................................................................................................................................................................... 20
Item 3. Legal Proceedings. ............................................................................................................................................................ 22
Item 4. Mine Safety Disclosures. .................................................................................................................................................. 22
PART II. ............................................................................................................................................................................................... 23
Item 5. Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities. ....... 23
Item 6. Selected Financial Data. ................................................................................................................................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. ............................................ 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. ...................................................................................... 49
Item 8. Financial Statements and Supplementary Data. ................................................................................................................ 52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. ......................................... 106
Item 9A. Controls and Procedures. ............................................................................................................................................. 106
Item 9B. Other Information. ....................................................................................................................................................... 106
PART III. ............................................................................................................................................................................................ 107
Item 10. Directors, Executive Officers, and Corporate Governance. .......................................................................................... 107
Item 11. Executive Compensation. ............................................................................................................................................. 107
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. ..................... 107
Item 13. Certain Relationships and Related Transactions, and Director Independence. ............................................................. 107
Item 14. Principal Accounting Fees and Services. ...................................................................................................................... 108
PART IV. ............................................................................................................................................................................................ 109
Item 15. Exhibits and Financial Statement Schedules. ................................................................................................................ 109
Signatures - MGE Energy, Inc. ................................................................................................................................................... 118
Signatures - Madison Gas and Electric Company ....................................................................................................................... 119
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, except as required by law.
Where to Find More Information
The public may read and copy any reports or other information that MGE Energy and MGE file with the SEC at the
SEC's public reference room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents also are available to
the public from commercial document retrieval services, the website maintained by the SEC at sec.gov, MGE Energy's
website at mgeenergy.com, and MGE's website at mge.com. Copies may be obtained from our websites free of charge.
Information contained on MGE Energy's and MGE's websites shall not be deemed incorporated into, or to be a part of,
this report.
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 Services
MGE State Energy Services
MGE Transco
NGV Fueling Services
Other Defined Terms:
AFUDC
Alliant
ANR
ARO
ASU
ATC
BART
Blount
CAA
CAIR
CAVR
CCR
CO2
Codification
Columbia
Cooling degree days
COSO
CPP
CSAPR
CWA
Dth
EEI
EGUs
ELG
Elm Road Units
EPA
FASB
FERC
FIP
FTR
GAAP
GHG
Heating degree days (HDD)
ICF
IRS
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 Services, LLC
MGE State Energy Services, LLC
MGE Transco Investment, LLC
NGV Fueling Services, LLC
Allowance for Funds Used During Construction
Alliant Energy Corporation
ANR Pipeline Company
Asset Retirement Obligation
Accounting Standard Update
American Transmission Company LLC
Best Available Retrofit Technology
Blount Station
Clean Air Act
Clean Air Interstate Rule
Clean Air Visibility Rule
Coal Combustion Residual
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
Clean Power Plan
Cross-State Air Pollution Rule
Clean Water Act
Dekatherms
Edison Electric Institute
Electric Generating Units
Effluent Limitations Guidelines
Elm Road Generating Station
United States Environmental Protection Agency
Financial Accounting Standards Board
Federal Energy Regulatory Commission
Federal Implementation Plan
Financial Transmission Rights
Generally Accepted Accounting Principles
Greenhouse Gas
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
5
kVA
kWh
MATS
MISO
MRO
MW
MWh
NAAQS
Nasdaq
NERC
NNG
NOV
NOx
NYSE
PCBs
PGA
PJM
PM
PPA
ppb
PSCW
REC
ROE
RTO
SCR
SEC
SIP
SO2
the State
Stock Plan
UW
VIE
WCCF
WDNR
WEPCO
Working capital
WPDES
WPL
WPSC
WRERA
XBRL
Kilovolt Ampere
Kilowatt-hour
Mercury and Air Toxins Standards
Midcontinent Independent System Operator Inc. (a regional transmission
organization)
Midwest Reliability 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 York Stock Exchange
Polychlorinated Biphenyls
Purchased Gas Adjustment clause
PJM Interconnection, LLC (a regional transmission organization)
Particulate Matter
Purchased power agreement
Parts Per Billion
Public Service Commission of Wisconsin
Renewable Energy Credit
Return on Equity
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:
Regulated electric utility operations – generating, purchasing, and distributing electricity through MGE.
Regulated gas utility operations – purchasing and distributing natural gas through MGE.
Nonregulated energy operations – owning and leasing electric generating capacity that assists MGE through
MGE Energy's wholly owned subsidiaries MGE Power Elm Road and MGE Power West Campus.
Transmission investments – representing our investment in American Transmission Company LLC, a company
engaged in the business of providing electric transmission services primarily in Wisconsin.
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, 2015, MGE supplied electric service to approximately 146,000 customers, with approximately 90%
located in the cities of Fitchburg, Madison, Middleton, and Monona and 10% in adjacent areas. Of the total number of
customers, approximately 87% were residential and 13% were commercial or industrial. Electric retail revenues for
2015, 2014, and 2013 were comprised of the following:
Year Ended December 31,
2014
2013
2015
Residential ............................................................
Commercial ...........................................................
Industrial ...............................................................
Public authorities (including the UW) ......................
Total .....................................................................
32.6%
53.2%
4.8%
9.4%
100.0%
33.3%
52.8%
4.8%
9.1%
100.0%
33.2%
52.4%
4.8%
9.6%
100.0%
Electric operations accounted for approximately 74.2%, 64.0%, and 69.0% of MGE's total 2015, 2014, and 2013
regulated revenues, respectively.
See Item 2. Properties, for a description of MGE's electric utility plant.
7
MGE is registered with North American Electric Reliability Corporation (NERC) and one regional entity, the Midwest
Reliability Organization (MRO). The essential purposes of these entities are the development and implementation of
regional and NERC reliability standards; and determining compliance with those standards, including enforcement
mechanisms.
Transmission
American Transmission Company LLC (ATC) 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 (RTO)
MISO
MGE is a nontransmission owning member of the MISO. MISO, a FERC approved RTO, is responsible for monitoring
the electric transmission system that delivers power from generating plants to wholesale power transmitters. MISO's
role is to ensure equal access to the transmission system and to maintain or improve electric system reliability in the
Midwest.
MISO maintains a bid-based energy market. MGE offers substantially all of its generation on the MISO market and
purchases much of its load requirement from the MISO market in accordance with the MISO Tariff. MGE participates
in the ancillary services market operated by MISO. That market is an extension of the existing energy market in which
MISO assumes the responsibility of maintaining sufficient generation reserves. In the ancillary services market, MISO
provides the reserves for MGE's load, and MGE may offer to sell reserves from its generating units.
MGE participates in the voluntary capacity auction, which provides an optional monthly forum for buyers and sellers of
aggregate planning resource credits to interact. Load serving entities, such as MGE, may participate in the voluntary
capacity auction potentially to obtain the necessary aggregate planning resource credits needed to meet their planning
reserve margin requirement established by the PSCW. Generator owners may participate to sell any excess aggregate
planning resource credits that are not needed by them.
PJM
MGE is a member of PJM. PJM, an RTO, is a neutral and independent party that coordinates and directs the operation
of the transmission grid within its area of coverage, administers a competitive wholesale electricity market, and plans
regional transmission expansion improvements to maintain grid reliability and relieve congestion.
Fuel supply and generation
MGE satisfies its customers' electric demand with internal generation and purchased power. During the years ended
December 31, 2015, 2014, and 2013, MGE's electric energy delivery requirements were satisfied from the following
fuel sources:
Year Ended December 31,
2014
2013
2015
Coal .......................................
Natural gas .............................
Fuel oil ...................................
Renewable sources ..................
Purchased power
Renewable ..........................
Other ..................................
Total ......................................
47.9%
9.1%
0.1%
3.0%
8.2%
31.7%
100.0%
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%
Sources used depend on market prices, generating unit availability, weather, and customer demand.
8
Generation Sources
MGE receives electric generation supply from coal-fired, gas-fired, and renewable energy sources. These sources
include owned facilities as well as facilities leased from affiliates and accounted for under our nonregulated energy
operations. See Item 2. Properties for more information regarding these generation sources, including location, capacity,
ownership or lease arrangement, and fuel source. See "Nonregulated Energy Operations" below for more information
regarding generating capacity leased to MGE by nonregulated subsidiaries.
Purchased power
MGE enters into short and long-term purchase power commitments with third parties to meet a portion of its anticipated
electric energy supply needs. The following table identifies purchase power commitments at December 31, 2015, with
unaffiliated parties for the next five years.
(Megawatts)
Purchase power commitments ...........
2016
162.4
2017
152.5
2018
152.5
2019
98.5
2020
98.5
Gas Utility Operations
MGE transports and distributes natural gas in a service area covering 1,682 square miles in seven south-central
Wisconsin counties. The service area includes the city of Madison, Wisconsin and surrounding areas.
At December 31, 2015, MGE supplied natural gas service to approximately 152,000 customers in the cities of Elroy,
Fitchburg, Lodi, Madison, Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 24 villages; and all or parts of
49 townships. Of the total number of customers, approximately 89% were residential and 11% were commercial or
industrial. Gas revenues for 2015, 2014, and 2013 were comprised of the following:
Year Ended December 31,
2014
2013
2015
Residential ............................................................
Commercial ...........................................................
Industrial (a) ...........................................................
Transportation service and other (a)...........................
Total .....................................................................
59.4%
35.7%
1.3%
3.6%
100.0%
53.0%
34.3%
11.0%
1.7%
100.0%
54.3%
33.4%
10.3%
2.0%
100.0%
(a) During the year ended December 31, 2015, a large interruptible industrial customer decided to
purchase gas from a third party supplier and to use MGE's facilities for the transport of that gas
resulting in a shift in gas revenues between industrial and transportation services.
Gas operations accounted for approximately 25.8%, 36.0%, and 31.0% of MGE's total 2015, 2014, and 2013 regulated
revenues, respectively.
MGE can curtail gas deliveries to its interruptible customers. Approximately 3% of retail gas deliveries in 2015 and
17% in 2014 were to interruptible customers.
Gas supply
MGE has physical interconnections with ANR Pipeline Company (ANR) and Northern Natural Gas Company (NNG).
MGE's primary service territory, which includes Madison and the surrounding area, receives deliveries at one NNG and
four ANR gate stations. MGE 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 5,953,689 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.
9
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.
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, 2015, 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,
LLC, 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 air and water standards, and potential climate change legislation.
Water Quality
EPA's Finalization of its Effluent Limitations Guidelines Rule for Steam Electric Power Plants
In September 2015, the EPA released its final rule for Effluent Limitations Guidelines (ELG) for the Steam Electric
Power Generating industry. The ELG rule lowers the existing permissible water discharge of metals and other pollutants
in wastewater from new and existing steam electric generation plants. The rule mostly covers certain wastewater
pollutants attributed to air pollution control and ash handling systems at coal-burning power plants with units greater
than 50 megawatt (MW) generation capacity. We are currently evaluating the rule for its effects on our operation and
expect that equipment upgrades may be necessary at our Elm Road Units and Columbia plants. The rule will go into
effect in 2018 and will apply to Wisconsin-based power plants as they renew their WPDES permits.
MGE cannot estimate costs associated with this rule with any certainty until we complete our evaluation. Management
believes compliance costs will be recovered in future rates based on previous treatment of environmental compliance
projects.
EPA Cooling Water Intake Rules (Section 316(b))
Section 316(b) of the Clean Water Act (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. Section 316(b) requirements are implemented in Wisconsin through modifications to plants' WPDES
permits, which govern plant wastewater discharges. WDNR is currently developing rules to implement the EPA 316(b)
rule.
Our WCCF, Blount, and Columbia plants are considered existing plants under this rule. Our WCCF facility already
employs a system that meets the 316(b) rule. Our Blount plant has conducted studies showing that it will likely be in
compliance with this rule when its WPDES permit is renewed in 2017. The operator of our Columbia plant plans to
conduct an intake study to demonstrate compliance with the 316(b) rule and/or identify design criteria needed to meet
the new rule requirements prior to Columbia's 2017 WPDES permit renewal. The exact requirements at Blount and
10
Columbia, however, will not be known until the WDNR finalizes its rule, approves the plant operators' approach, and
those sites' 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 sources. As of December 31, 2015, 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
Air quality regulations promulgated by the EPA and Wisconsin Department of Natural Resources (WDNR) in
accordance with the Federal Clean Air Act and the Clean Air Act Amendments of 1990 impose restrictions on emission
of particulates, sulfur dioxide (SO2), nitrogen oxides (NOx), hazardous air pollutants and other pollutants, and require
permits for operation of emission sources. These permits must be renewed periodically. Various newly enacted and/or
proposed federal and state initiatives are expected to result in additional operating and capital expenditure costs for
fossil-fueled electric generating units.
Mercury and Air Toxic Standards (MATS) Rule
In June 2015, the U.S. Supreme Court remanded the EPA's MATS rule to the D.C. Circuit Court. The Supreme Court's
decision held that the EPA was required to consider the cost of compliance when deciding that it was "appropriate and
necessary" to regulate mercury emissions from EGUs under Section 112 of the Clean Air Act. The remand was sent
back to the D.C. Circuit Court. In December 2015, the D.C. Circuit Court ruled to keep the MATS rule in place while
the EPA works to resolve the issues on remand. In November 2015, the EPA filed a proposed supplemental finding that
the cost considerations of the rule do not alter the EPAs original determination that it is "appropriate and necessary" to
regulate emissions of mercury from EGUs under Section 112 of the Clean Air Act. If the MATS rule is vacated or
further delayed, the Wisconsin mercury rule, which has similar regulatory requirements as MATS, will remain in effect
for utilities in Wisconsin. While the final version of the MATS rule remains uncertain, MGE has previously determined
that current pollution controls on its Columbia and Elm Road Units would meet both MATS and the Wisconsin mercury
rule. We do not expect any operational changes once the EPA's actions on remand are finalized.
Ozone NAAQS
In October 2015, the EPA revised the primary and secondary ozone NAAQS, lowering it to 70 ppb. The final standard
will likely cause Milwaukee County, where our Elm Road Units are located, to be designated as nonattainment for
ozone. The rule may also cause Columbia County (where our Columbia plant is located) and/or Dane County (where
our WCCF and Blount plants are located) to be in nonattainment. Attainment and nonattainment designations are based
on ozone data from 2014-2016 and thus are not known at this time. A nonattainment designation may have an effect on
operations at our facilities, however, the NAAQS process involves many steps and any effect on our generation units
will not be fully understood until the State of Wisconsin develops, receives approval for, and finalizes an
implementation plan for any counties found to be in nonattainment. MGE will continue to monitor developments,
attainment designations, and state and federal actions.
Sulfur Dioxide (SO2) NAAQS
In March 2015, the EPA entered into a court-approved consent decree requiring 1-hour SO2 attainment/nonattainment
area designations to be completed in three phases extending out until 2020. In August 2015, the EPA published its data
requirements rule that lays out expectations, designation process options, and timeframes for states and tribes to meet
for the SO2 NAAQS set in 2013. Under this new rule, states must submit their first designation proposals in July 2016
for those areas that contain large stationary sources of SO2 (sources that emit over a threshold mass of SO2, and/or over
a threshold emissions rate). These proposals must identify one of the following options for demonstrating attainment
with the 1-hour SO2 NAAQS: modeling of SO2 emissions; monitoring of SO2 emissions; or limiting large stationary
sources to 2,000 ton per year of SO2 emissions by January 13, 2017. The EPA must make final designation
determinations for these areas between 2017 and 2020 depending on the area.
In March 2015, MGE's Columbia plant was identified in the Federal Register as meeting the criteria of a large stationary
source of SO2 (based on 2012 data). As such, the State of Wisconsin must submit an attainment/nonattainment area
designation plan for Columbia County (the county in which the Columbia plant is located). Since the 2012 data was
collected, Columbia has installed pollution control equipment that has lowered its total SO2 emissions and its SO2
emissions rate. We anticipate, based on recent SO2 emissions modeling, that Columbia County will be recommended as
an attainment area by the state. An attainment recommendation, however, has not yet been submitted by the State of
Wisconsin to the EPA. Once the state submits its recommendation, the EPA will make final designations. While the
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attainment designation seems likely for Columbia, a nonattainment designation may have an adverse effect on the
operation of the Columbia plant. MGE will continue to monitor the developments with the Columbia County
designation process. Management believes compliance costs will be recovered in future rates based on previous
treatment of environmental compliance projects.
EPA's Cross-State Air Pollution Rule: Proposed Ozone Season Update based on 2008 Ozone NAAQS
In December 2015, the EPA published a proposed rule to amend the existing Cross-State Air Pollution Rule (CSAPR).
The proposed rule is designed to incorporate 2008 Ozone NAAQS attainment levels (current CSAPR is based on 1997
Ozone NAAQS levels) in 23 states, including Wisconsin, by establishing a federal implementation plan (FIP) to identify
and limit summertime NOx levels, a precursor to ozone that contributes to ozone transport. The proposed rule also
includes revisions to CSAPR that are designed to resolve issues remaining from the D.C. Circuit remand of CSAPR,
including Wisconsin's inclusion in the NOx ozone season portion of the rule.
The proposed rule's FIP goes into effect in 2017, which coincides with Phase II of the existing CSAPR. The rule as
proposed would reduce ozone season NOx emissions by about half as compared to Phase II numbers in the current rule.
We are currently evaluating the rule for its impact to MGE and thus do not know with certainty the exact impact. Initial
reviews, however, indicate that the proposed CSAPR update as written could have material effects on MGE. We will
continue to monitor the rule developments and legal developments to help determine how this rule will ultimately affect
MGE.
Clean Air Visibility Rule (CAVR)
Columbia may 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. Columbia's pollution control upgrades and
the EPA's stance that compliance with the CSAPR equals compliance with BART should mean that Columbia will not
need to do additional work to meet BART requirements. In addition, the EPA has indicated that they intend to extend
deadlines in this rule. At this time, however, the BART regulatory obligations, compliance strategies, and costs remain
uncertain due to the continued legal uncertainty surrounding CSAPR.
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.
MGE has taken steps to address GHG emissions through voluntary actions. In 2005, MGE announced its Energy 2015
Plan, which committed to ensuring a balanced, economic energy supply with reduced environmental emissions. The
Plan emphasized increased renewable energy, energy efficiency, and new cleaner generation – three strategies that
reduced GHG emissions. Under MGE's Energy 2015 Plan and other actions, our CO2 emissions declined from 2005 to
2015 by approximately 20% even though total system energy increased. In 2015, MGE announced its Energy 2030
framework and will continue to take steps to reduce CO2 emissions. Subject to regulatory approvals and other
conditions, MGE aims to increase renewable energy to 25% of retail electric sales by 2025 and to 30% by 2030. Under
our Energy 2030 framework, we will also work to reduce CO2 emissions by 40% from 2005 levels by 2030.
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 2016.
State and Regional Legislative Actions on Climate Change
It is not expected that the Wisconsin Legislature will enact broad GHG regulation in 2016. MGE continues to monitor
legislative developments.
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Greenhouse Gas Regulation
EPA's Greenhouse Gas (GHG) Reduction Guidelines under the Clean Air Act 111d Rule
In October 2015, the EPA published its Clean Power Plan rule, which became effective in December 2015, setting
guidelines for states to use in developing plans to control GHG emissions from existing fossil fuel-fired EGUs and
systems. In October 2015, the EPA also published a proposed federal implementation plan to be used as an example, or
in the event that a state does not submit a plan under this rule. When fully implemented in 2030, the Clean Power Plan
is projected to reduce GHG emissions from this sector by 32% below 2005 levels. States are given up to three years to
submit a plan or be subject to a federal plan to meet the reduction goals, and states are expected to meet interim goals
starting in 2022 and the final goal in 2030. Implementation of the rule is expected to have a direct impact on coal and
natural gas fired generating units, including possible changes in dispatch and additional operating costs.
In October 2015, many states (including Wisconsin) and other litigants filed petitions with the U.S. Court of Appeals
for the District of Columbia Circuit asking for a stay of the CPP rule, which would otherwise become effective on
December 22, 2015, and seeking expedited review of the petitioners' challenges to the CPP's legality. The parties'
request to stay the rule was denied by the D.C. Circuit on January 20, 2016, but the D.C. Circuit issued an expedited
schedule for resolving the merits of the litigation including oral arguments that will be held in early June 2016.
However, on January 26, 2016, several parties filed a request for a stay of the CPP with the U.S. Supreme Court; and on
February 9, 2016, the U.S. Supreme Court granted that request. The CPP may not now be implemented until the courts
ultimately resolve the underlying legality of the rule. Oral arguments are scheduled before the D.C. Circuit for June 2,
2016.
MGE is evaluating the CPP and related requirements. Given the pending legal proceedings and the need for a yet-to-be-
developed state implementation plan or federal implementation plan, the nature and timing of any final requirements is
subject to uncertainty. If the rule remains substantially in its present form, it is expected to have a material impact on
MGE.
Solid Waste
EPA's Coal Combustion Residuals Rule
In December 2014, the EPA finalized its Disposal of Coal Combustion Residuals from Electric Utilities (CCR) rule.
The rule became effective in October 2015. It provides that coal ash will be regulated as a solid waste, and defines what
ash use activities would be considered generally exempt beneficial reuse of coal ash. The rule also regulates landfills,
ash ponds, and other surface impoundments for coal combustion residuals by regulating their design, location,
monitoring, and operation. Landfills and impoundments that cannot meet design criteria will need to formally close
within defined timeframes.
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. Review of our Elm Road facility has indicated that the costs
to comply with this rule are not expected to be significant. We are still evaluating the rule's full effects at Columbia.
Columbia's operator has developed a preliminary implementation schedule for meeting the various deadlines spelled out
in the rule. Management believes compliance costs will be recovered in future rates based on previous treatment of
environmental compliance projects.
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 an 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 $19-29 million. See
Footnote 18.c. of the Notes to Consolidated Financial Statements for additional information regarding this matter.
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Employees
As of December 31, 2015, MGE had 708 employees. MGE employs 222 employees who are covered by a collective
bargaining agreement with Local Union 2304 of the International Brotherhood of Electrical Workers and 93 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, 2018. 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, 2018.
Financial Information About Segments
See Footnote 21 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: 61
Lynn K. Hobbie(b)
Age: 57
Jeffrey M. Keebler(b)
Age: 44
Cari Anne Renlund(b)
Age: 42
Craig A. Fenrick(b)
Age: 56
Jeffrey C. Newman(a)
Age: 53
Peter J. Waldron(b, c)
Age: 58
Title
Chairman of the Board, President and Chief Executive Officer
Effective
Date
02/01/2002
Service
Years as
an Officer
26
Senior Vice President - Marketing and Communications
02/01/2000
21
Senior Vice President - Energy Supply and Planning
Assistant VP - Energy Supply and Customer Service
Senior Director - Energy Supply Procurement
Vice President and General Counsel
Dewitt Ross & Stevens S.C. (law firm) - Partner
Wisconsin Department of Administration - Chief Legal Counsel
Senior Vice President - Energy Operations
Vice President - Energy Delivery
Vice President - Electric Transmission and Distribution
Assistant VP - Electric Transmission and Distribution
Senior Vice President, Chief Financial Officer, Secretary and
Treasurer
Vice President, Chief Financial Officer, Secretary and Treasurer
Vice President - Energy Production
Vice President and Chief Information Officer
Vice President and Operations Officer
07/23/2015
01/01/2012
05/01/2007
11/02/2015
06/11 - 10/15
01/11 - 05/11
07/23/2015
02/10/2015
01/01/2012
09/01/2006
07/23/2015
01/01/2009
07/23/2015
01/01/2012
09/01/2006
4
-
9
18
19
Note: Ages, years of service, and positions as of December 31, 2015.
(a) Executive officer of MGE Energy and MGE.
(b) Executive officer of MGE.
(c) Retired as of December 31, 2015.
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
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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.
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.
The following are significant proposed regulations that are expected to impact our operations:
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. In December 2015, the EPA published a proposed rule to amend the existing CSAPR.
The proposed rule is designed to incorporate 2008 Ozone NAAQS attainment levels (current CSAPR is based on 1997
Ozone NAAQS levels) in 23 states, including Wisconsin, by establishing a federal implementation plan (FIP) to identify
and limit summertime nitrogen oxide (NOx) levels, a precursor to ozone that contributes to ozone transport. The rule as
proposed would reduce ozone season NOx emissions by about half as compared to existing Phase II numbers. We are
15
currently evaluating the rule for its impact to MGE and thus do not know with certainty the exact impact. Initial
reviews, however, indicate that the proposed CSAPR update as written could have material effects on MGE.
In October 2015, the EPA published its Clean Power Plan rule, which became effective in December 2015, setting
guidelines for states to use in developing plans to control GHG emissions from existing fossil fuel-fired EGUs and
systems. When fully implemented in 2030, the Clean Power Plan is projected to reduce GHG emissions from this sector
by 32% below 2005 levels. Implementation of the rule is expected to have a direct impact on coal and natural gas fired
generating units, including possible changes in dispatch and additional operating costs. Given the pending legal
proceedings and the need for a yet-to-be-developed state implementation plan or federal implementation plan, the nature
and timing of any final requirements is subject to uncertainty. If the rule remains substantially in its present form, it is
expected to have a material impact on MGE.
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. Changes in power generation and storage technology could have significant effects on customer
behaviors and their energy consumption. Customers could engage in individual conservation efforts by voluntarily
reducing their consumption of electricity and pursuing alternative energy sources. Customer energy conservation could
adversely affect our results of operations by reducing our revenues without necessarily changing our operating costs due
to our obligation to serve.
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:
Affect our operating costs due to increased costs associated with lower levels of generation or the need for alternate
supply or alternate transportation,
Limit our ability to generate electricity if we are unable to arrange adequate deliveries of coal, and
Result in potentially higher costs for replacement purchased power as well as potential lost market sales
opportunities.
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A significant portion of our electric generating capacity is dependent on coal. Increased oil exploration and production
in the United States can increase the amount of oil being transported by railroad, which can affect 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 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:
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 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.
Acts of terrorism could materially and adversely impact our operations and financial condition.
Facilities for electric generation, transmission, and gas distribution are subject to the risk of being potential targets of
terrorist threats and activities. A terrorist act at our facilities could result in a disruption of our ability to generate,
transmit, transport, purchase, or distribute electricity or natural gas. A possible attack would have additional adverse
effects, including environmental ramifications, increased security and insurance costs, as well as general economic
volatility or uncertainty within our service territories. The inability to maintain operational continuity and any additional
costs incurred for repairing our facilities could materially and adversely affect our financial condition and results of
operations.
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
17
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.
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. 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
18
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.
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.
19
Item 2. Properties.
Electric Generation
Net summer rated capacity in service at December 31, 2015, was as follows:
Plants
Location
Commercial
Operation Date
Fuel
Net Summer
Rated Capacity
(MW)(1)
No. of
Units
Steam plants:
Columbia
Blount
WCCF
Elm Road Units
Combustion turbines
Portable generators
Wind turbines
Total
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
242(2,3)
103(7)
127(4)
106(2,5)
153(6)
50(7)
1(7,8)
3(7,9)
785
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, 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 48 days on
December 31, 2014, to approximately 88 days on December 31, 2015. See "Executive Overview" under Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of a possible
reduction in MGE's future ownership share in Columbia.
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
20
Road Units, and its interest in the Elm Road Units is leased to MGE. The other owners are Wisconsin Energy
Corporation, which operates the Units, and WPPI Energy, Inc. The Elm Road Units burn bituminous coal obtained from
northern West Virginia and southwestern Pennsylvania, and Powder River Basin coal from Wyoming. MGE's share of
the coal inventory supply for the Elm Road Units decreased from approximately 53 days on December 31, 2014, to
approximately 50 days on December 31, 2015.
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, 2015, MGE owned 880 miles of overhead electric distribution line and 1,210 miles of underground
electric distribution cable, all of which are located in Wisconsin. These electric distribution facilities are connected by
approximately 52 substations, installed with a capacity of 1,279,550 kVA. MGE's gas facilities include 2,690 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, 2015, 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 $65.3 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 $46.7 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.
21
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.c. of the Notes to Consolidated Financial Statements for a
description of several environmental proceedings involving MGE. See Footnote 18.d. 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.
22
PART II.
Item 5. Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities.
Market for Common Equity
MGE Energy
MGE Energy common stock is traded on Nasdaq under the symbol MGEE. On February 1, 2016, there were
approximately 38,308 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
2015
High
47.23
41.97
45.33
47.97
$
$
$
$
Low
39.18
36.75
36.46
40.66
$
$
$
$
2014
High
48.00
40.85
39.68
40.71
$
$
$
$
Low
37.25
37.25
36.30
35.66
$
$
$
$
Fourth quarter
Third quarter
Second quarter
First quarter
MGE
As of February 1, 2016, 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 2015 and 2014:
(Per share)
Fourth quarter
Third quarter
Second quarter
First quarter
2015
2014
0.295 $
0.295 $
0.283 $
0.283 $
0.283
0.283
0.272
0.272
$
$
$
$
MGE
The following table sets forth MGE's quarterly cash dividends declared during 2015 and 2014:
(In thousands)
Fourth quarter
Third quarter
Second quarter
First quarter
2015
10,000 $
10,000 $
10,000 $
- $
2014
-
9,750
9,750
7,000
$
$
$
$
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, above the PSCW authorized amount of
$43 million, that MGE may pay MGE Energy if its common equity ratio, calculated in the manner used in the rate
proceeding, is less than 55%. MGE's thirteen month rolling average common equity ratio at December 31, 2015, is
59.7%, as determined under the calculation used in the rate proceeding. MGE paid cash dividends of $30.0 million to
MGE Energy in 2015. The rate proceeding calculation includes as indebtedness imputed amounts for MGE's
23
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,
2015, approximately $353.0 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
31,025
20,350
69,200
120,575
Average Price
Paid per Share
41.61
42.44
43.26
42.70
$
$
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, 2015
November 1-30, 2015
December 1-31, 2015
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.
24
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 2015. The EEI Index reflects the consolidated performance of Edison Electric Institute investor-
owned electric utilities.
Cumulative Five-Year Total Return Comparison
(assumes $1,000 invested on 12/31/2010 with dividends reinvested)
Value of Investment at December 31,
MGEE
Russell 2000
EEI Index
2011
2012
2010
2015
$ 1,000 $ 1,134 $ 1,277 $ 1,490 $ 1,815 $ 1,900
1,552
1,715
1,115
1,225
1,000
1,000
1,548
1,384
1,624
1,784
958
1,200
2013
2014
25
Item 6. Selected Financial Data.
MGE Energy, Inc.
(In thousands, except per share amounts)
2015
For the Years Ended December 31,
2012
2013
2014
2011
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(a)
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(b) .............................................
Short-term debt ................................................
Total capitalization and short-term debt .......... $
412,528 $
143,737
7,763
564,028
419,894
19,879
124,255
8,613
(20,162)
112,706
(41,363)
71,343 $
34,668
2.06 $
1.16 $
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 $
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
976,271 $
299,792
49,753
278,735
69,470
434,868
(378,216)
1,730,673 $
948,005 $
307,582
41,124
281,514
67,697
438,898
(390,636)
1,694,184 $
794,738
892,039 $
899,257 $
285,702
284,249
265,694
32,882
18,549
19,853
299,421
292,072
288,116
57,006
61,064
64,504
401,862
412,840
431,436
(389,800)
(412,729)
(397,372)
1,579,060 $ 1,563,441 $ 1,458,882
690,458 $
395,280
-
1,085,738 $
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
(a) Reflects retrospective application of new accounting pronouncement. See Footnote 12 of the Notes to the
Consolidated Financial Statements for additional information.
(b) Includes current maturities.
26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
MGE Energy is an investor-owned public utility holding company operating through subsidiaries in five business
segments:
Regulated electric utility operations, conducted through MGE,
Regulated gas utility operations, conducted through MGE,
Nonregulated energy operations, conducted through MGE Power and its subsidiaries,
Transmission investments, representing our equity investment in ATC, and
All other, which includes corporate operations and services.
Our principal subsidiary is MGE, which generates and distributes electric energy, distributes natural gas, and represents
a majority portion of our assets, liabilities, revenues, and expenses. MGE generates and distributes electricity to
approximately 146,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and
distributes natural gas to approximately 152,000 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:
Weather, and its impact on customer sales,
Economic conditions, including current business activity and employment and their impact on customer demand,
Regulation and regulatory issues, and their impact on the timing and recovery of costs,
Energy commodity prices, including natural gas prices,
Equity price risk pertaining to pension related assets,
Credit market conditions, including interest rates and our debt credit rating,
Environmental laws and regulations, including adopted and pending environmental rule changes,
and other factors listed in Item 1A. Risk Factors.
For the year ended December 31, 2015, MGE Energy's earnings were $71.3 million or $2.06 per share compared to
$80.3 million or $2.32 per share for the same period in the prior year. MGE's earnings for the year ended December 31,
2015, were $45.4 million compared to $55.6 million for the same period in the prior year.
27
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,
2014
2013
2015
36.4 $
10.4
20.1
4.6
(0.2)
71.3 $
41.4 $
15.8
19.3
5.5
(1.7)
80.3 $
36.7
13.4
20.7
5.6
(1.5)
74.9
Our net income during 2015 compared to 2014 primarily reflects the effects of the following factors:
Electric net income decreased due to lower AFUDC and higher depreciation expense primarily related to the
Columbia environmental project being placed in service in April (Unit 2) and July 2014 (Unit 1). In addition, there
was a 0.3% decrease in electric retail sales in 2015 compared to the same period in the prior year.
Gas net income decreased due to a 27.0% decrease in gas retail sales reflecting lower customer demand compared
to the demand resulting from the extremely cold weather experienced in 2014. Heating degree days (a measure for
determining the impact of weather during the heating season) decreased by 18.9% compared to the prior year. The
average temperature in January 2015 was 20.1 degrees compared to 11.5 degrees in the prior year.
Transmission investment income reflects our share of ATC's earnings. ATC's earnings for 2015 reflect a charge
representing its estimate of its refund liability associated with the return on equity complaint filed with FERC. See
"Other Matters" below for additional information concerning ATC.
The increase in all other income primarily results from a decrease in voluntary contributions.
Our net income during 2014 compared to 2013 primarily reflects the effects of the following factors:
Electric net income increased compared to the prior period primarily related to ongoing efforts to manage electric
operating and maintenance expenditures.
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
increased by 3.4% compared to the prior year. In addition, gas operating and maintenance expenditures decreased
over the prior year.
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.
During 2015, the following events occurred:
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.
The PSCW approved a change in the electric and gas rate design as part of the December 2014 rate order. The rate
design better aligns the related fixed costs of providing gas and electric services. For example, the change lowers the gas
distribution variable rate (excluding purchased gas) by approximately two-thirds and increases 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.
ATC Return on Equity: Several parties have filed a complaint with the FERC seeking to reduce the base return on
equity (ROE) used by MISO transmission owners, including ATC. MISO's base ROE is 12.38% and ATC's base ROE
is 12.2%. In December 2015, an administrative law judge issued an initial decision authorizing transmission owners to
collect a base ROE of 10.32%. The initial decision will be reviewed by FERC and it is anticipated FERC will issue an
28
order on this issue by October 2016. In February 2015, a second complaint was filed with the FERC requesting a
reduction in the base ROE used by MISO transmission owners, including ATC, to 8.67%, with a refund effective date
retroactive to the filing date of the complaint. An initial decision from the administrative law judge is expected by
June 30, 2016. In January 2015, FERC accepted the transmission owner's request for a 50 basis-point incentive ROE
adder for participating in MISO. The adder became effective January 6, 2015, subject to refund, and FERC accepted the
transmission owner's request to defer collection of the adder pending the outcome of the first ROE complaint
proceeding. Our share of ATC's earnings for 2015 and 2014 reflects a pre-tax charge of $2.4 million and $0.7 million,
respectively, recorded by ATC for this matter representing its estimate of its refund liability for the period of
November 2013 through December 2015. Any change to ATC's ROE could result in lower equity earnings and
distributions from ATC in the future. We derived approximately 6.4% and 6.7% of our net income for the years ended
December 31, 2015 and 2014, respectively, from our investment in ATC. See "Other Matters" below for additional
information concerning ATC.
During 2016, several items may affect us, including:
2016 Rate Case Filing: In July 2015, the PSCW approved MGE's request to extend the current accounting treatment for
transmission related costs through 2016, conditioned upon MGE not filing a base rate case for 2016. This accounting
treatment will allow MGE to reflect any differential between transmission costs reflected in rates and actual costs
incurred in its next rate case filing.
2016 Annual Fuel Proceeding: In August 2015, the PSCW approved a $0.00256/kWh fuel credit to begin on
September 1, 2015, and continue throughout 2016. The fuel credit established a mechanism to return fuel savings to
electric customers as a bill credit. MGE returned $2.6 million of electric fuel-related savings in customer bill credits
during the period from September 1, 2015, through December 31, 2015. As of December 31, 2015, MGE has deferred
$9.5 million of 2015 electric fuel-related savings that are outside the range authorized by the PSCW. These costs are
subject to PSCW's annual review, expected to be completed in 2016.
In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs by $14.8 million as a result of continued
lower projected fuel costs in 2016. The PSCW will address the return of the 2016 fuel savings to customers as an update
to the fuel credit or through another approved mechanism. The return of the fuel savings to customers for 2016 will be
addressed during the PSCW's annual review during 2016 of 2015 fuel costs. MGE will defer these fuel savings until a
determination is made by the PSCW.
Loss of Industrial Customer: In November 2015, a large industrial customer announced its intention to relocate its
operations out of state and to close its manufacturing facilities within our service territory. That closure is expected to
occur in early 2017. This customer contributed approximately $3.8 million of pre-tax earnings for the year ended
December 31, 2015. While we expect that our rate request for 2017, which would be filed during 2016, will be
structured to address the effects of the closure, there could be some impact on our electric revenues during 2016 if the
customer's operations are curtailed as a result of the impending closure.
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 44% 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.
EPA's Clean Power Plan: On August 3, 2015, the EPA finalized its Clean Power Plan rule setting guidelines for states to
use in developing plans to control GHG emissions from existing fossil fuel-fired EGUs and systems. Implementation of
the rule is expected to have a direct impact on coal-based generating units, including possible changes in dispatch and
additional operating costs. MGE is currently evaluating the rule and its requirements. Although the implementation of
the rule is presently stayed as a result of a February 9, 2016, U.S. Supreme Court ruling, compliance with the rule's
requirements, including the yet-to-be-developed state implementation plan, could have a material impact on MGE if the
rule is upheld and becomes effective.
Pension and Other Postretirement Benefit Costs: Costs for pension and other postretirement benefits are affected by
actual investment returns on the assets held for those benefits and by the discount rate, which is sensitive to interest
rates, used to calculate those benefits. Interest rates and investment returns have experienced volatility since the end of
the year which could affect the value of the pension and postretirement benefit obligations. The changes in the discount
29
rates and value of plan assets are not expected to have an impact on the income statements for 2016. However, these
changes may affect benefit costs in future years. MGE expects changes in the cost for employee benefit plans will be
factored into future rate actions.
Future Generation: MGE is negotiating an agreement in 2016 with Alliant Energy that would allow MGE to reduce its
coal ownership in Columbia and give MGE potential investment ability in efficient new natural gas generation. In the
proposed agreement with Alliant Energy, MGE may acquire up to a 50 MW share of the capacity of Alliant Energy's
proposed Riverside Energy Center project. Alliant Energy's Riverside project, which calls for an approximately
700 MW expansion of its existing natural gas generation facility, is currently under review by the PSCW. A final
decision is expected this spring. If approved, project completion is expected by early 2020. Also as part of the proposed
agreement, MGE may forgo certain capital expenditures at Columbia, which Alliant Energy then will pay for in
exchange for a proportional increase in its ownership share of the plant. The arrangement excludes capital expenditures
related to the recently approved project to install additional environmental controls on Unit 2 at Columbia. MGE
currently owns 22% of Columbia.
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, 2015,
there were no borrowings outstanding under MGE Energy's or MGE's lines of credit.
The following discussion is based on the business segments as discussed in Footnote 21 of the Notes to Consolidated
Financial Statements.
Results of Operations
Year Ended December 31, 2015, Versus the Year Ended December 31, 2014
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 ......................................... $
2015
135,201 $
220,745
20,283
38,824
415,053
2,154
1,705
(6,384)
412,528 $
Revenues
2014
132,359
210,141
19,163
36,281
397,944
2,547
1,489
(7,131)
394,849
% Change
2.1 %
5.0 %
5.8 %
7.0 %
4.3 %
(15.4)%
14.5 %
10.5 %
4.5 %
2015
786,741
1,831,251
248,443
422,188
3,288,623
68,886
-
-
3,357,509
Sales (kWh)
2014
807,265
1,834,473
246,267
409,737
3,297,742
68,727
-
-
3,366,469
% Change
(2.5)%
(0.2)%
0.9 %
3.0 %
(0.3)%
0.2 %
-%
-%
(0.3)%
Cooling degree days (normal 665) ...
666
620
7.4 %
Electric operating revenues increased $17.7 million or 4.5% for the year ended December 31, 2015, due to the
following:
(In millions)
Rate changes ................................................ $
Fuel credit ....................................................
Adjustments to revenues................................
Other revenues .............................................
Volume ........................................................
Sales to the market........................................
Total ........................................................... $
14.4
3.9
0.8
0.4
(1.4)
(0.4)
17.7
30
Rate changes. Rates charged to retail customers for the year ended December 31, 2015, were $14.4 million or 3.6%
higher than those charged during the same period in the prior year.
In December 2014, the PSCW authorized MGE to increase 2015 rates for retail electric customers by $15.4 million
or 3.8%. See "2015 Rate Filing" under "Executive Overview" for more information.
Fuel Credit. During the years ended December 31, 2015 and 2014, customers received a fuel credit on their bill
related to the fuel savings of $2.6 million and $6.5 million, respectively, which increased electric revenues when
compared to the same period in the prior year.
Adjustments to Revenue. 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.
Volume. During the year ended December 31, 2015, there was a 0.3% decrease in total retail sales volumes
compared to the same period in the prior year primarily driven by lower use per residential customer.
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. 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, 2015, market volumes increased compared to the
same period in the prior year, reflecting increased opportunities for sales. In addition, market settlement resulted in
lower revenue per kWh for the year ended December 31, 2015, reflecting lower market prices.
Electric fuel and purchased power
Electric fuel and purchased power costs reflect an increase in internal generation volumes partially offset by a decrease
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, increased purchased power expense. These items are explained below.
Fuel for electric generation
The expense for fuel for internal electric generation increased $11.0 million during the year ended December 31, 2015,
compared to the same period in the prior year, due to the following:
(In millions)
Increase in per-unit cost ................................... $
Increase in volume...........................................
Total .............................................................. $
5.8
5.2
11.0
This increase in expense reflects a 13.6% increase in per-unit cost of internal electric generation primarily at Columbia
and a 10.7% increase in internal generated volume delivered to the system.
Purchased power
Purchased power expense increased $8.0 million during the year ended December 31, 2015, compared to the same
period in the prior year, due to the following:
(In millions)
Decrease in volume .................................................. $ (11.0)
Decrease in per-unit cost...........................................
(2.8)
Fuel Rules Adjustments
Increase in recorded fuel rule credit........................
Return of fuel credit in 2015..................................
Amortization of 2012 fuel rule credits in 2014.........
Return of fuel credit in 2014..................................
Total ....................................................................... $
11.6
(2.6)
6.3
6.5
8.0
The decrease in expense (before fuel rules adjustments) reflects a 3.8% decrease in the per-unit cost of purchased power
and a 12.8% decrease in the volume of power purchased from third parties primarily as a result of increased internal
generation.
31
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. 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, 2015, MGE deferred $11.6 million in fuel related cost savings to be
returned to customers. In addition, MGE returned $2.6 million of electric fuel-related savings on customer bills during
the year ended December 31, 2015. During the year ended December 31, 2014, as part of its rate freeze, MGE
amortized $6.3 million of the 2012 fuel rule credits, which reduced purchased power expense for that period. 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 increased $4.0 million during the year ended December 31, 2015,
compared to the same period in 2014. The following changes contributed to the net change:
(In millions)
Increased transmission costs........................................... $
Increased administrative and general costs .......................
Increased customer service costs.....................................
Increased production costs .............................................
Decreased customer accounts costs .................................
Total ............................................................................ $
3.3
1.6
0.5
0.1
(1.5)
4.0
For the year ended December 31, 2015, increased transmission costs are primarily related to an increase in transmission
reliability enhancements. In addition, increased administrative and general costs are primarily due to increased pension
and other postretirement benefits costs predominantly driven by a reduction in the discount rate, which has the effect of
increasing the related costs. Decreased customer account costs are primarily related to lower uncollectible accounts
receivable.
Electric depreciation expense
Electric depreciation expense increased $3.0 million for the year ended December 31, 2015, compared to the same
period in the prior year. This increase is primarily related to the completion of the Columbia environmental project. The
systems and equipment for Unit 2 and Unit 1 were placed into service in April 2014 and July 2014, respectively.
Other Electric Income
Other electric income decreased $2.4 million, primarily due to AFUDC equity related to the completion of the
Columbia environmental project. Unit 2 and Unit 1 were placed into service in April and July 2014, respectively.
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 7,080) .........
Average rate per therm of retail customer . $
2015
85,438 $
53,161
138,599
4,652
486
143,737 $
Revenues
2014
117,523
100,338
217,861
3,373
486
221,720
% Change
(27.3)%
(47.0)%
(36.4)%
37.9 %
-%
(35.2)%
0.764 $
0.876
(12.8)%
Therms Delivered
2014
110,422
138,151
248,573
46,905
-
295,478
7,887
2015
92,970
88,489
181,459
75,572
-
257,031
6,395
% Change
(15.8)%
(35.9)%
(27.0)%
61.1 %
-%
(13.0)%
(18.9)%
32
Gas revenues decreased $78.0 million or 35.2% for the year ended December 31, 2015. These changes are related to the
following factors:
(In millions)
Volume .......................................................... $
Rate/PGA changes ..........................................
Transportation and other effects .......................
Total ............................................................. $
(58.8)
(20.5)
1.3
(78.0)
Volume. For the year ended December 31, 2015, retail gas deliveries decreased 27.0% compared to the same period
in the prior year, as a result of extremely cold weather experienced in the first quarter of 2014. The decrease was also
attributable to a large commercial customer's decision to purchase gas from a third party supplier and to use MGE's
facilities for the transport of that gas. While the shift affects revenues, the impact to gas income of this shift is not
material as we do not earn margin on the natural gas commodity cost billed to customers.
Rate/PGA changes. In December 2014, the PSCW approved changes to customer rates and rate design for gas
service. Rates were reduced by 2.0%, effective January 1, 2015. Gas rate design consists of a fixed monthly customer
charge and a variable charge tied to actual usage, in addition to the separate charge for natural gas commodity costs
that is recovered through the PGA. The change shifted more of the rate recovery to the monthly charge, reflecting the
related fixed costs of providing gas services, and reduced the variable usage-based charge. Thus, gas net income was
more evenly distributed during the year and less sensitive to weather.
MGE recovers the cost of natural gas in its gas segment through the purchased gas adjustment clause (PGA). Under
the PGA, MGE is able to pass through to its gas customers the cost of gas. Changes in PGA recoveries affect
revenues but do not impact net income.
The average retail rate per therm for the year ended December 31, 2015, decreased 12.8% compared to the same
period in 2014, reflecting a $28.7 million decrease in natural gas commodity costs (PGA) offset by an $8.2 million
increase (comprised of a decrease in variable rate costs offset by an increase in fixed rate charges) related to rate
design changes. As noted previously, as a result of the rate design changes, revenues in the first and fourth quarters,
when usage is higher, were lower than in past years; and revenues in the second and third quarters, when usage is
lower, were higher than in past years.
Transportation and other effects. During the year ended December 31, 2015, transportation and other effects
increased $1.3 million primarily attributable to a large commercial customer's decision to purchase gas from a third
party supplier and to use MGE's facilities for the transport of that gas. The impact to gas income of this shift is not
material.
Cost of gas sold
For the year ended December 31, 2015, cost of gas sold decreased by $67.5 million, compared to the same period in the
prior year. The volume of gas purchased decreased 26.8%, which resulted in $38.5 million of decreased expense. The
cost per therm of natural gas decreased 27.6%, which resulted in $29.0 million of decreased expense.
Gas operating and maintenance expenses
Gas operating and maintenance expenses decreased $1.2 million for the year ended December 31, 2015, compared to
the same period in 2014. The following changes contributed to the net change.
(In millions)
Decreased customer service costs.................................... $
Decreased customer accounts costs .................................
Increased administrative and general costs .......................
Total ............................................................................ $
(1.0)
(0.9)
0.7
(1.2)
For the year ended December 31, 2015, decreased customer service costs are due to lower Focus on Energy payments,
Wisconsin's statewide energy efficiency and renewable resource program to promote energy efficiency on customer's
premises. Decreased customer accounts costs are due to lower uncollectible accounts receivable. Increased
administrative and general costs are primarily due to increased pension and other postretirement benefit costs
predominantly driven by a reduction in the discount rate.
33
Nonregulated Energy Operations - MGE Energy and MGE
For the years ended December 31, 2015 and 2014, net income at the nonregulated energy operations segment was
$20.1 million and $19.3 million, respectively. The nonregulated energy operations are conducted through
MGE Energy's subsidiaries: MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF),
which have been formed to own and lease electric generating capacity to assist MGE.
Transmission Investment Operations - MGE Energy and MGE
Transmission investment other income
For the years ended December 31, 2015 and 2014, other income at the transmission investment segment was
$7.7 million and $9.2 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.
All Other Operations - MGE Energy and MGE
Other income
The increase in all other income primarily results from a decrease in voluntary contributions.
Consolidated Income Taxes - MGE Energy and MGE
Both MGE Energy's and MGE's effective income tax rate for the years ended December 31, 2015 and 2014, was 36.7%
and 37.5%, respectively. The decrease in the effective tax rate is due in part to a higher estimated domestic
manufacturing deduction, offset by lower AFUDC equity earnings in 2015.
Noncontrolling Interest, Net of Tax - MGE
The noncontrolling interest, net of tax, reflects the accounting required for MGE Energy's interest in MGE Power Elm
Road (the Elm Road Units) and MGE Power West Campus (WCCF). MGE Energy owns 100% of MGE Power Elm
Road and MGE Power West Campus; however, due to the contractual agreements for these projects with MGE, the
entities are considered VIEs with respect to MGE and their results are consolidated with those of MGE, the primary
beneficiary of the VIEs. Also included in noncontrolling interest, net of tax, 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 statements of income:
Year Ended December 31,
(In millions)
MGE Power Elm Road ............................ $
MGE Power West Campus ...................... $
MGE Transco(a) ....................................... $
2015
16.6
7.3
2.2
$
$
$
2014
16.2
7.7
2.4
(a) In mid-2016, MGE is no longer expected to be the majority owner of MGE Transco. The change will have no
effect on MGE Energy's consolidated financial statements; however, MGE Energy's proportionate share of the
equity and net income of MGE Transco will be deconsolidated from MGE's financial statements. See further
discussion in Footnote 8 of the Consolidated Financial Statements.
34
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:
(In thousands, except cooling
degree days)
Residential ..................................$
Commercial .................................
Industrial ....................................
Other-retail/municipal ..................
Total retail ...............................
Sales to the market .......................
Other revenues ............................
Adjustments to revenues ...............
Total .......................................$
2014
132,359 $
210,141
19,163
36,281
397,944
2,547
1,489
(7,131)
394,849 $
Revenues
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
Sales (kWh)
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 %
-%
-%
-%
Cooling degree days (normal 665) .
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.
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.
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.
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.
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.
35
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. 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 as a reduction of 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 an increase in the discount rate, which has the
effect of reducing the related costs.
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.
36
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 . $
2014
117,523 $
100,338
217,861
3,373
486
221,720 $
Revenues
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 %
0.876 $
0.750
16.8 %
Therms Delivered
2013
102,599
134,619
237,218
37,778
-
274,996
7,628
2014
110,422
138,151
248,573
46,905
-
295,478
7,887
% Change
7.6 %
2.6 %
4.8 %
24.2 %
-%
7.4 %
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
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)
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 an increase in the discount rate.
37
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 statements 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
Liquidity and Capital Resources
MGE Energy and MGE have adequate liquidity to fund future operations and capital expenditures over the next twelve
months. Available resources include cash and cash equivalents, operating cash flows, liquid assets, borrowing capacity
under revolving credit facilities, and access to equity and debt capital markets.
38
Cash Flows
The following summarizes cash flows for MGE Energy and MGE during the years ended 2015, 2014, and 2013:
(In thousands)
Cash provided by/(used for):
2015
MGE Energy
2014
2013
2015
MGE
2014
2013
Operating activities ................. $
Investing activities ..................
Financing activities .................
141,185 $
(73,313)
(52,243)
128,762 $
(96,158)
(35,662)
140,267
(121,922)
4,111
$
148,460 $
(72,920)
(53,342)
128,538 $
(95,597)
(43,187)
138,684
(120,597)
(9,629)
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.
2015 vs. 2014
Cash provided by operating activities for the year ended December 31, 2015, was $141.2 million, an increase of
$12.4 million when compared to the same period in the prior year.
MGE Energy's net income decreased $9.0 million for the year ended December 31, 2015, when compared to the same
period in the prior year.
In 2015, MGE received a $10.0 million refund from the IRS for the 2014 tax year. Excluding the 2015 refund,
MGE Energy's federal and state taxes paid increased $4.7 million during the year ended December 31, 2015, when
compared to the same period in the prior year. In December 2014, bonus depreciation was extended for the year ended
December 31, 2014. Tax payments were made earlier in 2014 before the additional depreciation deduction was known.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $5.0 million in cash provided by operating
activities for the year ended December 31, 2015, primarily due to decreased receivables and decreased unbilled
revenues, partially offset by increased inventories, decreased accounts payable, and decreased current liabilities. The
decrease in current liabilities includes a fuel credit of $2.6 million that customers received on their bill in the period
September through December 2015 related to the 2015 fuel savings and $11.4 million of deferred fuel related cost
savings to be returned to customers.
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.
An increase in pension contribution resulted in an additional $10.4 million in cash used for operating activities for the
year ended December 31, 2015, 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 Energy's pension and other postretirement benefits.
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.
39
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 year ended December 31, 2014. Tax payments were made earlier in 2014
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.
MGE
2015 vs. 2014
Cash provided by operating activities for the year ended December 31, 2015, was $148.5 million, an increase of
$19.9 million when compared to the same period in the prior year.
Net income decreased $10.5 million for the year ended December 31, 2015, when compared to the same period in the
prior year.
In 2015, MGE received a $10.0 million refund from the IRS for the 2014 tax year. Excluding the 2015 refund, MGE's
federal and state taxes paid to MGE Energy decreased $3.3 million during the year ended December 31, 2015, when
compared to the same period in the prior year. In December 2014, bonus depreciation was extended for the year ended
December 31, 2014. Tax payments were made earlier in 2014 before the additional depreciation deduction was known.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $14.0 million in cash provided by operating
activities for the year ended December 31, 2015, primarily due to decreased receivables and decreased unbilled
revenues, partially offset by increased gas inventories, decreased accounts payable, and decreased other current
liabilities. The decrease in current liabilities includes a fuel credit of $2.6 million that customers received on their bill in
the period September through December 2015 related to the 2015 fuel savings and $11.4 million of deferred fuel related
cost savings to be returned to customers.
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.
An increase in pension contribution resulted in an additional $10.4 million in cash used for operating activities for the
year ended December 31, 2015, 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.
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.
40
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 year ended December 31, 2014. Tax payments were made earlier in 2014 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 $40.0 million of long-term debt.
Capital Requirements and Investing Activities
MGE Energy
2015 vs. 2014
MGE Energy's cash used for investing activities decreased $22.8 million for the year ended December 31, 2015, when
compared to the same period in the prior year.
Capital expenditures for the year ended December 31, 2015, were $72.0 million. This amount represents a decrease of
$20.6 million from the expenditures made in the same period in the prior year. The decrease primarily reflects
$16.2 million of lower expenditures on the Columbia environmental project in 2015 versus 2014 and decreased
expenditures in electric and gas distribution assets.
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.
MGE
2015 vs. 2014
MGE's cash used for investing activities decreased $22.7 million for the year ended December 31, 2015, when
compared to the same period in the prior year.
Capital expenditures for the year ended December 31, 2015, were $72.0 million. This amount represents a decrease of
$20.6 million from the expenditures made in the same period in the prior year. The decrease primarily reflects
$16.2 million of lower expenditures on the Columbia environmental project in 2015 versus 2014 and decreased
expenditures in electric and gas distribution assets.
41
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.
Capital expenditures
The following table shows MGE Energy's actual capital expenditures for both 2015 and 2014, forecasted capital
expenditures for 2016, and annual average forecasted capital expenditures for the years 2017 through 2019:
(In thousands)
For the years ended December 31,
Electric ............................................ $
Gas .................................................
Utility plant total ...........................
Nonregulated ...................................
MGE Energy total ......................... $
Actual
Forecasted
2014
2015
2016
(Annual Average)
2017-2019
68,067 $
22,104
90,171
2,505
92,676 $
49,370
18,787
68,157
3,873
72,030
$
$
63,070 $
24,690
87,760
3,484
91,244 $
68,027
29,532
97,559
3,662
101,221
The forecasted capital expenditures are based upon management's assumptions with respect to future events, including
the timing and amount of expenditures associated with compliance with environmental compliance initiatives, load
growth, and the timing and adequacy of rate recovery. Actual events may differ materially from those assumptions and
result in material changes to those forecasted amounts.
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 2015 capital requirements and cash obligations,
including dividend payments. External financing included short-term financing under existing lines of credit.
Financing Activities
MGE Energy
2015 vs. 2014
Cash used for MGE Energy's financing activities was $52.2 million for the year ended December 31, 2015, compared to
$35.7 million of cash used for the year ended December 31, 2014.
For the year ended December 31, 2015, dividends paid were $40.0 million compared to $38.4 million in the prior year.
This increase was a result of a higher dividend per share ($1.16 vs. $1.11).
For the year ended December 31, 2015, net short-term debt repayments were $7.0 million. There were no short-term
debt repayments for the same period in the prior year.
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.
42
MGE
2015 vs. 2014
During the year ended December 31, 2015, cash used for MGE's financing activities was $53.3 million compared to
$43.2 million of cash used for MGE's financing activities in the prior year.
Dividends paid from MGE to MGE Energy were $30.0 million for the year ended December 31, 2015, compared to
$26.5 million in the prior year.
Distributions to parent from noncontrolling interest, which represent distributions from MGE Power Elm Road and
MGE Power West Campus, were $14.7 million for the year ended December 31, 2015, compared to $21.4 million in the
prior year.
For the year ended December 31, 2015, net short-term debt repayments were $7.0 million. There were no short-term
debt repayments for the same period in the prior year.
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.
Dividend Restrictions
Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a lesser
degree, MGE's first mortgage bonds. The PSCW order restricts any dividends, above the PSCW authorized amount of
$43 million, that MGE may pay MGE Energy if its common equity ratio, calculated in the manner used in the rate
proceeding, is less than 55%. MGE's thirteen month rolling average common equity ratio at December 31, 2015, is
59.7% as determined under the calculation used in the rate proceeding. MGE was not restricted from paying cash
dividends in 2015. Cash dividends of $30.0 million and $26.5 million were paid by MGE to MGE Energy in 2015 and
2014, 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,
2015, approximately $353.0 million was available for the payment of dividends under this covenant.
43
Credit Facilities
At December 31, 2015, 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)
-
$
-
-
$
-
$
$
50.0
100.0
Expiration Date
June 1, 2020
June 1, 2020
Borrowings under the Credit Agreements may bear interest at a rate based upon either a "floating rate" or a "Eurodollar
Rate" adjusted for statutory reserve requirements, plus an adder based upon the credit ratings assigned to MGE's senior
unsecured long-term debt securities. The "floating rate" is calculated on a daily basis as the highest of a prime rate, a
Federal Funds effective rate plus 0.5% per annum, or a Eurodollar Rate for a one-month interest period plus 1%. The
"floating rate" adder ranges from zero to 0.125%. The "Eurodollar Rate" is calculated as provided in the Credit
Agreements. The "Eurodollar Rate" adder ranges from 0.625% to 1.125%.
The 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, 2015, the ratio of consolidated debt to consolidated total capitalization for each of
MGE Energy and MGE, as calculated under the credit agreements' covenant, were 36.4% and 36.1%, 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
2015
2014
Common shareholders' equity................
Long-term debt* ..................................
Short-term debt ....................................
*Includes the current portion of long-term debt.
63.6 %
36.4 %
-%
61.9 %
37.5 %
0.6 %
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.
44
Contractual Obligations and Commercial Commitments for MGE Energy and MGE
MGE Energy's and MGE's contractual obligations as of December 31, 2015, representing cash obligations that are
considered to be firm commitments, are as follows:
(In thousands)
MGE Energy
Long-term debt(a) ............................................ $
Repurchase-to-maturity transactions - loans(b) ........
Interest expense(c) ...........................................
Operating leases(d) ...........................................
Purchase obligations(e) ......................................
Other obligations(f) ..........................................
Total MGE Energy contractual obligations ........... $
MGE
Long-term debt(a) ............................................ $
Repurchase-to-maturity transactions - loans(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
395,508 $
3,671
277,558
12,441
543,850
23,833
1,256,861 $
395,508 $
3,671
277,558
12,441
543,850
21,516
1,254,544 $
4,266 $
706
19,394
1,615
144,987
13,138
184,106 $
4,266 $
706
19,394
1,615
144,987
10,821
181,789 $
58,810 $
984
34,689
1,956
159,184
3,098
258,721 $
58,810 $
984
34,689
1,956
159,184
3,098
258,721 $
24,212 $
922
31,791
587
104,715
1,510
163,737 $
24,212 $
922
31,791
587
104,715
1,510
163,737 $
308,220
1,059
191,684
8,283
134,964
6,087
650,297
308,220
1,059
191,684
8,283
134,964
6,087
650,297
(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) Chattel paper agreements. See Footnote 1.h. 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, 2015.
(d) Operating leases. See Footnote 18.b. 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. Voluntary
contributions to the qualified plans for 2016 are expected to be $10.0 million, which was paid in January 2016. MGE
does not expect to make contributions to the plans for 2017. The contributions for years after 2017 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.
The above amounts do not include future capital calls by ATC. On January 29, 2016, MGE Transco made a $0.5 million
capital contribution to ATC. The amount and timing of future capital calls is uncertain and primarily dependent on the
operations and expansion of ATC.
45
MGE Energy's and MGE's commercial commitments as of December 31, 2015, representing commitments triggered by
future events and including financing arrangements to secure obligations of MGE Energy and MGE, are as follows:
Total
1 Year
Expiration Within:
2-3 Years
4-5 Years
Due After
5 Years
(In thousands)
MGE Energy
Available lines of credit(a) .................$
150,000 $
MGE
Available lines of credit(b) .................$
100,000 $
- $
- $
- $
150,000 $
- $
100,000 $
-
-
(a) Amount includes the facility discussed in (b) plus an additional line of credit. MGE Energy has available at any
time a $50 million committed revolving credit agreement, expiring in June 2020. At December 31, 2015,
MGE Energy had no borrowings outstanding under this credit facility.
(b) Amount includes two committed revolving credit agreements totaling $100 million expiring in June 2020.
These credit facilities are used to support commercial paper issuances. At December 31, 2015, MGE had no
borrowings outstanding under these facilities, and MGE had no commercial paper outstanding.
Other Matters
ATC
In 2013, several parties filed a complaint with the FERC seeking to reduce the base return on equity (ROE) used by
MISO transmission owners, including ATC, "due to changes in the capital markets." The complaint 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. MISO's base ROE is 12.38% and ATC's base ROE
is 12.2%. In December 2015, an administrative law judge issued an initial decision that would reduce the transmission
owners' base ROE to 10.32%. That initial decision will be reviewed by FERC and it is anticipated FERC will issue an
order on this issue by October 2016. In February 2015, a second complaint was filed with the FERC requesting a
reduction in the base ROE used by MISO transmission owners, including ATC, to 8.67%, with a refund effective date
retroactive to the filing date of the complaint. An initial decision from the administrative law judge is expected by
June 30, 2016.
In January 2015, FERC accepted the transmission owner's request for a 50 basis-point incentive ROE adder for
participating in MISO. The adder became effective January 6, 2015, subject to refund, and FERC accepted the
transmission owner's request to defer collection of the adder pending the outcome of the first ROE complaint
proceeding.
Any change to ATC's ROE could result in lower equity earnings and distributions from ATC in the future. Our share of
ATC's earnings for 2015 reflects a charge recorded by ATC for this matter representing its estimate of its potential
refund liability for the period of November 2013 through December 2015. We derived approximately 6.4% and 6.7% of
our net income for the years ended December 31, 2015 and 2014, respectively, from our investment in ATC.
Rate Matters
In July 2015, the PSCW approved MGE's request to extend the current accounting treatment for transmission related
costs through 2016, conditioned upon MGE not filing a base rate case for 2016. This accounting treatment will allow
MGE to reflect any differential between costs reflected in rates and actual costs incurred in its next rate case filing.
Annual Fuel Proceeding
In August 2015, the PSCW approved a $0.00256/kWh fuel credit to begin on September 1, 2015, and continue
throughout 2016. The fuel credit established a mechanism to return fuel savings to electric customers as a bill credit.
MGE returned $2.6 million of electric fuel-related savings in customer bill credits during the period from September 1,
2015, through December 31, 2015. As of December 31, 2015, MGE has deferred $9.5 million of 2015 electric fuel-
related savings that are outside the range authorized by the PSCW. These costs are subject to PSCW's annual review,
expected to be completed in 2016.
46
In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs by $14.8 million as a result of continued
lower projected fuel costs in 2016. The PSCW will address the return of the 2016 fuel savings to customers as an update
to the fuel credit or through another approved mechanism. The return of the fuel savings for 2016 will be addressed
during the PSCW's annual review during 2016 of 2015 fuel costs. MGE will defer these fuel savings until a final
determination is made by the PSCW.
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:
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.
47
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.
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 2015, MGE used an assumed return on assets of 7.80% for pension and 7.06% for other
postretirement benefits. In 2016, the pension asset assumption will decrease from 7.80% to 7.65%. MGE will
decrease the postretirement benefit assumption from 7.06% to 6.97% in 2016. 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 $3.3 million, before taxes.
Discount rate. The discount rate represents the rate at which pension obligations could effectively be settled on a
present-value basis. MGE uses high-grade bond yields as a benchmark for determining the appropriate discount
rate. At December 31, 2015, MGE refined its methodology for using discount rates to measure the components of
net periodic benefit cost. The refined methodology uses individual spot rates, instead of a weighted average of the
yield curve spot rates, for measuring the service cost and interest cost components. The change in methodology
does not alter the measurement of the related benefit obligation as of December 31, 2015. Holding other
assumptions constant, a 0.5% reduction in the discount rate on the obligation balance at December 31, 2015, would
increase annual pension and other postretirement cost by approximately $2.8 million, before taxes.
Medical trend assumptions. The health care cost trend rate is the assumed rate of increase in per-capita health care
charges.
Mortality rate assumption. Expected mortality rates are used in the valuation to determine the expected duration of
future benefit payments to the plan participants. 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.
48
Accounting for Derivative Instruments
MGE accounts for derivative financial instruments, except those qualifying for the normal purchase normal sale
exception, at their fair value on the balance sheet. Fair value is determined using current quoted market prices, except
for the PPA which is valued utilizing an internally-developed pricing model. This model includes observable and
unobservable inputs.
MGE received approval from the PSCW to establish a regulatory asset or liability for the deferral of the effects of mark-
to-market accounting on contracts related to commodity hedging in MGE's regulated operations.
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 20 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 2016, fuel and purchased power costs included in MGE's base fuel
rates are $108.2 million. See Footnote 17 of the Notes to Consolidated Financial Statements for additional information.
49
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.
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, 2015, the cost
basis of these instruments exceeded their fair value by $0.8 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 sheets as a regulatory asset/liability.
MGE has also entered into a purchased power agreement that provides MGE with firm capacity and energy that began
on June 1, 2012, and ends on May 31, 2022 (the "base term"). The agreement also allows MGE an option to extend the
contract after the base term. The agreement is considered a derivative contract and is recognized at its fair value on the
consolidated balance 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, 2015, reflects a loss position of $53.3 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.
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 $3.3 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 1.39% and 8.04% during
the years ended December 31, 2015 and 2014, respectively.
Credit Risk - Counterparty
Credit risk is the loss that may result from counterparty nonperformance. MGE is exposed to credit risk primarily
through its merchant energy business. MGE uses credit policies to manage its credit risk, which include utilizing an
established credit approval process, monitoring counterparty limits, employing credit mitigation measures such as
collateral or prepayment arrangements, and using netting agreements.
Due to the possibility of extreme volatility in the prices of energy commodities and derivatives, the market value of
contractual positions with individual counterparties could exceed established credit limits or collateral provided by
those counterparties. If such a counterparty were then to fail to perform its obligations under its contract (for example,
fail to deliver the electricity MGE originally contracted for), MGE could sustain a loss that could have a material impact
on its financial results.
Additionally, if a counterparty were to default and MGE were to liquidate all contracts with that entity, MGE's credit
loss would include the loss in value of mark-to-market contracts; the amount owed for settled transactions; and
additional payments, if any, to settle unrealized losses on accrual contracts. As of December 31, 2015, no counterparties
have defaulted.
50
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 1,682 square miles in Wisconsin. Based on results for the year ended
December 31, 2015, no one customer constituted more than 10% of total operating revenues for MGE Energy and
MGE. Credit risk for electric and gas is managed by MGE's credit and collection policies, which are consistent with
state regulatory requirements.
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.
51
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, 2015.
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, 2015, has been audited
by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which
appears herein.
February 25, 2016
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, 2015.
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 25, 2016
52
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, 2015 and 2014,
and the results of their operations and their cash flows for each of the three years in the period ended December 31,
2015, 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, 2015, 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 25, 2016
53
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,
2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2015, 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 25, 2016
54
MGE Energy, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
For the Years Ended December 31,
2014
2013
2015
Operating Revenues:
Regulated electric revenues ............................................................ $
Regulated gas revenues ..................................................................
Nonregulated revenues ..................................................................
Total Operating Revenues ..........................................................
412,528 $
143,737
7,763
564,028
394,849 $
221,720
3,283
619,852
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 ..................................................................................... $
53,858
81,224
76,109
164,478
44,225
19,879
439,773
124,255
8,613
(20,162)
112,706
(41,363)
71,343 $
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 $
403,957
181,462
5,468
590,887
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
Earnings Per Share of Common Stock
(basic and diluted) ............................................................................ $
Dividends per share of common stock ................................................. $
2.06 $
1.16 $
2.32 $
1.11 $
2.16
1.07
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)
Net Income .............................................................................$
Other comprehensive income, net of tax:
Unrealized (loss) gain on available-for-sale securities, net of
tax ($67, ($54), and ($189)) ..................................................
Comprehensive Income ..........................................................$
For the Years Ended December 31,
2013
2014
2015
71,343 $
80,319 $
74,905
(101)
71,242 $
81
80,400 $
283
75,188
The accompanying notes are an integral part of the above consolidated financial statements.
55
MGE Energy, Inc.
Consolidated Statements of Cash Flows
(In thousands)
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 ......................................................
(Decrease) 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 ...............................................$
For the Years Ended December 31,
2013
2014
2015
71,343 $
80,319 $
74,905
44,225
21,927
596
3,333
(7,728)
721
4,508
(2,646)
6,254
3,658
978
(3,499)
(597)
6,645
(13,676)
-
5,143
141,185
(72,030)
(1,053)
-
(230)
(73,313)
(40,043)
(4,182)
-
(7,000)
(1,018)
(52,243)
15,629
65,755
81,384 $
19,636 $
23,800 $
(10,130) $
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)
3,963 $
1,569 $
9,892
The accompanying notes are an integral part of the above consolidated financial statements.
56
MGE Energy, Inc.
Consolidated Balance Sheets
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents ...............................................................................$
Accounts receivable, less reserves of $3,052 and $4,329, respectively .................
Other accounts receivable, less reserves of $642 and $420, respectively...............
Unbilled revenues ..........................................................................................
Materials and supplies, at average cost .............................................................
Fossil fuel .....................................................................................................
Stored natural gas, at average cost ....................................................................
Prepaid taxes .................................................................................................
Regulatory assets - current ..............................................................................
Other current assets ........................................................................................
Total Current Assets ...................................................................................
Other long-term receivables ................................................................................
Regulatory assets ...............................................................................................
Other deferred assets and other............................................................................
Property, Plant, and Equipment:
Property, plant, and equipment, net ..................................................................
Construction work in progress .........................................................................
Total Property, Plant, and Equipment ...........................................................
Investments .....................................................................................................
Total Assets ..............................................................................................$
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 ..........................................................................
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 - $1 par value - 75,000 shares authorized;
34,668 shares issued and outstanding ............................................................
Additional paid-in capital ............................................................................
Retained earnings .......................................................................................
Accumulated other comprehensive income, net of tax ....................................
Total Common Shareholders' Equity .............................................................
Long-term debt ..............................................................................................
Total Capitalization ....................................................................................
Commitments and contingencies (see Footnote 18) ...............................................
Total Liabilities and Capitalization ...........................................................$
At December 31,
2015
2014
81,384 $
37,112
7,477
25,008
19,155
13,110
16,145
35,252
9,538
10,570
254,751
5,045
148,199
5,602
65,755
41,614
7,610
31,262
17,121
8,098
21,036
38,910
8,360
10,711
250,477
2,181
156,823
4,837
1,217,094
26,351
1,243,445
73,631
1,730,673 $
1,189,077
19,029
1,208,106
71,760
1,694,184
4,266 $
-
40,830
5,067
11,215
9,515
8,343
4,910
84,146
360,785
1,050
20,785
75,680
44,935
61,820
565,055
4,182
7,000
41,655
5,086
11,241
-
6,901
13,931
89,996
338,563
1,223
22,715
90,201
46,560
50,269
549,531
34,668
316,268
339,165
357
690,458
391,014
1,081,472
-
1,730,673 $
34,668
316,268
308,007
458
659,401
395,256
1,054,657
-
1,694,184
The accompanying notes are an integral part of the above consolidated financial statements.
57
MGE Energy, Inc.
Consolidated Statements of Common Equity
(In thousands, except per share amounts)
Common Stock
Shares
Value
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
(Loss)/Income
Retained
Earnings
Total
2013
Beginning balance - December 31, 2012 .................
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 .....................
2015
Beginning balance - January 1, 2015 .....................
Cumulative effect of new accounting
principle (see Footnote 1) ..............................
Beginning balance - Adjusted .............................
Net income .................................................
Other comprehensive loss .................................
Common stock dividends declared
($1.16 per share) ........................................
Ending balance - December 31, 2015 .....................
34,668 $
34,668 $
316,268 $
228,399 $
94 $
74,905
(37,107)
283
34,668 $
34,668 $
316,268 $
266,197 $
377 $
80,319
(38,429)
(80)
81
579,429
74,905
283
(37,107)
617,510
80,319
81
(38,429)
(80)
34,668 $
34,668 $
316,268 $
308,007 $
458 $
659,401
34,668 $
34,668 $
316,268 $
308,007 $
458 $
659,401
(142)
307,865
71,343
(40,043)
(101)
34,668 $
34,668 $
316,268 $
339,165 $
357 $
(142)
659,259
71,343
(101)
(40,043)
690,458
The accompanying notes are an integral part of the above consolidated financial statements.
58
Madison Gas and Electric Company
Consolidated Statements of Income
(In thousands)
For the Years Ended December 31,
2013
2014
2015
Operating Revenues:
Regulated electric revenues ...................................................$
Regulated gas revenues .........................................................
Nonregulated revenues .........................................................
Total Operating Revenues .................................................
412,550 $
143,752
7,763
564,065
394,871 $
221,741
3,283
619,895
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 ..............................................
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 ...........................................$
53,866
81,237
76,124
163,622
44,178
19,879
38,159
477,065
87,000
712
7,728
(3,247)
(345)
4,848
91,848
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
20,520
94
(231)
20,383
71,465 $
20,927
62
(1,142)
19,847
81,938 $
403,980
181,477
5,468
590,925
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
20,087
(21)
(1,035)
19,031
76,445
(26,097)
45,368 $
(26,310)
55,628 $
(27,438)
49,007
The accompanying notes are an integral part of the above consolidated financial statements.
Madison Gas and Electric Company
Consolidated Statements of Comprehensive Income
(In thousands)
For the Years Ended December 31,
2014
2013
2015
Net Income ................................................................................. $
Other comprehensive income, net of tax:
Unrealized (loss) gain on available-for-sale securities, net of
tax ($81, $33, and ($126)) .........................................................
Comprehensive Income .............................................................. $
Less: Comprehensive Income Attributable to Noncontrolling
Interest, net of tax ....................................................................
Comprehensive Income Attributable to MGE............................. $
71,465 $
81,938 $
76,445
(121)
71,344 $
(48)
81,890 $
188
76,633
(26,097)
45,247 $
(26,310)
55,580 $
(27,438)
49,195
The accompanying notes are an integral part of the above consolidated financial statements.
59
Madison Gas and Electric Company
Consolidated Statements of Cash Flows
(In thousands)
For the Years Ended December 31,
2014
2013
2015
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 .........................................................
(Decrease) 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 .................................................. $
71,465 $
81,938 $
76,445
44,178
18,843
596
3,333
(7,728)
1,223
11,079
(2,647)
6,254
4,824
976
(3,587)
(18)
1,885
6,645
(13,677)
-
4,816
148,460
(72,030)
(710)
(180)
(72,920)
(30,000)
(14,708)
3,230
(4,182)
-
(7,000)
(682)
(53,342)
22,198
4,562
26,760 $
19,636 $
29 $
- $
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
-
3,963 $
1,569 $
9,892
The accompanying notes are an integral part of the above consolidated financial statements.
60
Madison Gas and Electric Company
Consolidated Balance Sheets
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents ............................................................................................. $
Accounts receivable, less reserves of $3,052 and $4,329, respectively ...............................
Affiliate receivables .....................................................................................................
Other accounts receivable, less reserves of $642 and $420, respectively.............................
Unbilled revenues ........................................................................................................
Materials and supplies, at average cost ...........................................................................
Fossil fuel ...................................................................................................................
Stored natural gas, at average cost ..................................................................................
Prepaid taxes ...............................................................................................................
Regulatory assets - current ............................................................................................
Other current assets ......................................................................................................
Total Current Assets .................................................................................................
Affiliate receivable long-term ...........................................................................................
Regulatory assets .............................................................................................................
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 ........................................................................................
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,
2015
2014
26,760 $
37,112
542
7,390
25,008
19,155
13,110
16,145
34,279
9,538
10,544
199,583
4,766
148,199
8,486
4,562
41,614
7,112
7,524
31,262
17,121
8,098
21,035
39,103
8,360
10,683
196,474
5,295
156,823
4,977
1,216,415
26,351
1,242,766
69,984
1,673,784 $
1,188,351
19,029
1,207,380
68,402
1,639,351
4,266 $
-
40,742
5,021
11,215
9,515
8,343
4,791
83,893
352,626
1,050
20,785
75,680
44,935
61,817
556,893
4,182
7,000
41,654
5,039
11,241
-
6,901
11,350
87,367
333,502
1,223
22,715
90,201
46,560
50,267
544,468
17,348
192,417
291,888
23
501,676
140,308
641,984
391,014
1,032,998
-
1,673,784 $
17,348
192,417
276,662
144
486,571
125,689
612,260
395,256
1,007,516
-
1,639,351
The accompanying notes are an integral part of the above consolidated financial statements.
61
Madison Gas and Electric Company
Consolidated Statements of Common Equity
(In thousands)
Additional
Common Stock
Shares
Value
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)/Income
Non-
Controlling
Interest
Total
2013
Beginning balance - December 31, 2012 .... 17,348 $ 17,348 $
Net income ....................................
Other comprehensive income ................
Cash dividends paid to parent by MGE .....
Equity contribution received by
noncontrolling interest ....................
Distributions to parent from
noncontrolling interest ....................
192,417 $
223,527 $
4 $
117,470 $
550,766
49,007
(25,000)
27,438
188
76,445
188
(25,000)
1,420
1,420
Ending balance - December 31, 2013 ....... 17,348 $ 17,348 $
192,417 $
247,534 $
192 $
118,963 $
(27,365)
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 ....................
principle (see Footnote 1) ................
Beginning balance - Adjusted ...............
Net income ....................................
Other comprehensive loss ....................
Cash dividends paid to parent by MGE .....
Equity contribution received by
noncontrolling interest ....................
Distributions to parent from
noncontrolling interest ....................
55,628
(26,500)
26,310
(48)
(27,365)
576,454
81,938
(48)
(26,500)
1,775
1,775
(21,359)
(21,359)
612,260
(142)
276,520
45,368
(30,000)
26,097
(121)
(142)
612,118
71,465
(121)
(30,000)
3,230
3,230
(14,708)
(14,708)
641,984
Ending balance - December 31, 2014 ....... 17,348 $ 17,348 $
192,417 $
276,662 $
144 $
125,689 $
2015
Beginning balance - January 1, 2015 ....... 17,348 $ 17,348 $
Cumulative effect of new accounting
192,417 $
276,662 $
144 $
125,689 $
612,260
Ending balance - December 31, 2015 ....... 17,348 $ 17,348 $
192,417 $
291,888 $
23 $
140,308 $
The accompanying notes are an integral part of the above consolidated financial statements.
62
Notes to Consolidated Financial Statements
December 31, 2015, 2014, and 2013
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, MGE 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" on the consolidated balance sheets.
63
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 sheets. As of December 31, 2015 and
2014, the receivable – margin account balance of $2.3 million and $2.2 million, respectively, is shown net of
any collateral posted against derivative positions. As of December 31, 2015 and 2014, there was $1.0 million
and $2.2 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 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, and renewable energy
credits (RECs). MGE values natural gas in storage, fossil fuels, and materials and supplies using average
cost.
REC allowances are included in "Materials and supplies" on the consolidated balance sheets and are
recorded based on specific identification. These allowances are charged to purchase power expense as they
are used in operations. MGE's REC allowance balances as of December 31, 2015 and 2014, were
$0.3 million and $0.8 million, respectively.
h. Chattel Paper Agreements - MGE Energy and MGE.
MGE makes available to qualifying customers a financing program for the purchase and installation of
energy-related equipment that will provide more efficient use of utility service at the customer's property.
The energy-related equipment installed at the customer sites is used to secure the customer loans. MGE is a
party to a chattel paper purchase agreement with a financial institution under which it can sell or finance an
undivided interest with recourse, in up to $10.0 million of the financing program receivables, until July 31,
2016. The length of the MGE guarantee to the financial institution varies from one to ten years depending on
the term of the underlying customer loan. The loan balances outstanding at December 31, 2015, approximate
the fair value of the energy-related equipment acting as collateral. MGE accounts for these agreements as
secured borrowings.
Prior to the Transfers and Servicing Asset authoritative accounting guidance that became effective in 2015,
these agreements were treated as off-balance sheet arrangements. Beginning January 1, 2015, these
agreements are included as assets and liabilities in the consolidated balance sheets. As of December 31,
2015, assets ("Other accounts receivable" and "Other deferred assets") and liabilities ("Accounts payable"
and "Other deferred liabilities") increased approximately $3.7 million as a cumulative result of the guidance.
In addition, the cumulative effect of this guidance resulted in a $0.1 million reduction in retained earnings.
As of December 31, 2015, the remaining contractual maturities of the chattel paper agreements were as
follows:
(In thousands)
Repurchase-to-Maturity Transactions:
Loans ...................................................$
2016
2017
2018
2019
2020
Thereafter
706 $
476 $
508 $
477 $
445 $
1,059
64
i. 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.
j. 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.
k. 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
2015
2.6 %
1.7 %
2.4 %
2014
2.6 %
1.7 %
2.4 %
2013
2.7 %
1.7 %
2.3 %
l. 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 consolidated 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.
m. 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.
n. 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
65
by means of prospective monthly adjustments to rates. At December 31, 2015 and 2014, MGE had over
collected $0.8 million and $1.2 million, respectively. These amounts are included in "Other current
liabilities" on the consolidated balance sheets.
o. 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.
p. 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
and MGE's consolidated income statements 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.
q. Allowance for Funds Used During Construction - MGE Energy and MGE.
Allowance for funds used during construction is included in utility plant accounts and represents the cost of
borrowed funds used during plant construction and a return on shareholder's capital used for construction
purposes. In the consolidated income statements, the cost of borrowed funds (AFUDC-debt) is presented as
an offset to "Interest expense" and the return on shareholder's capital (AFUDC-equity funds) is shown as an
item within "Other income." For 2015, as approved by the PSCW, MGE capitalized AFUDC-debt and equity
on 50% of applicable average construction work in progress at 7.93%. For both 2014 and 2013, MGE
capitalized AFUDC-debt and equity on 50% of applicable average construction work in progress at 8.21%.
For 2015 and 2014, 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.
r.
Investments - MGE Energy and MGE.
Investments in limited liability companies that have specific ownership accounts in which MGE Energy or
MGE's ownership interest is more than minor and are considered to have significant influence are accounted
for using the equity method. All other investments are carried at fair value or at cost, as appropriate. See
Footnote 4 for further information.
s. Capitalized Software Costs - MGE Energy and MGE.
Property, plant, and equipment includes the net book value of capitalized costs of internal use software
totaling $12.0 million and $8.4 million at December 31, 2015 and 2014, respectively. During 2015, 2014,
and 2013, MGE recorded $2.2 million, $1.6 million, and $1.5 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.
t.
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, 2015, 2014, and 2013.
66
u. 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.
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 $14.7 million, $14.6 million, and $13.8 million for the years ended December 31, 2015, 2014, and 2013,
respectively.
Operating income taxes, including tax credits and license fee tax, are included in rates for utility related
items.
v. 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.
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.
67
x. Derivative and Hedging Instruments - MGE Energy and MGE.
As part of regular operations, MGE enters into contracts, including options, swaps, futures, forwards, and
other contractual commitments, to manage its exposure to commodity prices. MGE recognizes all derivatives
in the consolidated balance sheets at fair value, with changes in the fair value of derivative instruments to be
recorded in current earnings or deferred in accumulated other comprehensive income (loss), depending on
whether a derivative is designated as, and is effective as, a hedge and on the type of hedge transaction.
Derivative activities are in accordance with the company's risk management policy.
If the derivative qualifies for regulatory deferral, the derivatives are marked to fair value and are offset with
a corresponding regulatory asset or liability. Cash flows from such derivative instruments are classified on a
basis consistent with the nature of the underlying hedged item.
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 sheets related to its interest in this
VIE:
(In thousands)
Property, plant, and equipment, net ........... $
Construction work in progress ..................
Affiliate receivables ................................
Deferred income taxes .............................
Long-term debt .......................................
Noncontrolling interest ............................
2015
177,904 $
2,400
-
40,865
65,305
79,113
2014
179,620
1,976
1,742
40,044
67,972
72,537
Long-term debt consists of $65.3 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, 2015, 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 $45.5 million represents the equity portion and was recognized over the
period allowed for recovery in rates which ended in 2015.
b. MGE Power West Campus.
MGE Power West Campus is not a subsidiary of MGE; however, it has been consolidated in the financial
statements of MGE. MGE Power West Campus was created for the purpose of owning new generating
assets. Its sole principal asset is the WCCF, which it leases to MGE pursuant to a long-term lease. MGE is
responsible for operation of the plant during the term of the lease. Based on the nature and terms of these
contractual relationships, MGE absorbs a majority of the expected losses, residual value, or both, associated
with the ownership and operation of the WCCF and therefore holds a variable interest in MGE Power West
68
Campus, even though it has no equity interest in MGE Power West Campus. MGE has the power to direct
the activities that most significantly impact WCCF's economic performance and is also the party most
closely associated with MGE Power West Campus. As a result, MGE is the primary beneficiary. At
December 31, MGE has included the following significant accounts on its consolidated balance sheets
related to its interest in this VIE:
(In thousands)
Property, plant, and equipment, net ............$
Affiliate receivables .................................
Deferred income taxes ..............................
Long-term debt ........................................
Noncontrolling interest .............................
2015
2014
84,403 $
5,295
19,612
46,703
37,603
86,763
5,862
23,813
48,218
30,755
Long-term debt consists of $46.7 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, 2015, 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 were recovered
in rates over a 10 year period that started in 2005 and ended in 2015.
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, 2015 and 2014, 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:
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 ............................. $
MGE Energy
2015
2014
MGE
2015
2014
$
1,147,701 $
384,163
1,531,864
578,410
953,454
1,110,953
369,975
1,480,928
559,615
921,313
1,147,718 $
384,175
1,531,893
578,410
953,483
1,110,970
369,987
1,480,957
559,615
921,342
315,589
51,949
263,640
313,152
45,388
267,764
314,750
51,818
262,932
312,314
45,305
267,009
23,837
2,514
1,243,445 $
16,988
2,041
1,208,106
$
23,837
2,514
1,242,766 $
16,988
2,041
1,207,380
MGE's utility plant is subject to the lien of its Indenture of Mortgage and Deed of Trust. As of December 31,
2015 and 2014, there was $1.2 million of bonds outstanding under that indenture. See Footnote 9 for further
discussion of the mortgage indenture.
69
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 ...........................
Gross unrealized losses ..........................
Fair value .................................................
Equity method investments:
ATC .....................................................
Other ....................................................
Total equity method investments .................
Other investments .....................................
Total ........................................................ $
MGE Energy
MGE
2015
2014
2015
2014
2,225 $
599
(2)
2,822
69,466
1,184
70,650
159
73,631 $
1,964
765
-
2,729
67,673
1,199
68,872
159
71,760
$
480 $
40
(2)
518
69,466
-
69,466
-
$
69,984 $
489
240
-
729
67,673
-
67,673
-
68,402
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, 2015, 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 ........
2015
MGE Energy
2014
19 $
10
38 $
21
2013
2015
39 $
2
19 $
10
MGE
2014
2013
16
(3)
- $
-
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, 2015, 2014, and 2013, MGE Transco recorded the following:
(In thousands)
Equity in earnings from investment in ATC ........................... $
Dividends received from ATC ..............................................
Capital contributions to ATC ................................................
2015
2014
2013
7,728 $
6,645
710
9,150 $
7,740
1,775
9,434
7,404
1,420
At December 31, 2015 and 2014, 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. On
January 29, 2016, MGE Transco made a $0.5 million capital contribution to ATC.
At December 31, 2015 and 2014, 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 consolidated financial statements as noncontrolling interest.
In mid-2016, MGE is no longer expected to be the majority owner of MGE Transco. The change will have
no effect on MGE Energy's consolidated financial statements; however, MGE Energy's proportionate share
of the equity and net income of MGE Transco will be deconsolidated from MGE's financial statements. See
further discussion in Footnote 8.
70
ATC's summarized financial data for the years ended December 31, 2015, 2014, and 2013 is as follows:
(In thousands)
Income statement data for the year ended December 31,
Operating revenues .............................................................. $
Operating expenses ..............................................................
Other income ......................................................................
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...................................... $
2015
2014
615,836 $
(319,321)
1,176
(97,250)
200,441 $
2015
80,520 $
3,957,576
4,038,096 $
330,248 $
1,800,029
244,991
1,662,828
4,038,096 $
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 $
2013
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
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% (242 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 was $38.2 million, $28.1 million, and $37.5 million for
the years ended December 31, 2015, 2014, and 2013, respectively.
Each owner provides its own financing and reflects its respective portion of facilities and operating costs in
its financial statements. MGE's interest in Columbia, included in its gross utility plant in service, and the
related accumulated depreciation reserves at December 31 were as follows:
(In thousands)
Utility plant .....................................................$
Accumulated depreciation.................................
Property, plant, and equipment, net ....................
Construction work in progress ...........................
Total property, plant, and equipment ..................$
2015
2014
273,762 $
(84,864)
188,898
17,110
206,008 $
268,597
(80,645)
187,952
6,941
194,893
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 was $20.9 million, $20.3 million, and $13.4 million for the years ended
December 31, 2015, 2014, and 2013, respectively.
71
MGE Power Elm Road's interest in the portion of the Elm Road Units in-service and the related accumulated
depreciation reserves at December 31 were as follows:
(In thousands)
Nonregulated plant ...........................................$
Accumulated depreciation.................................
Property, plant, and equipment, net ....................
Construction work in progress ...........................
Total property, plant, and equipment ..................$
2015
2014
202,326 $
(24,422)
177,904
2,400
180,304 $
199,582
(19,962)
179,620
1,976
181,596
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 ....................$
2015
2014
111,141 $
(26,738)
84,403 $
111,453
(24,691)
86,762
Operating charges are allocated to the UW based on formulas contained in the operating agreement. Under
the provisions of this arrangement, the UW is required to reimburse MGE for their allocated portion of fuel
and operating expenses. For the years ended December 31, 2015, 2014, and 2013, the UW allocated share of
fuel and operating costs was $3.7 million, $2.8 million, and $4.9 million, respectively.
6.
Regulatory Assets and Liabilities - MGE Energy and MGE.
The following regulatory assets and liabilities are reflected in MGE's consolidated balance sheets as of
December 31:
(In thousands)
2015
2014
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 ................................................ $
4,849
10,672
54,083
368
8,950
78,181
634
157,737
231
9,515
643
1,559
17,137
327
888
30,300
$
$
$
$
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
72
MGE expects to recover its regulatory assets and return its regulatory liabilities through rates charged to
customers based on PSCW decisions made during the ratemaking process or based on PSCW long-standing
policies and guidelines. The adjustments to rates for these regulatory assets and liabilities will occur over the
periods either specified by the PSCW or over the corresponding period related to the asset or liability.
Management believes it is probable that MGE will continue to recover from customers the regulatory assets
described above based on prior and current ratemaking treatment for such costs. All regulatory assets for which a
cash outflow had been made are earning a return, 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 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.c.
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.
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
73
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.
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 has
collected the carrying costs in rates over a six year period that ended in 2015. 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, 2015 and 2014, 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, 2015 and 2014, MGE Energy paid $40.0 million (or $1.16 per share)
and $38.4 million (or $1.11 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, 2015 and 2014, MGE paid $30.0 million and $26.5 million, respectively, in cash
dividends to MGE Energy.
74
b. Dilutive Shares Calculation - MGE Energy.
MGE Energy does not hold any dilutive securities.
8.
Noncontrolling Interest - MGE.
The noncontrolling interest on MGE's consolidated balance sheets at December 31 was as follows:
(In thousands)
MGE Power Elm Road (a) .......................................................... $
MGE Power West Campus (a).....................................................
MGE Transco (b) .......................................................................
Total Noncontrolling Interest ..................................................... $
2015
79,113 $
37,603
23,592
140,308 $
2014
72,537
30,755
22,397
125,689
The net income attributable to noncontrolling interest, net of tax, for the years ended December 31, 2015, 2014,
and 2013 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.....$
2015
2014
2013
16,577 $
7,348
2,172
26,097 $
16,160 $
7,666
2,484
26,310 $
17,373
7,657
2,408
27,438
(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 consolidated financial statements as noncontrolling interest.
(b) At December 31, 2015, 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 consolidated financial statements as noncontrolling interest. In mid-2016, MGE is no longer
expected to be the majority owner of MGE Transco. The change will have no effect on MGE Energy's
consolidated financial statements; however, MGE Energy's proportionate share of the equity and net income
of MGE Transco will be deconsolidated from MGE's financial statements. No gain or loss is expected to be
recognized on the date MGE ceases to have a controlling financial interest.
75
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...................................... $
2015
MGE
Energy
MGE
2014
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
28,063
18,640
15,000
40,138
25,167
28,000
20,000
20,000
275,008
(4,266)
(228)
391,014 $
30,000
20,000
25,000
25,000
100,000
20,000
15,000
30,000
15,000
28,063
18,640
15,000
40,138
25,167
28,000
20,000
20,000
275,008
(4,266)
(228)
391,014
$
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
28,954
19,264
15,000
41,805
26,167
28,000
20,000
20,000
279,190
(4,182)
(252)
395,256
(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, 2015, approximately $353.0 million was available for the payment of
dividends under this covenant.
(b) The indenture under which MGE's Medium-Term notes are issued provides that those notes will be
entitled to be equally and ratably secured in the event that MGE issues any additional first mortgage
bonds.
(c) 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,
2015, MGE was in compliance with the covenant requirements.
76
(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, 2015, MGE Power West
Campus was 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, 2015, MGE Power Elm Road was in
compliance with the covenant requirements.
b. Long-Term Debt Maturities.
Below is MGE Energy's and MGE's aggregate maturities for all long-term debt for years following the
December 31, 2015, consolidated balance sheets.
(In thousands)
2016 .......................... $
2017 ..........................
2018 ..........................
2019 ..........................
2020 ..........................
Future years ...............
Total.......................... $
MGE
Energy
4,266 $
34,358
24,452
4,553
19,659
308,220
395,508 $
MGE *
4,266
34,358
24,452
4,553
19,659
308,220
395,508
*Includes $46.7 million for MGE Power West Campus and $65.3 million for MGE Power Elm Road, all of
which are consolidated with MGE's debt (see Footnote 2 for further information).
10. Notes Payable to Banks, Commercial Paper, and Lines of Credit.
a. MGE Energy.
At December 31, 2015, MGE Energy had an unsecured, committed revolving line of credit of $50 million
expiring June 1, 2020. At December 31, 2015, 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, 2015, MGE Energy was in compliance with the covenant requirements.
b. MGE.
For short-term borrowings, MGE generally issues commercial paper (issued at the prevailing discount rate at
the time of issuance), which is supported by unused committed bank lines of credit. At December 31, 2015,
MGE had two unsecured, committed revolving lines of credit for a total of $100 million expiring June 1,
2020. At December 31, 2015, no borrowings were outstanding under these facilities, and MGE had no
commercial paper outstanding.
The agreements require MGE to maintain a ratio of consolidated debt to consolidated total capitalization not
to exceed a maximum of 65%. The ratio calculation excludes assets, liabilities, revenues, and expenses
included in MGE's financial statements as the result of the consolidation of VIEs, such as MGE Power West
Campus and MGE Power Elm Road. A change in control constitutes a default under the 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, 2015,
MGE was in compliance with the covenant requirements.
77
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,
2014
2015
2013
150,000 $
- $
-%
17,500 $
1,511 $
0.17%
100,000 $
- $
-%
17,500 $
1,511 $
0.17%
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%
(a) MGE Energy short-term borrowings include MGE Energy and MGE lines of credit and MGE
commercial paper.
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 accounting standard clarifies that fair value should be based on
the assumptions market participants would use when pricing the asset or liability including assumptions about
risk. The standard also establishes a three level fair value hierarchy based upon the observability of the
assumptions used and requires the use of observable market data when available. The levels are:
Level 1 - Pricing inputs are quoted prices within active markets for identical assets or liabilities.
Level 2 - Pricing inputs are quoted prices within active markets for similar assets or liabilities; quoted prices
for identical or similar instruments in markets that are not active; and model-derived valuations that are
correlated with or otherwise verifiable by observable market data.
Level 3 - Pricing inputs are unobservable and reflect management's best estimate of what market participants
would use in pricing the asset or liability.
a. Fair Value of Financial Assets and Liabilities Recorded at the Carrying Amount.
At December 31, 2015 and 2014, 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's 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.
78
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* ...................................
2015
2014
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
81,384 $
81,384
$
65,755 $
65,755
-
395,508
-
435,767
7,000
399,690
7,000
457,420
26,760 $
26,760
$
4,562 $
4,562
-
395,508
-
435,767
7,000
399,690
7,000
457,420
*Includes long-term debt due within one year.
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 ........................................$
Fair Value as of December 31, 2015
Total
Level 1
Level 2
Level 3
234 $
759
993 $
54,316 $
3,145
57,461 $
234 $
148
382 $
54,316 $
3,145
57,461 $
- $
759
759 $
581 $
-
581 $
- $
148
148 $
581 $
-
581 $
- $
-
- $
- $
3,145
3,145 $
- $
-
- $
- $
3,145
3,145 $
234
-
234
53,735
-
53,735
234
-
234
53,735
-
53,735
79
(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 ........................................$
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
(a) These amounts are shown gross and exclude $1.0 million and $2.2 million of collateral
that was posted against derivative positions with counterparties as of December 31, 2015
and 2014, respectively.
No transfers were made in or out of Level 1 or Level 2 for the year ended December 31, 2015.
Investments include exchange-traded investment securities valued using quoted prices on active exchanges
and are therefore classified as Level 1.
Derivatives include exchange-traded derivative contracts, over-the-counter transactions, a purchased power
agreement, and FTRs. Most exchange-traded derivative contracts are valued based on unadjusted quoted
prices in active markets and are therefore classified as Level 1. A small number of exchange-traded
derivative contracts are valued using quoted market pricing in markets with insufficient volumes and are
therefore considered unobservable and classified as Level 3. Transactions done with an over-the-counter
party are on inactive markets and are therefore classified as Level 3. These transactions are valued based on
quoted prices from markets with similar exchange-traded transactions. FTRs are priced based upon monthly
auction results for identical or similar instruments in a closed market with limited data available and are
therefore classified as Level 3.
The purchased power agreement (see Footnote 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
80
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 department. On a quarterly basis,
management in the Energy Supply and Finance departments 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
2015
96.9%
95.1%
2014
98.1%
95.0%
60%-75%
40%-25%
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.
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 .............................................
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) ...............................................$
2015
(53,986) $
2014
(64,628) $
2013
(72,346)
484
-
(6,635)
-
23,052
35
-
(16,451)
-
10,642
-
5,129
-
26,382
(125)
-
(31,386)
-
(53,501) $
(53,986) $
7,718
-
(2,618)
(108)
23,726
(2)
-
(20,998)
-
(64,628)
- $
- $
-
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 .........................................................$
2015
2014
2013
(6,663) $
28
(6,635) $
5,137 $
(8)
5,129 $
(2,618)
-
(2,618)
(b) MGE's exchange-traded derivative contracts, over-the-counter party transactions, purchased
power agreement, and FTRs are subject to regulatory deferral. These derivatives are therefore
marked to fair value and are offset in the financial statements with a corresponding regulatory
asset or liability.
81
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 ............. $
2015
MGE Energy
2014
2013
2015
MGE
2014
2013
16,837 $
2,774
15,951
5,976
(175)
41,363 $
(891) $
(589)
(1,508) $
8,213
19,295 $
3,443
637 $
(451)
(448)
8,322
39,284
10,600
(219)
48,185 $
37,203
1,163
(212)
44,859 $
13,538
5,305
(175)
41,406 $
38,553
10,625
(219)
49,145 $
36,937
1,223
(212)
45,822
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
2014
35.0 %
5.1 %
(0.2)%
(1.7)%
-%
(0.8)%
0.1 %
37.5 %
2015
35.0 %
5.2 %
(0.2)%
(1.8)%
(1.4)%
(0.1)%
-%
36.7 %
2013
35.0 %
5.1 %
(0.2)%
(1.5)%
(0.2)%
(0.7)%
-%
37.5 %
2015
35.0 %
5.2 %
(0.2)%
(1.8)%
(1.4)%
(0.1)%
-%
36.7 %
MGE
2014
35.0 %
5.1 %
(0.2)%
(1.7)%
-%
(0.8)%
0.1 %
37.5 %
2013
35.0 %
5.1 %
(0.2)%
(1.5)%
(0.2)%
(0.7)%
-%
37.5 %
The significant components of deferred tax liabilities (assets) that appear on MGE Energy's and MGE's
consolidated balance sheets as of December 31 are 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 $
2015
327,822 $
30,382
1,422
57,697
21,660
8,011
14,831
461,825
-
(21,391)
(46,582)
(1,047)
(21,660)
(18,589)
(109,269)
70
(109,199)
352,626 $
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
2015
327,918 $
38,213
1,422
57,697
21,660
8,011
14,997
469,918
-
(21,391)
(46,582)
(1,047)
(21,660)
(18,523)
(109,203)
70
(109,133)
360,785 $
82
As of December 31, 2015, MGE Energy and MGE did not have federal net operating losses or federal tax
credit carryforwards. As of December 31, 2014, MGE Energy and MGE had approximately $16.5 million
and $5.4 million of state net operating loss and federal tax credit 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 and
reflected in deferred tax liabilities on the consolidated balance sheets.
Our state valuation allowance reduces MGE Energy's and MGE's deferred tax assets for state carryforward
losses to estimated realizable value due to the uncertainty of future income estimates in various state tax
jurisdictions. For tax purposes, as of December 31, 2015, 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.
In November 2015, the FASB issued authoritative accounting guidance on the presentation of deferred taxes
in the financial statements. Prior to the authoritative guidance, deferred taxes were presented as a net current
asset or liability and net noncurrent asset or liability. As a result of the Accounting Standard Update (ASU),
all deferred tax assets and liabilities, along with any related valuation allowance, will be classified as
noncurrent on the consolidated balance sheets. The authoritative guidance states that early adoption of the
ASU is permitted using either prospective or retrospective application. MGE Energy and MGE have adopted
this standard early by retrospectively applying the guidance to all prior periods presented in addition to the
current year ended December 31, 2015. For MGE Energy and MGE, as of December 31, 2014, current assets
("Deferred income taxes") decreased by approximately $3.5 million and $1.3 million, respectively, and
noncurrent liabilities ("Deferred income taxes") decreased by approximately $3.5 million and $1.3 million,
respectively, as a cumulative result of the guidance.
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.
A tabular reconciliation of unrecognized tax benefits and interest from January 1, 2013, to December 31,
2015, 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, .......................................... $
2015
2014
2013
2,365 $
488
520
-
(845)
2,528 $
2,363 $
610
618
-
(1,226)
2,365 $
3,204
377
424
(40)
(1,602)
2,363
(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, .............. $
2015
2014
2013
92 $
(102)
321
311 $
101 $
(97)
88
92 $
314
(275)
62
101
Unrecognized tax benefits of $2.5 million and $0.4 million are liabilities shown with "Other deferred
liabilities" on the December 31, 2015 and 2014, consolidated balance sheets, respectively. At December 31,
2014, $2.0 million of unrecognized tax benefits are netted with deferred tax liabilities 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,
2015 and 2014, 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
83
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,
2015, 2014, or 2013 related to federal permanent differences and tax credits.
The unrecognized tax benefits at December 31, 2015, 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 .......................... 2012 through 2015
MGE Energy Wisconsin combined reporting corporation return ..................... 2011 through 2015
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
$2.8 million, $2.5 million, and $2.3 million in 2015, 2014, and 2013, respectively. A measurement date of
December 31 is utilized for all pension and postretirement benefit plans.
All employees hired after December 31, 2006, have been enrolled in the defined contribution pension plan, rather
than the defined benefit pension plan previously in place.
a. Benefit Obligations and Plan Assets.
(In thousands)
Change in Benefit Obligations:
Net benefit obligation at beginning of year ............. $
Service cost .........................................................
Interest cost .........................................................
Plan participants' contributions ..............................
Actuarial (gain) loss(a) ..........................................
Gross benefits paid ...............................................
Less: federal subsidy on benefits paid(b)..............
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
2015
340,233
7,263
13,766
-
(17,576)
(11,121)
-
332,565
288,548
4,153
9,136
-
(11,121)
290,716
(41,849)
$
$
$
$
$
2014
283,958
6,179
13,574
-
48,162
(11,640)
-
340,233
277,398
21,907
883
-
(11,640)
288,548
(51,685)
$
$
$
$
$
Other Postretirement
Benefits
2015
2014
78,478
1,559
3,075
741
(5,828)
(3,280)
190
74,935
38,952
603
3,154
741
(3,280)
40,170
(34,765)
$
$
$
$
$
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)
(a) In 2014, lower discount rates and mortality table updates were the main drivers to the actuarial loss.
(b) In 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into
law authorizing Medicare to provide prescription drug benefits to retirees. For the years ended
December 31, 2015 and 2014, the subsidy due to MGE was $0.2 million.
The accumulated benefit obligation for the defined benefit pension plans at the end of 2015 and 2014 was
$302.5 million and $304.0 million, respectively.
84
The amounts recognized in the consolidated balance sheets to reflect the funded status of the plans at
December 31 are as follows:
(In thousands)
Current liability ................................................... $
Long-term liability ...............................................
Net liability ......................................................... $
2015
(966)
(40,883)
(41,849)
$
$
2014
(1,025)
(50,660)
(51,685)
$
$
2015
(52)
(34,713)
(34,765)
$
$
2014
(65)
(39,461)
(39,526)
Pension Benefits
Other Postretirement
Benefits
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:
(In thousands)
Net actuarial loss ................................................. $
Prior service benefit .............................................
Transition obligation ............................................
Total ................................................................... $
Pension Benefits
2015
2014
80,660
(436)
-
80,224
$
$
85,102
(413)
-
84,689
$
$
Other Postretirement
Benefits
2015
13,086
(15,158)
29
(2,043)
$
$
2014
17,657
(17,827)
32
(138)
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
2015
332,565
290,716
$
2014
340,233
288,548
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
2015
332,565 $
302,471
290,716
2014
340,233
304,023
288,548
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 Cost (Benefit):
Service cost ................................................... $
Interest cost ...................................................
Expected return on assets ................................
Amortization of:
Pension Benefits
2014
6,179 $
13,574
(22,051)
2015
7,263 $
13,766
(22,682)
2013
7,705 $
12,656
(19,027)
Other Postretirement Benefits
2013
2014
2015
2,380
1,339 $
1,559 $
3,871
3,166
3,075
(2,176)
(2,615)
(2,812)
Transition obligation ...................................
Prior service cost (benefit) ...........................
Actuarial loss .............................................
Net periodic cost (benefit) ............................... $
-
23
5,395
3,765 $
-
204
703
(1,391) $
-
314
8,014
9,662 $
3
(2,669)
953
109 $
3
(2,669)
252
(524) $
3
110
1,236
5,424
85
c. Plan Assumptions.
The weighted-average assumptions used to determine the benefit obligations were as follows for the years
ended December 31:
Discount rate(a) .......................................................
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
2015
2014
4.51%
3.78%
4.11%
3.85%
N/A
N/A
N/A
N/A
N/A
N/A
Other Postretirement
Benefits
2015
2014
4.32%
N/A
6.5%
5.0%
2022
3.96%
N/A
6.5%
5.0%
2021
(a) In 2015, MGE refined its methodology for using discount rates to measure the components of net
periodic benefit cost. The refined methodology uses individual spot rates, instead of a weighted average
of the yield curve spot rates, for measuring the service cost and interest cost components. The change in
methodology does not alter the measurement of the related benefit obligation as of December 31, 2015.
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
2014
4.88%
8.10%
3.93%
2015
4.11%
7.80%
3.84%
2013
4.09%
8.10%
4.60%
Other Postretirement Benefits
2013
2014
2015
4.14%
4.69%
3.96%
6.79%
7.07%
7.06%
N/A
N/A
N/A
The assumed health care cost trend rates have a significant effect on the amounts reported for the health care
plans. The following table shows how an assumed 1% increase or 1% decrease in health care cost trends
could impact postretirement benefits in 2015 dollars:
(In thousands)
Effect on other postretirement benefit obligation
Effect on total service and interest cost components
$
1% Increase 1% Decrease
(1,753)
(92)
1,391 $
80
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.
86
The asset allocation for MGE's pension plans at the end of 2015 and 2014, and the target allocation for 2016,
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
2015
63.0 %
29.0 %
8.0 %
100.0 %
2014
62.0 %
31.0 %
7.0 %
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 $40.2 million and $39.0 million at the end
of 2015 and 2014, respectively. Of this amount, $34.1 million and $32.8 million at the end of 2015 and
2014, 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, 2015. 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, 2015, there were no significant concentrations (defined as greater than
10 percent of plan assets) of risk in MGE pension and postretirement benefit plan assets.
f. Fair Value Measurements of Plan Assets.
Pension and other postretirement benefit plan investments are recorded at fair value. See Footnote 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, 2015:
Cash and Cash Equivalents – This category includes highly liquid investments with maturities of less than
three months which are traded in active markets.
Equity Securities – These securities consist of U.S. and international stock funds. The U.S. stock funds are
primarily invested in domestic equities. Securities in these funds are typically priced using the closing price
from the applicable exchange, NYSE, Nasdaq, etc. The international funds are composed of international
equities. Securities are priced using the closing price from the appropriate local stock exchange.
Fixed Income Securities – These securities consist of U.S. bond funds and short-term funds. U.S. bond funds
are priced by a pricing agent using inputs such as benchmark yields, reported trades, broker/dealer quotes,
and issuer spreads. The short-term funds are valued initially at cost and adjusted for amortization of any
discount or premium.
Real Estate – 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.
87
The fair value of MGE's plan assets, by asset category are as follows:
(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 .........................
Fixed Rate Fund ..........................................
Total .......................................................$
(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 .......................................................$
Fair Value as of December 31, 2015
Total
Level 1
Level 2
Level 3
300 $
300 $
- $
98,949
22,446
27,561
55,948
3,388
16,225
73,112
27,231
1,518
4,208
330,886 $
-
-
-
-
-
-
-
-
-
-
300 $
98,949
22,446
27,561
55,948
3,388
16,225
73,112
-
-
-
297,629 $
-
-
-
-
-
-
-
-
27,231
1,518
4,208
32,957
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
No transfers were made in or out of Level 1 or Level 2 for the year ended December 31, 2015.
The following table summarizes the changes in the fair value of the Level 3 plan assets.
(In thousands)
Balance as of January 1, 2014 ..................................................... $
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 .................................................
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, 2015 ................................................. $
Level 3 Assets
Insurance
Continuance
Fund
Fixed Rate
Fund
1,428 $
-
Real Estate
19,628 $
1,561
2,291
-
23,480
2,749
1,002
-
27,231 $
44
46
-
1,518
46
(46)
-
1,518 $
54
4,392
-
4,446
103
(341)
-
4,208
g. Expected Cash Flows.
Contributions to the qualified plans for 2016 are expected to be $10.0 million, which was paid in
January 2016. MGE does not expect to make contributions to the plans for 2017. The contributions for years
after 2017 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.
88
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 2015, MGE made $13.7 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
12,489 $
13,320
14,506
15,456
16,381
95,167
3,119 $
3,481
3,947
4,453
4,910
30,364
(227) $
(249)
(273)
(296)
(325)
(2,121)
2,892
3,232
3,674
4,157
4,585
28,243
(In thousands)
2016
2017
2018
2019
2020
2021 - 2025
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.
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, 2015, 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. Units are
subject to a five-year graded vesting schedule.
Grant Date
February 19, 2016 ..........................
February 20, 2015 ..........................
February 21, 2014 ..........................
February 15, 2013 ..........................
February 17, 2012 ..........................
MGE Energy
Units Granted
19,055
18,948
21,991
22,884
25,040
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.
Under the Director Incentive 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. This plan is similar to MGE Energy's Performance Unit Plan for eligible employees described
above.
Grant Date
January 15, 2016 ............................
January 16, 2015 ............................
January 17, 2014 ............................
MGE Energy
Units Granted
3,773
3,794
4,683
89
During the years ended December 31, 2015, 2014, and 2013, MGE recorded $1.0 million, $2.0 million, and
$1.5 million, respectively, in compensation expense as a result of awards under the plans. In January 2015, cash
payments of $1.3 million were distributed relating to awards that were granted in 2010. During the year ended
December 31, 2015, MGE recorded a $0.2 million gain on 4,676 units forfeited. No forfeitures occurred during
the years ended December 31, 2014, and 2013. At December 31, 2015, $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 markets in which it buys and sells power within the same
hour to meet electric energy delivery requirements. This treatment resulted in a $68.6 million, a $91.1 million,
and a $78.0 million reduction to sales to the market and purchase power expense for MISO markets for the years
ended December 31, 2015, 2014, and 2013, respectively.
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. 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. MGE's commodity derivative activities are
conducted in accordance with its electric and gas risk management program, which is approved by the
PSCW and limits the volume MGE can hedge with specific risk management strategies. The maximum
length of time over which cash flows related to energy commodities can be hedged is four years. If the
derivative qualifies for regulatory deferral, the derivatives are marked to fair value and are offset with a
corresponding regulatory asset or liability. The deferred gain or loss is recognized in earnings in the delivery
month applicable to the instrument. Gains and losses related to hedges qualifying for regulatory treatment
are recoverable in gas rates through the PGA or in electric rates as a component of the fuel rules mechanism.
b. Notional Amounts.
The gross notional volume of open derivatives is as follows:
Commodity derivative contracts ...........................
Commodity derivative contracts ...........................
FTRs .................................................................
December 31, 2015
355,580 MWh
5,037,500 Dth
2,000 MW
December 31, 2014
448,000 MWh
4,405,000 Dth
1,854 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, 2015 and 2014, the cost basis of exchange-traded derivatives and FTRs exceeded their fair
value by $0.8 million and $1.6 million, respectively.
MGE is a party to a purchased power agreement that provides MGE with firm capacity and energy during a
base term from June 1, 2012, through May 31, 2022. The agreement also allows MGE an option to extend
the contract after the base term. The agreement is accounted for as a derivative contract and is recognized at
its fair value on the consolidated balance sheets. However, the derivative qualifies for regulatory deferral and
is recognized with a corresponding regulatory asset or liability depending on whether the fair value is in a
loss or gain position. The fair value of the contract at December 31, 2015 and 2014, reflects a loss position of
90
$53.3 million and $53.4 million, respectively. The actual cost will be recognized in purchased power
expense in the month of purchase.
The following table summarizes the fair value of the derivative instruments on the consolidated balance
sheets. All derivative instruments in this table are presented on a gross basis and are calculated prior to the
netting of instruments with the same counterparty under a master netting agreement as well as the netting of
collateral. For financial statement purposes, 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, 2015 and
2014, MGE Energy and MGE had the right to reclaim collateral (a receivable) of $1.0 million and
$2.2 million, respectively.
Asset Derivatives
Liability Derivatives
Fair Value Balance Sheet Location
Fair Value
Balance Sheet Location
(In thousands)
December 31, 2015
Commodity derivative contracts ..... Other current assets
Commodity derivative contracts ..... Other deferred charges
FTRs ........................................... Other current assets
PPA ............................................. N/A
PPA ............................................. N/A
$
146 Derivative liability (current)
144 Derivative liability (long-term)
234 Derivative liability (current)
N/A Derivative liability (current)
N/A Derivative liability (long-term)
$
December 31, 2014
Commodity derivative contracts ..... Other current assets
Commodity derivative contracts ..... Other deferred charges
FTRs ........................................... Other current assets
PPA ............................................. N/A
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)
1,266
70
-
8,340
44,930
2,262
171
-
6,870
46,560
The following tables show the effect of netting arrangements for recognized derivative assets and liabilities
that are subject to a master netting arrangement or similar arrangement on the consolidated balance sheets.
Offsetting of Derivative Assets
(In thousands)
December 31, 2015
Commodity derivative contracts .... $
FTRs ..........................................
December 31, 2014
Commodity derivative contracts .... $
FTRs ..........................................
Offsetting of Derivative Liabilities
(In thousands)
December 31, 2015
Commodity derivative contracts .... $
PPA ...........................................
December 31, 2014
Commodity derivative contracts .... $
PPA ...........................................
Gross Amounts
Gross Amounts
Offset in
Balance Sheets
Collateral
Posted Against
Derivative Positions
Net Amount
Presented in
Balance Sheets
290 $
234
223 $
642
(290) $
-
(223) $
-
- $
-
- $
-
-
234
-
642
Gross Amounts
Gross Amounts
Offset in
Balance Sheets
Collateral
Posted Against
Derivative Positions
Net Amount
Presented in
Balance Sheets
1,336 $
53,270
2,433 $
53,430
(290) $
-
(223) $
-
(1,038) $
-
8
53,270
(2,179) $
-
31
53,430
91
The following tables summarize the unrealized and realized gains (losses) related to the derivative
instruments on the consolidated balance sheets at December 31, 2015 and 2014, and the consolidated income
statements for the years ended December 31, 2015 and 2014.
2015
2014
Current and
Long-Term
Regulatory
Asset
Other Current
Assets
Current and
Long-Term
Regulatory
Asset
Other Current
Assets
(In thousands)
Balance at January 1, ...................................................... $
Unrealized loss (gain) .......................................................
Realized (loss) gain reclassified to a deferred account .........
Realized (loss) gain reclassified to income statement ..........
Balance at December 31, ................................................. $
54,998 $
8,586
(2,953)
(6,549)
54,082 $
1,001 $
-
2,953
(2,746)
1,208 $
63,893 $
(14,518)
595
5,028
54,998 $
411
-
(595)
1,185
1,001
Realized Losses (Gains)
2015
2014
(In thousands)
Year Ended December 31:
Commodity derivative contracts .................... $
FTRs ..........................................................
PPA ...........................................................
Fuel for Electric
Generation/
Purchased Power
Fuel for Electric
Generation/
Purchased Power
Cost of Gas Sold
Cost of Gas Sold
2,236 $
(309)
4,820
2,548 $
-
-
(5,515) $
(1,110)
1,515
(1,103)
-
-
MGE's commodity derivative contracts, FTRs, and PPA are subject to regulatory deferral. These derivatives
are marked to fair value and are offset with a corresponding regulatory asset or liability. Realized gains and
losses are deferred on the consolidated balance sheets and are recognized in earnings in the delivery month
applicable to the instrument. As a result of the above described treatment, there are no unrealized gains or
losses that flow through earnings.
The PPA has a provision that may require MGE to post collateral if MGE's debt rating falls below
investment grade (i.e., below BBB-). The amount of collateral that it may be required to post varies from
$20.0 million to $40.0 million, depending on MGE's nominated capacity amount. As of December 31, 2015,
no collateral is required to be, or has been, posted. Certain counterparties extend MGE a credit limit. If MGE
exceeds these limits, the counterparties may require collateral to be posted. As of December 31, 2015 and
2014, certain counterparties were in a net liability of less than $0.1 million.
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, 2015, no counterparties have defaulted.
17. Rate Matters - MGE Energy and MGE.
a. Rate Proceedings.
In July 2015, the PSCW approved MGE's request to extend the current accounting treatment for transmission
related costs through 2016, conditioned upon MGE not filing a base rate case for 2016. This accounting
treatment will allow MGE to reflect any differential between transmission costs reflected in rates and actual
costs incurred in its next rate case filing.
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 postretirement benefit
costs. The authorized return on common stock equity is 10.2%.
92
The PSCW also approved changes to customer rates and rate design for gas service that became effective
January 1, 2015. Gas rate design consists of a fixed monthly customer charge and a variable charge tied to
actual usage, in addition to the separate charge through the PGA for natural gas commodity costs. The
change shifted more of the rate recovery to the monthly charge, reflecting the related fixed costs of providing
gas services, and reduced the variable usage-based charge. Thus, gas net income is expected to be more
evenly distributed during the year and less sensitive to weather.
On July 26, 2013, the PSCW authorized MGE to freeze electric and natural gas rates at 2013 levels for 2014.
The order authorized 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 amortized in 2014. The fuel credit accrued interest at MGE's weighted cost of capital. The authorized
return on common stock equity was 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%.
b. Fuel Rules.
Fuel rules require the PSCW and Wisconsin utilities to defer electric fuel-related costs that fall outside a
symmetrical cost tolerance band around the amount approved for a utility in its annual fuel proceedings. Any
over/under recovery of the actual costs is determined on an annual basis and is 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.
In August 2015, the PSCW approved a $0.00256/kWh fuel credit to begin on September 1, 2015, and
continue throughout 2016. The fuel credit established a mechanism to return fuel savings to electric
customers as a bill credit. MGE returned $2.6 million of electric fuel-related savings in customer bill credits
during the period from September 1, 2015, through December 31, 2015. As of December 31, 2015, MGE has
deferred $9.5 million of 2015 electric fuel-related savings that are outside the range authorized by the
PSCW. These costs are subject to PSCW's annual review, expected to be completed in 2016.
In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs by $14.8 million as a result of
continued lower projected fuel costs in 2016. The PSCW will address the return of the 2016 fuel savings to
customers as an update to the fuel credit or through another approved mechanism. The return of the fuel
savings to customers for 2016 will be addressed during the PSCW's annual review during 2016 of 2015 fuel
costs. MGE will defer these fuel savings until a determination is made by the PSCW.
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 credit of $6.5 million was returned to customers in October 2014.
93
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, 2015, 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 ............................................
$
2016
38,028 $
2017
13,115 $
2018
12,736 $
2019
2020
3,850 $
-
18,500
10,611
47,901
29,947
144,987 $
18,551
-
48,398
723
80,787 $
18,482
-
46,855
324
78,397 $
17,562
-
35,023
143
56,578 $
14,254
-
33,883
-
48,137
(a) Total coal commitments for the Columbia and Elm Road Units, including transportation. Fuel
procurement for MGE's jointly owned Columbia and Elm Road Units is handled by WPL and WEPCO,
respectively, who are the operators of those facilities. 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
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. 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, 2015, under agreements classified as operating leases
with noncancelable terms in excess of one year are as follows:
(In thousands)
Minimum lease payments .........$
2016
1,615
2017
2018
2019
2020
1,282 $
674 $
310 $
Thereafter
8,283
277 $
Rental expense under operating leases totaled $2.1 million, $2.5 million, and $2.7 million for 2015, 2014,
and 2013, respectively.
94
c. Environmental - MGE Energy and MGE.
Water Quality
Water quality regulations promulgated by the EPA and WDNR in accordance with the Federal Water
Pollution Control Act, or more commonly known as the Clean Water Act (CWA), impose restrictions on
discharges of various pollutants into surface waters. The CWA also regulates surface water quality issues
that affect aquatic life, such as water temperatures, intake structures, and wetlands filling. The CWA also
includes discharge standards, which require the use of effluent-treatment processes equivalent to categorical
"best practicable" or "best available" technologies. The CWA regulates discharges from "point sources,"
such as power plants, through establishing discharge limits in water discharge permits. MGE's power plants
operate under Wisconsin Pollution Discharge Elimination System (WPDES) permits issued by the WDNR to
ensure compliance with these discharge limits, which permits are subject to periodic renewal.
EPA's Effluent Limitations Guidelines (ELG) and Standards for Steam Electric Power Generating Point
Source Category
In November 2015, the EPA published its final rule setting Effluent Limitations Guidelines (ELG) for the
steam electric power generating industry. The ELG rule establishes federal limits on the amount of metals
and other pollutants that can be discharged in wastewater from new and existing steam electric generation
plants. The ELG rule mostly covers pollutants that are captured by certain air pollution control systems and
via wet ash handling systems at coal-burning power plants with units greater than 50 megawatt (MW)
generation capacity. The operators of our Columbia and Elm Road Units have indicated that equipment
upgrades may be necessary to comply with the new discharge standards. The rule will go into effect in 2018
and will be applied to Wisconsin-based power plants as they renew their WPDES permits, but no later than
2023. Management believes that any compliance costs will be recovered in future rates based on previous
treatment of environmental compliance projects.
EPA Cooling Water Intake Rules (Section 316(b))
Section 316(b) of the Clean Water Act requires that the cooling water intake structures at electric power
plants meet best available technology standards so that mortality from entrainment (drawing aquatic life into
a plant's cooling system) and impingement (trapping aquatic life on screens) are reduced. The EPA finalized
its 316(b) rule for existing facilities in 2014. Section 316(b) requirements are implemented in Wisconsin
through modifications to plants' WPDES permits, which govern plant wastewater discharges. WDNR is
currently developing rules to implement the EPA 316(b) rule.
Our WCCF, Blount, and Columbia plants are considered existing plants under this rule. Our WCCF facility
already employs a system that meets the 316(b) rule. Our Blount plant has conducted studies showing that it
will likely be in compliance with this rule when its WPDES permit is renewed in 2017. The operator of our
Columbia plant plans to conduct an intake study to demonstrate compliance with the 316(b) rule and/or
identify design criteria needed to meet the new rule requirements prior to Columbia's 2017 WPDES permit
renewal. The exact requirements at Blount and Columbia, however, will not be known until the WDNR
finalizes its rule, approves the plant operators' approach, and those sites' 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 sources. As of December 31, 2015, 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 greenhouse gas regulations, the EPA's recent proposed update to the Cross-
State Air Pollution Rule (CSAPR), and recently revised National Ambient Air Quality Standards (NAAQS)
for ozone have the potential to result in additional operating and capital expenditure costs for MGE.
95
EPA's Greenhouse Gas (GHG) Reduction Guidelines under the Clean Air Act 111(d) Rule
In October 2015, the EPA published its Clean Power Plan (CPP) rule, which went into effect in
December 2015, setting guidelines and approval criteria for states to use in developing plans to control GHG
emissions from existing fossil fuel-fired electric generating units (EGUs) and systems. When fully
implemented in 2030, the CPP is projected to reduce GHG emissions from this sector by 32% below 2005
levels. States are given up to three years to submit a plan to meet the reduction goals and are expected to
meet interim goals starting in 2022 and the final goal in 2030. Implementation of the rule is expected to have
a direct impact on existing coal and natural gas fired generating units, including possible changes in dispatch
and additional operating costs.
In October 2015, the EPA also published a proposed federal implementation plan under the CPP rule. The
proposed federal implementation plan is designed to provide mass-based and rate-based emissions trading
options to serve as a model and/or resource for states that are adopting their own plans, or for use by the
EPA in states that do not implement their own plans under the finalized CPP.
In October 2015, many states (including Wisconsin) and other litigants filed petitions with the U.S. Court of
Appeals for the District of Columbia Circuit asking for a stay of the CPP rule, which would otherwise
become effective on December 22, 2015, and seeking expedited review of the petitioners' challenges to the
CPP's legality. The parties' request to stay the rule was denied by the D.C. Circuit on January 20, 2016, but
the D.C. Circuit issued an expedited schedule for resolving the merits of the litigation including oral
arguments that will be held in early June 2016. However, on January 26, 2016, several parties filed a request
for a stay of the CPP with the U.S. Supreme Court; and on February 9, 2016, the U.S. Supreme Court
granted that request. The CPP may not now be implemented until the courts ultimately resolve the
underlying legality of the rule. Oral arguments are scheduled before the D.C. Circuit for June 2, 2016.
MGE is evaluating the CPP and related requirements. Given the pending legal proceedings and the need for
a yet-to-be-developed state implementation plan or federal implementation plan, the nature and timing of
any final requirements is subject to uncertainty. If the rule remains substantially in its present form, it is
expected to have a material impact on MGE.
National Ambient Air Quality Standards (NAAQS) and Related Rules
The EPA's NAAQS regulations have been developed to set ambient levels of six pollutants to protect
sensitive human populations (primary NAAQS) and the environment (secondary NAAQS) from the negative
effects of exposure to these pollutants at higher levels. The Clean Air Act requires that the EPA periodically
review, and adjust as necessary, the NAAQS for these six air pollutants. The EPA's NAAQS review can
result in a lowering of the allowed ambient levels of a pollutant, a change in how the pollutant is monitored,
and/or a change in which sources of that pollutant are regulated. States implement any necessary monitoring
and measurement changes and recommend areas for attainment (meets the ambient requirements) or
nonattainment (does not meet these standards). The EPA makes the final attainment and nonattainment
determinations. States must come up with a state implementation plan (SIP) to get nonattainment areas into
attainment and maintain air quality in attainment areas. A company with facilities located in a nonattainment
area will be most affected. Their facilities may be subject to additional data submissions and measurement
during permitting renewals, their facilities may need to meet new emission limitations set by the SIP (which
could result in significant capital expenditures), and the company may have additional expenses and/or
difficulties expanding existing facilities or building new facilities. The process from determining acceptable
primary and/or secondary NAAQS to executing SIPs can take years. 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. In addition, the EPA has
adopted interstate transport rules such as the CSAPR to address contributions to NAAQS nonattainment
from upwind sources in neighboring states. In the following paragraphs we discuss specific NAAQS and
transport rule developments that may affect MGE.
Ozone NAAQS
In October 2015, the EPA revised the primary and secondary ozone NAAQS, lowering each to 70 ppb. The
rule became effective in December 2015. Based on current ozone monitoring data, it appears that Milwaukee
County (where our Elm Road Units are located) will likely not attain the lowered standards, and Dane and
Columbia Counties (where our WCCF/Blount and Columbia Units are located, respectively) may or may not
attain them. It is too early to determine, however, as final attainment designations for these three counties
will be based upon air monitoring data for years 2014-2016 and must be approved by the EPA. Once these
designations are complete, the State of Wisconsin will develop implementation plans for each county
designated as nonattainment, which could affect operations and emission control obligations for plants
96
located within the nonattainment counties. These implementation plans will be developed sometime after
2017. Because these implementation plans involve rule making by the State that has not yet started, it is
unknown at this time when they will be finalized and implemented. The State of Wisconsin has requested to
intervene in a lawsuit filed by five other states challenging the EPA's new ozone standard alleging that the
new standard is not attainable and the EPA is not properly considering background levels in setting its ozone
attainment levels. MGE will continue to monitor legal developments, attainment designations, and any state
actions and implementation plans.
Sulfur Dioxide (SO2) NAAQS
In March 2015, the EPA entered into a court-approved consent decree requiring 1-hour SO2
attainment/nonattainment area designations to be completed in three phases extending out until 2020. In
August 2015, the EPA published its data requirements rule that lays out expectations, designation process
options, and timeframes for states and tribes to meet for the SO2 NAAQS set in 2013. Under this new rule,
states must submit their first designation proposals in July 2016 for those areas that contain large stationary
sources of SO2 (sources that emit over a threshold mass of SO2, and/or over a threshold emissions rate).
These proposals must identify one of the following options for demonstrating attainment with the 1-hour
SO2 NAAQS: modeling of SO2 emissions; monitoring of SO2 emissions; or limiting large stationary sources
to 2,000 ton per year of SO2 emissions by January 13, 2017. The EPA must make final designation
determinations for these areas between 2017 and 2020 depending on the area.
In March 2015, MGE's Columbia plant was identified in the Federal Register as meeting the criteria of a
large stationary source of SO2 (based on 2012 data). As such, the State of Wisconsin must submit an
attainment/nonattainment area designation plan for Columbia County (the county in which the Columbia
plant is located). Since the 2012 data was collected, Columbia has installed pollution control equipment that
has lowered its total SO2 emissions and its SO2 emissions rate. We anticipate, based on recent SO2 emissions
modeling, that Columbia County will be recommended as an attainment area by the state. An attainment
recommendation, however, has not yet been submitted by the State of Wisconsin to the EPA. Once the state
submits its recommendation, the EPA will make final designations. While the attainment designation seems
likely for Columbia, a nonattainment designation may have an adverse effect on the operation of the
Columbia plant. MGE will continue to monitor the developments with the Columbia County designation
process. Management believes compliance costs will be recovered in future rates based on previous
treatment of environmental compliance projects.
EPA's Cross-State Air Pollution Rule: Proposed Ozone Season Update based on 2008 Ozone NAAQS
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. The EPA rule adjustments and several court rulings, including recent court and EPA
actions, continue to impart a level of uncertainty heading into 2016.
In December 2015, the EPA published a proposed rule to amend the existing CSAPR. The proposed rule is
designed to incorporate 2008 Ozone NAAQS attainment levels (current CSAPR is based on 1997 Ozone
NAAQS levels) in 23 states, including Wisconsin, by establishing a federal implementation plan (FIP) to
identify and limit summertime nitrogen oxide (NOx) levels, a precursor to ozone that contributes to ozone
transport. The proposed rule also includes revisions to CSAPR that are designed to address issues remaining
from the D.C. Circuit remand of CSAPR, including Wisconsin's inclusion in the NOx ozone season portion
of the rule.
The proposed rule's FIP goes into effect in 2017, which coincides with Phase II of the existing CSAPR, and
will replace the Phase II ozone season NOx allowances with updated NOx allowances designed to meet 2008
Ozone NAAQS attainment. The rule as proposed would reduce ozone season NOx emissions by about half as
compared to existing Phase II numbers. We are currently evaluating the rule for its impact to MGE and thus
do not know with certainty the exact impact. Initial reviews, however, indicate that the proposed CSAPR
97
update as written could have material effects on MGE. We will continue to monitor the rule developments
and the D.C. Circuit Court remand completion to help determine how this rule will ultimately affect MGE.
Clean Air Visibility Rule (CAVR)
Columbia may 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. Columbia's
pollution control upgrades and the EPA's stance that compliance with the CSAPR equals compliance with
BART should mean that Columbia will not need to do additional work to meet BART requirements. In
addition, the EPA has indicated that they intend to extend deadlines in this rule. At this time, however, the
BART regulatory obligations, compliance strategies, and costs remain uncertain due to the continued legal
uncertainty surrounding CSAPR.
Solid Waste
EPA's Coal Combustion Residuals Rule
In December 2014, the EPA finalized its Disposal of Coal Combustion Residuals from Electric Utilities
(CCR) rule. The rule became effective in October 2015. It provides that coal ash will be regulated as a solid
waste, and defines what ash use activities would be considered generally exempt beneficial reuse of coal ash.
The rule also regulates landfills, ash ponds, and other surface impoundments for coal combustion residuals
by regulating their design, location, monitoring, and operation. Landfills and impoundments that cannot
meet design criteria will need to formally close within defined timeframes.
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. Review of our Elm Road facility has
indicated that the costs to comply with this rule are not expected to be significant. We are still evaluating the
rule's full effects at Columbia. Columbia's operator has developed a preliminary implementation schedule for
meeting the various deadlines spelled out in the rule. Management believes compliance costs will be
recovered in future rates based on previous treatment of environmental compliance projects.
Columbia
Based upon current available information, compliance with various environmental requirements and
initiatives is expected to result in significant additional operating and capital expenditures at Columbia as
noted below.
Columbia Clean Air Act Litigation
Columbia is a coal-fired generating station operated by WPL in which WPL, WPSC, and MGE have
ownership interests. In December 2009, the EPA sent a Notice of Violation (NOV) to 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 an 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 $19-
$29 million. In addition, the consent decree establishes emission rate limits for SO2, NOx, and particulate
matter and annual plant-wide emission caps for SO2 and NOx. MGE intends to seek recovery in future 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.
d. Legal Matters - MGE Energy and MGE.
MGE is involved in various legal matters that are being defended and handled in the normal course of
business. MGE maintains accruals for such costs that are probable of being incurred and subject to
reasonable estimation. The accrued amount for these matters is not material to the financial statements.
98
e. 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 $1.6 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 $1.5 million into this fund. As of December 31, 2015,
MGE Energy has $0.7 million remaining in commitments. The timing of infusions is dependent on the needs
of the fund and is therefore uncertain at this time.
MGE has several other commitments related to various projects. Payments for these commitments are
expected to be as follows:
(In thousands)
2016
2017
2018
2019
2020
Other commitments ..................$
612 $
523 $
509 $
511 $
19. Asset Retirement Obligations - MGE Energy and MGE.
Thereafter
6,086
497 $
MGE recorded an obligation for the fair value of its legal liability for asset retirement obligations (AROs)
associated with removal of the West Campus Cogeneration Facility and the Elm Road Units, electric substations,
combustion turbine generating units, wind generating facilities, and photovoltaic generating facilities, all of
which are located on property not owned by MGE Energy and MGE and would need to be removed upon the
ultimate end of the associated leases. The significant conditional AROs identified by MGE included the costs of
abandoning in place gas services and mains, the abatement and disposal of equipment and buildings
contaminated with asbestos and PCBs, and the proper disposal and removal of tanks, batteries, and underground
cable. Changes in management's assumptions regarding settlement dates, settlement methods, or assigned
probabilities could have a material effect on the liabilities recorded by MGE at December 31, 2015, 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, 2014, to December 31, 2015. Amounts
include conditional AROs.
(In thousands)
Balance at January 1, ................................. $
Liabilities incurred (a) .................................
Accretion expense .....................................
Liabilities settled .......................................
Revisions in estimated cash flows (a) ............
Balance at December 31,............................ $
2015
19,744 $
2,380
1,131
(124)
1,229
24,360 $
2014
19,359
68
1,077
(343)
(417)
19,744
(a) In the second quarter of 2015, MGE recorded an obligation of $2.3 million for the fair value of its legal
liability for AROs associated with the effect of the final Coal Combustion Residual Rule at Columbia. An
additional $1.3 million was recorded in the fourth quarter, associated with this ARO, based on revised
estimates.
99
20. Adoption of Accounting Principles and Recently Issued Accounting Pronouncements - MGE Energy and
MGE.
a. 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 became effective January 1,
2015. The authoritative guidance changed the accounting for the Chattel Paper program and required
additional disclosures. Prior to adoption of the standard, Chattel Paper was treated as an off-balance sheet
arrangement. See Footnote 1.h for additional information.
b. 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 was scheduled to become effective January 1, 2017. In July 2015, the
FASB deferred the effective date to January 1, 2018. MGE Energy and MGE are currently assessing the
impact this pronouncement will have on their financial statements.
c. Consolidations.
In February 2015, the FASB issued authoritative guidance within the Codification's Consolidation topic that
provides guidance on the evaluation of certain legal entities for consolidation purposes. This authoritative
guidance is effective January 1, 2016. The impact of this guidance on our financial statements is not
expected to be material.
d. Debt Issuance Costs.
In April 2015, the FASB issued authoritative guidance within the Codification's Interest topic that provides
guidance on the presentation of debt issuance costs in financial statements. This authoritative guidance is
effective January 1, 2016. The authoritative guidance changes the presentation of debt issuance costs on the
balance sheet from an asset to a direct deduction from the related debt liability. The impact of this guidance
on our financial statements is not expected to be material.
e. Cloud Computing Arrangements.
In April 2015, the FASB issued authoritative guidance within the Codification's Software topic that provides
guidance on the accounting treatment of cloud computer arrangements. This authoritative guidance is
effective January 1, 2016. The authoritative guidance provides criteria for determining whether a cloud
computing arrangement contains a software license that should be accounted for as internal-use software.
The impact of this guidance on our financial statements is not expected to be material.
f.
Inventory Measurement.
In July 2015, the FASB issued authoritative guidance within the Codification's Inventory topic that provides
guidance on the subsequent measurement of inventory. This authoritative guidance will become effective
January 1, 2017. The authoritative guidance changes the subsequent measurement of inventory from the
lower of cost or market to the lower of cost or net realizable value. MGE Energy and MGE are currently
assessing the impact this pronouncement will have on their financial statements.
g. Deferred Income Taxes.
In November 2015, the FASB issued authoritative guidance within the Codification's Income Taxes topic
that provides guidance on the presentation of deferred taxes in financial statements. This authoritative
guidance will become effective January 1, 2017, and changes the presentation of deferred taxes on the
consolidated balance sheets. The authoritative guidance states that earlier adoption of the ASU is permitted
using either prospective or retrospective application. Prior to the authoritative guidance, deferred taxes were
presented as a net current asset or liability and net noncurrent asset or liability. As a result of the adoption of
this standard, all deferred tax assets and liabilities, along with any related valuation allowance, will be
classified as noncurrent on the consolidated balance sheets. MGE Energy and MGE have early adopted this
100
standard for the year ended December 31, 2015, and retrospectively applied the guidance to all prior periods
presented. See Footnote 12 for additional information.
21.
Segment Information - MGE Energy and MGE.
The electric utility business purchases, generates and distributes electricity, and contracts for transmission
service. The gas utility business purchases and distributes natural gas and contracts for the transportation of
natural gas. Both the electric and gas segments operate through MGE Energy's principal subsidiary, MGE.
The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power, MGE
Power Elm Road, and MGE Power West Campus. These subsidiaries own and lease electric generating capacity
to assist MGE. MGE Power Elm Road has an ownership interest in two coal-fired generating units in Oak Creek,
Wisconsin, which are leased to MGE, and MGE Power West Campus owns a controlling interest in the electric
generation plant of a natural gas-fired cogeneration facility on the UW campus. MGE Power West Campus's
portion is also leased to MGE.
The transmission investment segment invests, 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, MGE 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.
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.
101
The following table shows segment information for MGE Energy's and MGE's operations:
(In thousands)
MGE Energy
Year Ended December 31, 2015
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, 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) ...................... $
Electric
Gas
Non-
regulated
Energy
Transmission
Investment
All Others
Consolidation/
Elimination
Entries
Consolidated
Total
412,528 $
143,737 $
7,763 $
513
11,780
413,041
155,517
(29,945)
(6,758)
(318,001)
(128,241)
65,095
20,518
400
(11,187)
54,308
(17,915)
(33)
(3,203)
17,282
(6,915)
39,435
47,198
(7,475)
(158)
39,565
-
(5,993)
33,572
(13,474)
- $
-
-
-
(19)
(19)
7,728
-
7,709
(3,102)
- $
-
-
(47)
(857)
(904)
518
221
(165)
43
36,393 $
10,367 $
20,098 $
4,607 $
(122) $
- $
564,028
(51,728)
(51,728)
-
51,728
-
-
-
-
-
- $
-
564,028
(44,225)
(395,548)
124,255
8,613
(20,162)
112,706
(41,363)
71,343
394,849 $
221,720 $
3,283 $
- $
- $
- $
619,852
509
8,366
395,358
230,086
(26,933)
(6,308)
(297,409)
(194,203)
71,016
2,847
(10,410)
63,453
29,575
(86)
(3,229)
26,260
(22,070)
(10,480)
42,692
45,975
(7,407)
(139)
38,429
-
(6,208)
32,221
(12,932)
-
-
-
-
-
9,150
-
9,150
(3,664)
-
-
(47)
(875)
(922)
(1,832)
174
(2,580)
961
(51,567)
(51,567)
-
51,567
-
-
-
-
-
41,383 $
15,780 $
19,289 $
5,486 $
(1,619) $
- $
-
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
404,494
(25,780)
12,629
194,091
(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
102
(In thousands)
MGE
Year Ended December 31, 2015
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, 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 ................. $
Electric
Gas
Non-
regulated
Energy
Transmission
Investment
Consolidation/
Elimination
Entries
Consolidated
Total
412,550 $
143,752 $
7,763 $
491
413,041
(29,945)
(335,803)
47,293
287
(11,187)
36,393
11,765
155,517
(6,758)
(135,124)
13,635
(65)
(3,203)
10,367
39,435
47,198
(7,475)
(13,632)
26,091
-
(5,993)
20,098
- $
-
-
-
(19)
(19)
4,626
-
4,607
(51,691)
(51,691)
-
51,691
-
-
-
-
-
-
-
-
(26,097)
36,393 $
10,367 $
20,098 $
4,607 $
(26,097) $
- $
564,065
-
564,065
(44,178)
(432,887)
87,000
4,848
(20,383)
71,465
(26,097)
45,368
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
*Amounts are shown net of the related tax expense, consistent with the presentation on the MGE Consolidated Statements of Income.
103
The following table shows segment information for MGE Energy's and MGE's assets and capital expenditures:
(In thousands)
MGE Energy
Assets:
December 31, 2015 ........... $
December 31, 2014 (a) .........
December 31, 2013 ...........
Capital Expenditures:
Year ended Dec. 31, 2015 .... $
Year ended Dec. 31, 2014 ....
Year ended Dec. 31, 2013 ....
Utility
Consolidated
Electric
Gas
Assets not
Allocated
Nonregulated
Energy
Transmission
Investment
All Others
Consolidation/
Elimination
Entries
Total
976,271 $
299,792 $
49,753 $
278,735 $
69,470 $
434,868 $
(378,216) $
1,730,673
948,005
899,257
307,582
265,694
41,124
19,853
281,514
288,116
67,697
64,504
438,898
431,436
(390,636)
1,694,184
(389,800)
1,579,060
49,370 $
18,787 $
- $
3,873 $
68,067
100,146
22,104
15,554
Utility
-
-
2,505
3,347
- $
-
-
- $
-
-
Consolidated
- $
-
-
72,030
92,676
119,047
(In thousands)
MGE
Electric
Gas
Assets not
Allocated
Nonregulated
Energy
Transmission
Investment
Consolidation/
Elimination
Entries
Total
Assets:
December 31, 2015 ........... $
December 31, 2014 (a) .........
December 31, 2013 ...........
Capital Expenditures:
Year ended Dec. 31, 2015 .... $
Year ended Dec. 31, 2014 ....
Year ended Dec. 31, 2013 ....
976,271 $
299,792 $
49,753 $
278,685 $
69,470 $
(187) $
1,673,784
948,005
899,257
307,582
265,694
41,124
19,853
281,464
288,066
67,697
64,504
(6,521)
(6,731)
1,639,351
1,530,643
49,370 $
18,787 $
- $
3,873 $
68,067
100,146
22,104
15,554
-
-
2,505
3,347
- $
-
-
- $
-
-
72,030
92,676
119,047
(a) Reflects retrospective application of new accounting pronouncement. See Footnote 12 for additional information.
104
22. Quarterly Summary of Operations - MGE Energy (unaudited).
(In thousands, except per share amounts)
2015
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 ...................................... $
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 ...................................... $
Notes:
March 31
June 30
September 30 December 31
Quarters Ended
98,240
69,928
1,966
170,134
138,283
31,851
(2,986)
(10,587)
18,278 $
0.53 $
0.283 $
98,852 $
110,713
680
210,245
166,274
43,971
11
(16,265)
27,717 $
0.80 $
0.272 $
99,481
20,669
1,976
122,126
98,077
24,049
(2,562)
(8,008)
13,479 $
0.39 $
0.283 $
96,697 $
31,218
850
128,765
104,324
24,441
(1,320)
(9,034)
14,087 $
0.41 $
0.272 $
121,453 $
17,431
1,911
140,795
94,618
46,177
(2,472)
(15,351)
28,354 $
0.82 $
0.295 $
112,869 $
21,404
862
135,135
95,015
40,120
(2,505)
(14,286)
23,329 $
0.67 $
0.283 $
93,354
35,709
1,910
130,973
108,795
22,178
(3,529)
(7,417)
11,232
0.32
0.295
86,431
58,385
891
145,707
116,141
29,566
(5,780)
(8,600)
15,186
0.44
0.283
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.
23. Related Party Transactions - MGE Energy and MGE.
ATC
During 2015, 2014, and 2013, MGE recorded $28.2 million, $26.8 million, and $27.7 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 years ended December 31, 2015 and 2013,
MGE had a receivable due from ATC of $0.2 million. For the year ended December 31, 2014, MGE had a
receivable due from ATC of $0.1 million.
For additional discussion on MGE's relationship with ATC, see Footnote 4.
105
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 2015, 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, 2015, 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, 2015, 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, 2015. As a result of that assessment, management determined that there were no
material weaknesses as of December 31, 2015 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.
106
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 (2016 Proxy Statement) to be filed with the SEC on or
before March 28, 2016. 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 2016 Proxy Statement.
The information required by Item 10 relating to executive officers is set forth above in Item 1. Business - Executive
Officers of the Registrants.
Code of Ethics
MGE Energy has adopted a Code of Ethics applicable to its directors and all of its employees, including its chief
executive officer, chief financial officer, and principal accounting officer. The Code of Ethics is available on
MGE Energy's website at www.mgeenergy.com.
Item 11. Executive Compensation.
See Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
MGE Energy
The required information is included in the 2016 Proxy Statement, which will be filed with the SEC on or before
March 28, 2016, for Item 11 under the section "EXECUTIVE COMPENSATION," not including "Compensation
Committee Report," and "Cumulative Five-Year Total Return Comparison Graph," and for Item 12 under the section
"BENEFICIAL OWNERSHIP," which is incorporated herein by reference.
MGE Energy does not have or maintain any 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 2016 Proxy Statement, which will be filed with the SEC on or before March 28, 2016.
107
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 2016 Proxy Statement, which will be filed with the SEC on or before March 28, 2016.
MGE
Independent Registered Public Accounting Firm Fees Disclosure
Audit fees (a) ........................................................................................... $
Audit-related fees (b) ................................................................................
Tax fees (c) .............................................................................................
All other fees (d) ......................................................................................
2015
822,605 $
75,000
137,965
7,900
2014
803,913
50,000
204,367
69,100
(a) Audit Fees were for professional services rendered for the audits of the financial statements, review of the
interim financial statements, opinions on the effectiveness of our internal controls over financial reporting for
MGE Energy, and services that generally only the independent auditor can reasonably provide, such as comfort
letters, statutory audits, consents and assistance with and review of documents filed with the SEC.
(b) Audit-Related Fees were for professional services rendered in connection with utility commission-mandated
obligations.
(c) Tax Fees were for review of federal and state income tax returns and tax planning.
(d) All Other Fees were for generation project advisory services 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.
108
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, 2015, 2014, and 2013 .................. 55
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014, and
2013 ............................................................................................................................................................ 55
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013 ............ 56
Consolidated Balance Sheets as of December 31, 2015 and 2014 .............................................................. 57
Consolidated Statements of Common Equity as of December 31, 2015, 2014, and 2013 .......................... 58
Notes to Consolidated Financial Statements ............................................................................................... 63
MGE
Consolidated Statements of Income for the years ended December 31, 2015, 2014, and 2013 .................. 59
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014, and
2013 ............................................................................................................................................................ 59
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013 ............ 60
Consolidated Balance Sheets as of December 31, 2015 and 2014 .............................................................. 61
Consolidated Statements of Common Equity as of December 31, 2015, 2014, and 2013 .......................... 62
Notes to Consolidated Financial Statements ............................................................................................... 63
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.)
109
4.3
10.1
10.2
10.3
10.4
10.5
10.6
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 June 1, 2015, among MGE Energy, Inc., the Lenders party thereto and
JPMorgan Chase Bank, N.A., as Administrative Agent. (Exhibit 10.1 to Form 8-K dated June 3, 2015,
File No. 0-49965)
Credit Agreement dated as of June 1, 2015, among Madison Gas and Electric Company, the Lenders
party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. (Exhibit 10.2 to Form 8-K
dated June 3, 2015, File No. 0-1125.)
Credit Agreement dated as of June 1, 2015, among Madison Gas and Electric Company, the Lenders
party thereto and U.S. Bank National Association, as Administrative Agent. (Exhibit 10.3 to Form 8-K
dated June 3, 2015, 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.)
10.7 West Campus Cogeneration Facility Joint Ownership Agreement, dated as of October 13, 2003, among
MGE Power West Campus, LLC, The Board of Regents of the University of Wisconsin System, and the
State of Wisconsin, as Joint Owners. (Exhibit 10.19 to Form 10-Q for the quarter ended September 30,
2005, File No. 0-1125.)
10.8 West Campus Cogeneration Facility Operation and Maintenance Agreement, dated as of October 13,
2003, among Madison Gas and Electric Company, as Operator, and the Board of Regents of the
University of Wisconsin System, as Joint Owner. (Exhibit 10.20 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)
10.9 West Campus Cogeneration Facility Lease Agreement, dated as of March 18, 2004, among MGE Power
West Campus, LLC, as Lessor, and Madison Gas and Electric Company, as Lessee. (Exhibit 10.21 to
Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.10 West Campus Cogeneration Facility Ground Lease, dated as of July 15, 2002, among MGE Power LLC,
as Lessee, and the Board of Regents of the University of Wisconsin System, as Lessor. (Exhibit 10.22 to
Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.11 West Campus Cogeneration Facility Amendment of Ground Lease, dated as of March 18, 2004, among
MGE Power West Campus, LLC, as Lessee, and the Board of Regents of the University of Wisconsin
System, as Lessor. (Exhibit 10.23 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-
1125.)
10.12 West Campus Cogeneration Facility MGE Ground Sublease, dated as of March 18, 2004, among MGE
Power West Campus, LLC, as Lessee, and Madison Gas and Electric Company, as Lessor. (Exhibit
10.24 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.13 Elm Road Generating Station Common Facilities Operating and Maintenance Agreement, dated as of
December 17, 2004, among Madison Gas and Electric Company, Wisconsin Electric Power Company,
and Wisconsin Public Power Inc., as Lessee/Owner Parties, and Wisconsin Electric Power Company, as
Operating Agent. (Exhibit 10.7 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-
1125.)
110
10.14 Elm Road Generating Station New Common Facilities Ownership Agreement, dated as of December 17,
2004, among MGE Power Elm Road, LLC, Elm Road Generating Station Supercritical, LLC, and
Wisconsin Public Power Inc., as Joint Owners. (Exhibit 10.8 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)
10.15 Elm Road Generating Station I Ownership Agreement, dated as of December 17, 2004, among MGE
Power Elm Road, LLC, Elm Road Generating Station Supercritical, LLC, and Wisconsin Public Power
Inc., as Joint Owners, Elm Road Services, LLC, as Project Manager, and W.E. Power LLC. (Exhibit
10.9 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.16 Elm Road Generating Station I Facility Lease Agreement, dated as of November 4, 2005, among MGE
Power Elm Road, LLC, as Lessor, and Madison Gas and Electric Company, as Lessee. (Exhibit 10.10 to
Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.17 Elm Road Generating Station I Operating and Maintenance Agreement, dated as of December 17, 2004,
among Madison Gas and Electric Company, Wisconsin Electric Power Company, and Wisconsin Public
Power Inc., as Lessee/ Owners, and Wisconsin Electric Power Company, as Operating Agent. (Exhibit
10.11 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.18 Elm Road Generating Station I Easement and Indemnification Agreement, dated as of December 17,
2004, among MGE Power Elm Road, LLC and Wisconsin Public Power Inc., as Grantees, and
Wisconsin Electric Power Company, as Grantor. (Exhibit 10.12 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)
10.19 Assignment and Assumption Agreement, dated as of November 4, 2005 between MGE Power Elm
Road, LLC and Madison Gas and Electric Company relating to Elm Road Generating Station I
Easement and Indemnification Agreement, dated as of December 17, 2004, among MGE Power Elm
Road, LLC and Wisconsin Public Power Inc., as Grantees, and Wisconsin Electric Power Company, as
Grantor. (Exhibit 10.16 to Form 10-K for the year ended December 31, 2005, File No. 0-1125.)
10.20 Elm Road Generating Station II Ownership Agreement, dated as of December 17, 2004, among MGE
Power Elm Road, LLC, Elm Road Generating Station Supercritical, LLC, and Wisconsin Public Power
Inc., as Joint Owners, Elm Road Services, LLC, as Project Manager, and W.E. Power LLC. (Exhibit
10.13 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.21 Elm Road Generating Station II Facility Lease Agreement, dated as of November 4, 2005, among MGE
Power Elm Road, LLC, as Lessor, and Madison Gas and Electric Company, as Lessee. (Exhibit 10.14 to
Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.22 Elm Road Generating Station II Operating and Maintenance Agreement, dated as of December 17,
2004, among Madison Gas and Electric Company, Wisconsin Electric Power Company, and Wisconsin
Public Power Inc., as Lessee/ Owners, and Wisconsin Electric Power Company, as Operating Agent.
(Exhibit 10.15 to Form 10-Q for the quarter ended September 30, 2005, File No. 0-1125.)
10.23 Elm Road Generating Station II Easement and Indemnification Agreement, dated as of December 17,
2004, among MGE Power Elm Road, LLC and Wisconsin Public Power Inc., as Grantees, and
Wisconsin Electric Power Company, as Grantor. (Exhibit 10.16 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)
10.24 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.)
10.25 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.)
10.26 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.)
111
10.27* Form of Severance Agreement. (Exhibit 10.37 to Form 10-K for the year ended December 31, 2008,
File No. 0-49965.)
10.28* Form of Amendment to Severance Agreement. (Exhibit 10.29 to Form 10-K for the year ended
December 31, 2010, File No. 0-49965.)
10.29* Form of Deferred Compensation Agreement. (Exhibit 10.38 to Form 10-K for the year ended
December 31, 2008, File No. 0-49965.)
10.30* 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.)
10.31* Form of Income Continuation Agreement. (Exhibit 10.40 to Form 10-K for the year ended
December 31, 2008, File No. 0-49965.)
10.32* 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.)
10.33* 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.)
10.34* Amendment Number Two to MGE Energy, Inc., 2006 Performance Unit Plan, dated February 25, 2015.
(Exhibit 10.1 to Form 8-K dated December 15, 2015, 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
12.2
MGE Energy, Inc.
Madison Gas and Electric Company
Subsidiaries of MGE Energy, Inc.
Consent of Independent Registered Public Accounting Firm
23.1
23.2
MGE Energy, Inc.
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, 2015, filed by the following officers for
the following companies:
31.1
31.2
31.3
31.4
Filed by Gary J. Wolter for MGE Energy, Inc.
Filed by Jeffrey C. Newman for MGE Energy, Inc.
Filed by Gary J. Wolter for Madison Gas and Electric Company
Filed by Jeffrey C. Newman for Madison Gas and Electric Company
112
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, 2015, filed by the
following officers for the following companies:
32.1
32.2
32.3
32.4
Filed by Gary J. Wolter for MGE Energy, Inc.
Filed by Jeffrey C. Newman for MGE Energy, Inc.
Filed by Gary J. Wolter for Madison Gas and Electric Company
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.
113
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,
2014
2015
2013
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 (loss) gain on available-for-sale securities, net of
tax ($67, ($54), and ($189)) ..............................................................
Comprehensive Income ...................................................................... $
690 $
690
(690)
71,306
526
136
71,278
65
71,343
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
(101)
71,242 $
81
80,400 $
283
75,188
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,
2014
2015
2013
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 ..................................... $
37,085 $
48,165 $
53,952
(3,690)
(3,690)
(2,422)
(2,422)
(40,043)
-
(40,043)
(6,648)
58,429
51,781 $
(38,429)
(89)
(38,518)
7,225
51,204
58,429 $
(2,425)
(2,425)
(37,107)
(97)
(37,204)
14,323
36,881
51,204
The accompanying notes are an integral part of the above consolidated financial statements.
114
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,
2015
2014
51,781 $
58,429
20
1,386
53,187
249
649,276
1,447
650,723
704,159 $
530 $
263
144
937
7,998
4,766
12,764
350,936
339,165
357
690,458
-
704,159 $
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
The accompanying notes are an integral part of the above consolidated financial statements.
115
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, 2015.
2. Credit Agreements.
As of December 31, 2015, MGE Energy had access to an unsecured, committed credit facility with aggregate bank
commitments of $50.0 million. At December 31, 2015, 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 Power Elm Road......................................................
MGE Power West Campus ................................................
MGE Transco ..................................................................
Total ............................................................................... $
Dividends from Affiliates
2014
2015
2013
30,000 $
10,000
3,000
1,708
44,708 $
26,500 $
13,500
6,000
1,859
47,859 $
25,000
17,300
9,250
816
52,366
Dividend Restrictions
Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a
lesser degree, MGE's first mortgage bonds. The PSCW order restricts any dividends, above the PSCW authorized
amount of $43 million, that MGE may pay MGE Energy if its common equity ratio, calculated in the manner used
in the rate proceeding, is less than 55%. MGE's thirteen month rolling average common equity ratio at
December 31, 2015, is 59.7% as determined under the calculation used in the rate proceeding. MGE paid cash
dividends of $30.0 million to MGE Energy in 2015. 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, 2015, approximately $353.0 million was available for the payment of dividends under this covenant.
See Footnotes 9 and 10 of the Notes to Consolidated Financial Statements for long-term debt and lines of credit
dividend restrictions.
116
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 2013:
Accumulated provision for uncollectibles
Fiscal Year 2014:
Accumulated provision for uncollectibles
Fiscal Year 2015:
Accumulated provision for uncollectibles
$
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
$
4,748,657
595,500
25,500
(1,675,577) $
3,694,080
117
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 25, 2016
/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 25, 2016.
/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
Senior 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
118
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 25, 2016
/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 25, 2016.
/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
Senior 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
119
(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:262)(cid:3)(cid:79)(cid:72)
Madison Gas and
Electric Company
MGE Transco
Investment LLC
MGE Power LLC
MAGAEL, LLC
Central Wisconsin
Development
(cid:7)(cid:111)(cid:117)(cid:114)(cid:111)(cid:117)(cid:45)(cid:2462)(cid:111)(cid:109)
MGE Services, LLC
MGE Power
West Campus, LLC
MGE Power
Elm Road, LLC
North Mendota
Energy & Technology
Park, LLC
NGV Fueling
Services, LLC
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 Energy, Inc.
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.
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: 146,000
Population: 312,500
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: 152,000
Population: 434,600
Area: 1,682 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
P.O. Box 1231
Madison, WI 53701-1231
Learn more at mgeenergy.com
MGE is committed to environmental stewardship. This report is printed on recycled paper.